A really smart and experienced investor said to me the other day that with these 3 things, he could absolutely increase any SaaS company value (and would invest in doing so):
- The right operational data about the company and good, comparable benchmarks,
- Intelligent interpretation of the data, especially around go-to-market
- Improved business processes focused on leapfrogging the gap between the company’s operating performance and benchmarks.
In effect, this is what most good PE firms and investors do with their acquisitions and it is having an operating efficiency ripple effect in the SaaS sector. If there is anything we can take away from the incredible M&A market of 2018 – “another week, another blockbuster software acquisition!” – it’s that even wildly successful companies like Qualtrics, can be even morewildly successful. It is the expectation that an awful lot is being left on the table that is driving investors to upping the ante even as high as 23X revenue that SAP is paying for Qualitrics.
Granted, improving operating efficiency isn’t the only way to increase a SaaS company’s value; access to a lot of capital, and access to a huge distribution network are also ways to improve a company’s value – but those are a lot harder to get. In terms of access to capital, we’ve seen some companies being very successful even if they weren’t very efficient, but they had access to large amounts of capital. Not all players have that access to capital.
In terms of distribution, it would be nice to get Microsoft, or Oracle or Cisco to distribute one of your products with every one of their products, but not always possible. Of course, that’s how Microsoft grew fast, by getting every PC manufacturer (except Apple) to ship their operating system and then apps. Again, not possible for the majority of SaaS B-2-B vendors.
You Can Control Your Destiny
What most companies can control is their operating efficiency. There is always room for improvement in operational efficiency. First off, it is the focused improvements that can make all the difference. Focus first on improving your go-to-market processes. Then, it is the continuous improvements, regular testing and tweaking of the process, that lead to steady increases in SaaS company value.
Over the decade + that OPEXEngine has been benchmarking SaaS and software companies, we see companies that are data-driven, know their metrics and are always focused on improving them and they benchmark their operations every year. These are the companies that eventually “graduate” out of our benchmarking community because they either are so big, we don’t work with them anymore, or they are acquired (but more of them are coming back as operating departments of very large companies). We are going to have to increase our upper limits as more SaaS companies break the $500M+ milestone.
Here’s a few insights and use cases of how we’ve seen companies use benchmarks to improve SaaS company value after working with hundreds of B-2-B vendors:
Use benchmarks to guide your budgeting and planning
A good budgeting process guided by sector benchmarks is worth its weight in gold. Bad or ill thought out budgets and plans will plague your company far more than the effort it takes to do a good budget and a 2-5 year plan. It is really hard when you are in operating mode to have to keep fixing the budget. And not planning in advance for growth is a killer. If you plan to grow revenue, you are going to be growing headcount, which has all sorts of ripple effects on facilities, networks, IT, management, etc. and none of that can be done at the last minute, especially not in this market.
Companies that use benchmarks to track against what other companies have done in all these areas don’t have to be constantly scrambling and trying to make up for being behind the eight ball. Make the investment in doing the budgeting and planning process right, using benchmarks and getting full management buy-in up front and it will pay off a hundred-fold.
Look at your KPIs, identify ones that are lagging, then dig into the drivers of that KPI
Here’s an example: A key SaaS KPI like retention is the result of many “drivers.” To dig into retention, I’d recommend looking not just at user activity with your product, but also your NPS (Net Promoter Score), the ratio of Customer Success managers to customers, and every point of contact between your company and the customer, plus other drivers like discounting (if there’s a lot of discounting going on – there’s probably a problem with your pricing). Use benchmarks to compare your KPIs, and then use benchmarks against all the drivers. How do you know if any of these KPIs, and their related drivers are good, great, or below average, if you don’t have good benchmarks to compare them to?
Get everyone in the management team on the same page in terms of targets
Humans are funny this way, but we are amazingly influenced by expectations. If we think it is normal to close 10 deals a week, we’ll work really hard to do that. If we think it is normal to only close 3 deals a week, we’re more likely to do that. At the same time, you can’t just set expectations beyond what is humanly possible or you’ll create frustration and a sense of failure. Also, if your targets are set too high, or even if they are set too low, your planning will be off and you’ll make mistakes.
Here’s a real-life example from a CFO in the benchmarking community. His company had trouble with quota achievement, which affected planning. His VP Sales wanted to increase quotas, thinking that would drive greater sales performance and motivation. Using accurate benchmarks for SaaS companies their size, with similar average contract values (ACV), the CFO found that their quotas were actually already a bit high, which may have been contributing to low quota achievement. By setting quotas closer to the benchmark, after 6 months, the company had much better quota achievement and better forecasting, which actually drove higher sales. The VP of Sales wouldn’t have bought into the CFO’s suggestion of lower quotas without seeing the actual benchmark data compiled from companies like theirs.
Every company can improve its operating efficiency. All it takes is good data and the ability to dig into the key drivers of performance.
Being part of a peer benchmarking community just makes good sense. It is insurance that you are operating within sector norms, or above or below – but at least you know how you stand. It is data to guide budgeting, planning and resource allocation. Benchmarking helps you avoid spending a lot of time in fire drills to gather anecdotal information when company decisions need to be supported.
And maybe even more importantly, it is consistent, 3rdparty data to get everyone on the management team and board synched up and agreed on the metrics and numbers – so the team can spend more time moving forward instead of stuck arguing about the numbers.