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www.saas-capital.com GROWTH PAGE 1 BENCHMARKING PRIVATE SAAS COMPANY GROWTH RATES It's not difficult to benchmark your SaaS business's performance against that of public SaaS companies, but it's also not that helpful. The sheer scale of the public companies makes for an apples-to-oranges comparison that does not reveal credible performance accomplishments or gaps. To solve for this information gap, SaaS Capital has been surveying private SaaS businesses since 2012, and our most recent survey, covering 2017 performance, had over 950 company participants. The survey covers a wide range of topics including churn, CAC, unit economics, spending levels, etc., and we will report on all those metrics throughout the year. The most important metric we track in the survey is revenue growth. This is because your company's growth rate relative to that of other SaaS businesses of similar size is the single largest determinant of your company's valuation multiple. Growth Rate by Company Size How fast your SaaS business is growing is only relevant when compared to a group of similarly sized businesses. A growth rate of 80% for a $3 million SaaS business is very good, while growth of 80% for a $20 million SaaS business is amazing. The smaller company might be worth 5 times revenue, while the latter might be worth closer to 10 times revenue. A few takeaways from the data: First and foremost: overall growth in the SaaS industry is pervasive. Out of the nearly 950 respondents, only four companies reported shrinking in 2017, and only 41 companies reported zero growth. Of the remaining ~900 companies, 90% reported annual revenue growth of greater than 10%. Second, growth rates decline as revenue levels increase. This is simply due to math (a larger denominator) and boards and management teams need to use the data above to set informed growth plans and not simply base assumptions on prior year performance. How Long Does it Take? With such prevalent growth, we were surprised to see how long it takes the typical SaaS company to scale. The median age of companies with $1 million in ARR is 6 years, with those raising venture capital reaching the milestone in 4 years, and bootstrapped companies getting there in 7 years. RESEARCH BRIEF 16: GROWTH RATES - 10 20 30 40 50 60 < $1 million $1-$5 million $5-$10 million $10-$20 million $20-$50 million $50+ million Growth RateAnnual Revenue Median Growth 2018 SaaS Capital "The median age of companies with $1 million in ARR is 6 years." www.saas-capital.com GROWTH PAGE 2 While there is some noise in the data below because the revenue bands are so tight, this chart is useful for comparing your company's progress with 950 other SaaS companies. The chart can also help objectively assess the benefits of raising equity from a venture capital firm at various points in the company's life cycle. It's also interesting that no venture-backed companies, besides the very large ones ($75+ million), are older than about 10 years. This is likely due to VC fund horizons with the data suggesting 10 to 12 years is the implicit window that entrepreneurs, boards, and investors give themselves to get as big as they can before an exit. Other Data and Observations For the following points, we look only at companies with ARR greater than $1 million, and generally use the median growth rate, as opposed to average. We will likely dive deeper into all of the following points in future publications. Bootstrapped companies were growing at 28% per year, whereas companies that had raised angel or venture capital financing were growing at 43% and 50% respectively. However, it's not clear which is the cause and which the result, as investors are looking to back companies that already show signs of being strong performers. Average contract value (ACV) does not appear to impact growth rate. Median growth rates for companies across all ACVs range between 35 and 40%. We have seen in a previous analysis, however, that increasing prices over time is an important driver of growth. SaaS companies targeting a horizontal market are growing faster than companies attacking a vertical industry: 40% growth versus 35% respectively. This relationship is generally true across companies of all sizes, but it is particularly strong among larger companies. Horizontal SaaS companies with about $10 million in annual recurring revenue (ARR) and up grew 40% in 2017, while vertical-focused companies of the same size grew by 30%. This makes sense, as vertical-focused companies, depending on the size of their vertical, may eventually run out of market to sell to. At nearly all revenue levels, SaaS companies that bill annually in advance grow faster than their peers that bill monthly. The median growth rate for companies billing annually upfront was 40% versus 36% for those billing month-to-month. Cause and effect are difficult to determine, but there is no doubt the annual billing companies enjoy a meaningful cash flow advantage over monthly billers during periods of high growth. The correlation between higher retention and higher growth rate was weaker this year as there were a number of younger companies with gross revenue retention below 70% and growth rates well above 100%. The correlation between growth and retention increases as companies mature and more of next year's revenue comes from the current year. Companies can outrun churn when they are little, but it eventually catches up. More on churn benchmarks in future Research Briefs. - 5 10 15 20 25 Median Company Age in YearsAnnual Revenue Bootstrapped Companies VC-backed Companies All companies SaaS Capital "Horizontal SaaS companies with $10 million in ARR and up grew 40% in 2017, while their vertical-focused peers grew by 30%." www.saas-capital.com GROWTH PAGE 3 ABOUT SAAS CAPITAL SaaS Capital is the leading provider of long-term Committed Credit Facilities to SaaS companies. Focusing exclusively on the SaaS business model, SaaS Capital delivers faster decisions, more capital, and longer commitments. SaaS businesses have used SaaS Capital's Committed Credit Facilities, instead of equity, to finance growth and create hundreds of millions of dollars in enterprise value without sacrificing significant ownership or control. Also, through its partnership with DH Capital, a boutique investment banking advisory firm, SaaS Capital can assist with M&A and capital raising services. SaaS Capital has offices in Cincinnati, New York, and Seattle. Visit www.saas-capital.com to learn more. 810 SEVENTH AVENUE, SUITE 2005 | NEW YORK, NY 10019 1225 HAYWARD AVENUE | CINCINNATI, OH 45208 7900 E GREENLAKE DRIVE NE, SUITE 206 | SEATTLE, WA 98103 IWWW.SAAS-CAPITAL.COM TODD GARDNER | FOUNDER AND MANAGING DIRECTOR | TGARDNER@SAAS-CAPITAL.COM | 513-368-4814 ROB BELCHER | MANAGING DIRECTOR | RBELCHER@SAAS-CAPITAL.COM | 303-870-9529
