SaaS companies scale, getting more cash efficient over time. Below is the math. To see this, we compare two metrics: ‘lifetime cash efficiency’ and ‘current cash efficiency’.
The first metric we look at is lifetime cash efficiency (“LCE”). We measure LCE as:
Current annual revenue / [equity + debt — cash]
It is the amount of historical net investment it has taken to generate the current level of annual recurring revenue. The data below for the last 79 SaaS IPO’s shows at the time of IPO, SaaS companies generated on median $0.58 of revenue for every dollar of net investment up to the IPO.
To show that SaaS scales, we compare the LCE of $0.58 to another metric we really like, called current cash efficiency (“CCE”). The formula for CCE is:
[current year revenue — last year’s revenue] / current year operating loss
Simply put, CCE measures the cost of net new revenue created in a in a year while LCE measures the cost of all revenue generated to date, since SaaS revenue is by definition recurring revenue. If SaaS companies get more efficient over time and truly scale, we would expect to see CCE greater than LCE. Sure enough, it is. The CCE is $0.96.
Those metrics are materially higher, meaning SaaS companies have been more efficient at generating recent revenue than they were in the earlier stages of their growth. The data backs up what we’ve seen anecdotally: SaaS does scale.
The math shows SaaS does scale as companies get bigger, so while profitability is great, so long as you’re growing cash efficiently (not necessarily profitably) and retain the customer (100%+ net dollar retention), you’ll build a fantastic business. Eventually, profitability comes with cash efficient scale and you’ll create a lot of value.
Thanks for your readership. Visit blossomstreetventures.com for more SaaS data.