Benchmarking your SaaS
Where do you sit within the SaaS Industry?
Photo by Kelly Sikkema on Unsplash
There are a few bits of data that have come out that shed light on the state of the SaaS industry. SaaS Capital (a Venture Debt provider) produces a survey from private SaaS companies that shows trends around performance. And Profitwell tracks the cumulative MRR from a sample of the 34,000+ companies, overall CAGR for the sector.
Reading through this stuff (as a bit of a numbers nerd) I spotted some interesting things that I wanted to share:
Growth - the metric that matters the most in SaaS
Let’s start by saying that growth in SaaS is down across the board, both in B2B and B2C. Overall CAGR for SaaS Category is down from a high of 81.5% in February 2022 to 7.5% two years later. However, Profitwell is predicting an upswing in growth in the last quarter of 2024 (to at least 11.5%), in part fuelled by the Fed’s interest rate cut and other emerging factors that suggests a much stronger 2025.
In the chart below, Profitwell suggests that there is a 2 month lag between interest rates and SaaS growth.
In recent years there has been a bit of backlash against the ‘growth at all costs’ doctrine, with investors emphasising the need to be capital efficient as well. But growth hasn’t gone away as the major determinator of value in SaaS terms.
Let’s have a quick look at why growth matters:
1. Churn. You need net growth to be above your net revenue churn to prevent overall contraction. When you are small, revenue churn is small, but as you grow, so does churn. Adding the same new revenue in real terms month-on-month will eventually see your churn catch up with you.
2. Predictability. The appeal of recurring revenue is its predictability. If your growth is lacklustre, then you can predict that you’re not likely to be that interesting 3, 4, 5 years down the line.
3. Operational efficiency. Growth drives operational leverage. As the business scales, costs (such as customer acquisition and infrastructure) often decrease per customer, improving profitability.
4. Product Market Fit. PMF is the key to scale. Strong growth demonstrates PMF.
As you would expect, the higher the growth percentage, the higher the ARR Multiple as a means of valuation. But, it depends where you are on your ARR journey.
At ScreenCloud, when we were at $1m in ARR we grew over 200% in the following year. But when we were at $10m our growth was less than 50%. This is expected because of course, adding $2m at the $1m ARR is 200%, but adding $2m at the $10m is only 20%. As an aside, when people like me talk about our stellar growth rates around 2018, always remember we were operating at a time of much higher SaaS growth overall.
However, valuations are still based on multiples of ARR, influenced by your growth trajectory and where you are on your ARR journey.
According to SaaS Capital, if you are at less than $1m in ARR, the median annual growth rate is 59%. Any less than 17% growth would put you in the bottom 25% percentile and anything more than 106% would put you in the top 25%.
At $5m in ARR, a median growth rate is 35%.
And at over $20m ARR it is 22%.
How much does that matter? Well, in terms of valuation it really has a big impact. A $5m ARR company growing at 30% might only be worth 3x its ARR. Whereas a $20m ARR company growing at the same rate might be worth 10x.
I’ve met some agencies who are happy enough with a lowish SaaS growth rate because compared to their professional services revenue, it’s smashing it out of the park. But to me, they’re leaving money on the table. And now is the time to double-down on growth.
Net Revenue Retention is more than just about retention
Net Revenue Retention (NRR) - in other words the amount of revenue your customers were paying at the beginning of a period compared to the amount those same customers paid you at the end of a period - has a correlation to growth. Of course it does. It stands to reason if your customers were collectively paying you $1m a year ago and if a year later those same customers are now paying you $1.1m, then that extra $100k is contributing to your growth.
But what’s interesting is that companies with a higher NRR have an exponentially higher growth rate than their lower NRR peers. If you look at the graph below, you can see that companies with a higher NRR have overall growth rates that are much higher than their lower NRR peers: much more than just the contribution from NRR alone.
The obvious question is whether this is correlation or causation. Are companies that grow the fastest also more likely to have higher NRR because the drivers behind their fast growth are the same ones that result in customers expanding their accounts?
I don’t know the answer, but I’ve long campaigned for customer expansion/churn to be as high in the hierarchy of company focus as new business is. Maybe just maybe, being fixated on the service being so good that customers don’t want to leave, will also result in winning more customers in the first place.
Growth Rate by Funding Type
VC-backed companies grow quicker than bootstrapped ones. This again could be a correlation/causation thing. The better companies are more likely to attract investment. But like it or not, if you’ve got external investment you’re in a cohort more likely to grow at a faster rate than your bootstrapped friends.
What is interesting, though, is that while overall SaaS growth has declined across both funded and non-funded SaaS businesses as the market has cooled, this hasn’t been the case for VC-backed companies in the sub $1m ARR category.
If you’re under $1m in ARR and VC-backed, statistically you are seeing much higher Year-on-Year growth than in previous years.
Why is this? It could show a bit of a return to burning harder. VC-backed companies typically spend 40% more on marketing than bootstrapped ones.
Growth by Age
This is a funny one. Because on face value you would say, yes it’s obvious the older the business is, the lower the growth rate because they will have a higher ARR on average than newly started businesses. For all the reasons outlined above, the greater your ARR, the lower the percentage growth. But, there is another trend that is worth noting: yes, growth is higher for startups, but there seems to be a bit of a weird thing that happens at the six year mark.
If you look at this graph, there seems to be an upward trend in ARR (the green bars) for the first five years and then for the next five years it kind of stays flat. Statistically, if your SaaS is 15 years old you will have the most ARR. One explanation might be that the faster growing SaaS businesses start to get acquired at around the six year mark. Then those that have made it to 15 years, are in it for the long run, or maybe they are themselves acquirers.
To sum up
The key things that I took from all of this are:
Growth is still a key metric for SaaS businesses.
Growth across the board has been tough the last couple of years, but there is reason for optimism.
A focus on Net Revenue Retention pays dividends above and beyond just reducing revenue churn.
Being VC-backed statistically gives you an edge over being bootstrapped, probably because you can afford to be more aggressive with your sales & marketing efforts.
Most of the fast growth happens in the first five years of a SaaS business’s life regardless of ARR.
Which all means… if you have an early stage SaaS product, you should probably be focusing on aggressive growth now and that should include something more than treating NRR as a nice bonus if it happens. And maybe it’s time to at least sanity-check your decisions around bootstrapping if that’s where you are.
