Are SaaS companies spending less to add new revenue? We looked at the ‘cash efficiency’ of every SaaS company that has IPO’d since October 2017. The definition of cash efficiency is net new revenue/operating loss, so the higher the figure, the more revenue is being added for each dollar of loss. The reciprocal of this formula is also payback period on your net loss, so for instance if you have net new revenue/operating loss of $0.50, your payback period is 2 years (no good). If it’s $0.75, your payback period is 1.5 years (good), and if it’s $1.00 your payback period is 1 year (excellent). Note that for companies that are profitable or failing to grow, this ratio doesn’t apply and we have marked those companies accordingly. The data is below (dollars are in millions).
Over the past 7 quarters, SaaS cash efficiency has been good, range bound between $0.70 and $0.91. Q3 was the best quarter shown; on median companies added $0.91 of new revenue for each dollar of operating loss. Adding $0.91 of net new revenue for every dollar of net loss means you have a payback period of 1.1 years which is excellent. Note that Q3’s $0.91 was a pop from Q2 at $0.70, so we cannot call this a new trend of improved efficiency. If the past is predictor, efficiency will decline again and stay rangebound.
Why is it ok to generate less than $1 of revenue for each dollar of operating loss? The reason is SaaS revenue is typically very high quality, paid up front, contracted for at least 1 year, has a low cost of maintenance, and most importantly recurring. The recurrence means once you’ve got the customer, you do not lose them and they become an annuity. The median net dollar retention of these companies was 112% in Q3, meaning that in future years the revenue from each customer actually grows over time. Cash efficiency is one of the most important metrics measures in SaaS, and combined with net dollar retention, the two metrics are the greatest drivers of value in our view.
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