GP Bullhound has released a report called The CFO Handbook: For B2B SaaS. It is covers SaaS metrics (including definitions), how to structure financial charts and tables, performance benchmarks, operational best practices, and reporting templates. Well worth the download.
I found the benchmark numbers for ARR Growth and Free Cash Flow Margin (FCF Margin) for startups of different sizes (<$10 million, $10-50 million and above $50 million in ARR) interesting. Especially as they give specific ranges for what is required to be considered Good, Better or Best.
I combined ARR Growth and FCF Margin benchmarks into the tables below to make it easier to compare how different companies are doing (sort of a Rule of 40 chart).
Three takeaways, including one obvious one:
- A larger SaaS startup can grow ARR slower, but should be more profitable
- A startup will likely have problems raising venture capital if it is ‘only’ Good in ARR Growth and Good in FCF Margin, as the combination doesn’t reach the Rule of 40 (ARR Growth-FCF Margin should be above 40 %).
- Even the combinations of Good+Better and Good+Best won’t get to the Rule of 40 all the time, especially for smaller startups. Company needs to grow extremely fast (250 %+ year-over-year) or being profitable to get to Rule of 40. It is a tough world even for SaaS startups that are executing well.
- Size and Speed: on pricing vs time to close (Difficulty Ratio) and pricing vs viable GTM approach (Mosaic Ventures)
- Payback Time: benchmark on payback time for customer acquisition costs (and a link to 39 other areas a SaaS company can work with to improve margins)
- Fewer numbers: Don Valentine (founder of Sequoia Capital) on the financial metrics he thinks matter: gross profit and cash flow