Cash efficiency is one of the most important metrics in SaaS. Since the revenue at SaaS companies is largely recurring, we measure it as ARR / net investment. Formulaically it’s revenue / [equity + debt — cash]. It’s a valuable metric for comparing how efficient one company is to another.
We measured the cash efficiency of the last 79 SaaS companies at the time of their IPO; the data goes back to 2017, and shows if you can generate $0.58 cents of revenue each year per $1.00 of investment in SaaS, you’re at the median of successful SaaS businesses that went public. Below are the data and a few observations.
The logic. Why does it make sense that $1 of investment generates only $0.58 of revenue? Because good SaaS businesses have net retention of 100%+, so that revenue is generated every year like an annuity.
The best businesses generate ~$2. The top 15 publicly traded SaaS businesses in our set on average are generating $2.71 of revenue for every $1 of net investment. The dataset includes familiar companies like Zoom Video, JFrog, and DataDog.
The least efficient generate $0.20. The 15 least efficient businesses in the data set generate $0.20 of revenue for every dollar of net investment. This includes companies like Slack, Snowflake and Palantir, with the worst being Hashicorp.
The last 15 are in line. The last 15 companies had median cash efficiency of $0.55 and an average of $0.73. So companies have not gotten more cash efficient over time.
If you have $0.60 of recurring annual revenue per $1.00 of investment at scale, you’re on your way to joining the ranks of successful publicly traded SaaS companies.
Thank you for your readership. See more blogs and SaaS data at blossomstreetventures.com. Email the author at sammy@blossomstreetventures.com.
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