Fast growing SaaS businesses are usually unprofitable, but what is level of operating loss or burn is acceptable? We looked at the last 81 software IPOs going back to MongoDB in October 2017. The data is below and observations follow.
Revenue to burn is 3.28x to 1. That’s the acceptable level of SaaS operating loss. In other words for every dollar of burn or operating loss, you need to be generating at least $3.28 of revenue. We arrive at that figure by isolating only those companies that are losing money. Note that while the median is 3.28x, the average is materially higher at 5.37x. Since all of these companies are very successful (they IPO’d after all), it’s safe to say that so long as SaaS revenue is growing nicely, you’re retaining the customer, and your burn isn’t out of control as per this ratio, you’re ok to burn.
Some are profitable. Only 21 of the 81 SaaS companies that went public were profitable at the time. That’s 26%. Some of the companies had excellent operating margins including Zoominfo (32%), Certara (28%), Doximity (26%), and Definitive Healthcare (41%). Median operating loss of the entire data set was -$35.0mm in the year leading up to the IPO.
A few are very unprofitable. Qualtrics at the time of going public had an anemic margin of -168% (-0.59x revenue to burn ratio). Snowflake was -135% (-0.74x). Gitlab was -141% -(0.71x).
Most recent. The past 5 and 10 IPO’s had a median revenue to burn ratio of only 2.10x. Median operating losses were also much higher than the entire data set at -$255mm and -$192mm respectively.
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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