In SaaS, we would argue it’s good to be unprofitable so long as you’re cash efficiently adding high quality ARR with 100%+ net dollar retention. In order to measure the cash efficiency, we like looking at the formula:
new revenue over a given period / operating loss over the same period
Its reciprocal is ‘payback period’ which is simply the formula:
1 year / (new revenue over a given period / operating loss over the same period)
If your payback period is within 1.5 years, so long as you never lose that customer base, meaning you have 100%+ net dollar retention, you’re doing very well. Below we measure payback period for the last 79 SaaS companies to IPO. The data goes back to October 2017. Note that payback period is measured only for unprofitable companies, which encompasses 57 of the 79 companies shown.
Median payback is 1 year. The 57 SaaS companies that were still not profitable at IPO had a payback period of ~1 year. This is exceptional. If you’re paying for the customer in 1 year and never losing the customer (100%+ NDR), you’re building a very large and valuable business given SaaS revenue is valued somewhere between 6x to 9x depending on growth.
$0.96 of net new revenue for each $1 of loss. SaaS companies acquired $0.96 of net new revenue for each dollar of loss in the year prior to IPO. Again, an excellent figure. Remember the reciprocal of this is the payback period above.
Operating loss definition. The definition of operating loss is fully loaded which is:
Revenue — COGS — S&M — R&D — G&A
The measurement period for operating loss and new revenue is 1 year, so as to eliminate any seasonality. The take-away here is that if you’re never losing the customer (100%+ NDR) and have a short payback period, operating losses are desirable, especially since SaaS businesses are valued on ARR.
Thank you for reading. Visit us at blossomstreetventures.com for more SaaS data and blogs. Email the author at sammy@blossomstreetventures.com