Below we compare the change in revenue in the year a SaaS company IPO’d to its sales and marketing spend in that same year. That simple formula is “Sales Efficiency.” For example, if revenue grew from $100mm to $150mm while S&M spend was $80mm, Sales Efficiency would be ($150mm — $100mm) / $80mm, or $0.63 of new revenue for every $1 of S&M spend. Observations and data are below.
Efficiency doesn’t improve with scale. Of the 158 SaaS IPOs we looked at, the median Sales Efficiency in the IPO year was $0.66 and the average was $0.97. The year before the IPO, the median was $0.71 and the average was $0.94. On median, companies got less efficient as they got bigger. The gap between the median and average also tells you a handful of outliers are pulling the average up, so use the median as your benchmark.
What $0.66 means. At $0.66, it takes about 1.5 years of S&M spend to buy back a dollar of annual revenue, and closer to 2 years once you account for a typical 75% gross margin. That works because SaaS revenue recurs and, with net dollar retention above 100%, grows. It’s also why every dollar of S&M efficiency is worth chasing.
Efficiency at IPO didn’t predict the winners. Some of the best SaaS companies went public well below the median: Palantir at $0.33, MongoDB at $0.46, Snowflake at $0.57, and Cloudflare at $0.61. Others went public well above it: Veeva at $1.94, ZoomInfo at $1.65, Atlassian at $1.54, and Datadog at $1.10. Efficiency matters, but it’s one input.
Lack of data. Over time, SaaS companies have stopped reporting 3 full years of financials, likely because the JOBS Act lets newer issuers show only 2. Of the first 80 companies on the list, 73 provided 3 years of data so we could run the analysis. Of the next 78, only 23 did. The list is in order of IPO, so the lack of recent data limits the analysis.
More recent data. If we isolate the last 20 IPOs, the median in the year of IPO is $0.66, identical to the full list. SaaS companies have not gotten better at Sales Efficiency over the years. The average does fall from $0.97 to about $0.68, which means recent IPOs have fewer blowout outliers. They’re also bigger. The median revenue of the last 20 at IPO was $231mm, versus $125mm for the full list, and they spend a bigger share of revenue on S&M, roughly 64% versus 44%.
If you’re running between $0.50 and $0.70 of new revenue per dollar of S&M, you’re in line with most of the companies that made it public. Above $1.00, you’re in rare company.
Thank you for your readership. See more blogs and SaaS data at blossomstreetventures.com. Other resources we’ve built for founders include: SoftwareMultiples.com; softwareMRRcalculator.com; FounderInvited.com, and TwoFoundersTalk.com. Founders are always welcome to reach out to sammy@blossomstreetventures.com as well.