Swedish SaaS investor Monterro has shared its Nordic B2B software growth benchmark report for 2024. It’s based on data from 298 Nordic software companies and has data around CAC payback (it is going up), salary increases (about 4.5 % planned for 2024), pricing increases (almost 7 %), churn and many other things a founder, executive or investor would be interested in.
Looking at the data it seems like the companies reporting are mainly bootstrapped and backed by lower risk type of investors (family offices, private equity etc as opposed to venture capital), as profitability is quite high from very small to €25+ million revenue companies.
OpenView has released its SaaS Benchmarks Report 2023. It’s an interesting report (requires registration for the full PDF) that can be compared to earlier reports from ChartMogul and Insight Partners. In general, revenue growth is slower but efficiency and profitability is much stronger.
75th percentile companies (with $1-5 in revenue) grew 100 % year-over-year in this data, which indicates overall revenue growth rate has slowed as top quartile companies grew 183 % in the ChartMogul data and 190 % in the Insight Partners data from earlier this year. It is not an apples to apples comparison, but to me it makes sense that growth has slowed somewhat.1
As revenue growth has slowed, startups has cut the number of employees. For companies with $1-5 million in revenue the average number of employees is down 26 % between 2022 and 2023.
This means revenue per employee, which is a good top-level metric, for top quartile startups with $1-5 million in revenue is up 47 % between 2022 and 2023 to $150k.
75th percentile and top quartile is not the same, which I messed up in the initial version of this post. Top quartile is the top 25 % companies and 75th percentile is the data on only the first (a.k.a. “worst”) company in the top quartile. ↩︎
Iconiq Growth has released a very good benchmark report for enterprise SaaS companies. It is especially useful to understand the international benchmarks when building a SaaS company in the Nordics (where we overall tend to be a little less aggressive in driving ARR growth and have an emphasis on profitability earlier).
A takeaway that stood out to me was that top quartile SaaS companies grow from $10 million ARR to $100 million ARR in 3.5 years. According to Chartbeat top quartile companies get to $10 million in ARR in 3 years and 8 months from first sale, which makes it about of 7 years and 1 quarter from first sale to $100 million to be in top quartile.
Iconiq also shares benchmark data on popular core SaaS metrics. Even if these metrics are for median and top quartile companies (and not top 10 %), it is clear that raising multiple, ever larger rounds of venture capital with less than top quartile metrics is going to be very dilutive for founders.
The median and top quartile SaaS companies covered are not profitable even at $50-100 million ARR, with average negative free cash flow margins of 35-45 %. So they need to raise a lot of capital.
My take is that either a SaaS startup needs to in the top quartile for ARR growth (with other metrics being roughly equal to competitors) or it should execute a much lower burn plan that can attract a wider variety of investors.
ChartMogul CEO Nick Franklin shared the SaaS Growth Report: How SaaS Businesses Grow From Zero to $30M ARR and Beyond. There are a bunch of interesting data points, but a series of data points that caught my eye is how fast the best SaaS companies reach $1 million and $10 million in ARR from making the first sale. And they do it fast.
The top 10 % reach $1 million in ARR in 9 months and the top 25 % reach it in 1.5 years.
The top 10 % reach $10 million in ARR in 2 years and 9 months and the top 25 % reach it in 3 years and 8 months.
Insight Partners has released its latest SaaS Sales KPI report (thx Arne). The buckets are geared towards slightly larger companies than in the report ChartMogul released awhile back. This makes sense as Insight is a later-stage investor, which could influence the data they have gathered.
For companies with up to $10 million in ARR, the median growth rate in 2022 was 90 % year-over-year with the top performers growing 190 % y-o-y. This is similar growth rate to ChartMogul with its $1-3 million bucket having 183 % y-o-y growth and the $3-10 million bucket having 119 % y-o-y growth.
The Net Revenue Retention for top performers was ca 120 % in Insight’s data vs ca 110 % in ChartMogul’s data.
One takeaway is that for a SaaS startup to successfully raise multiple rounds of venture capital it should have best-in-class in ARR growth rate and best-in-class retention.
Even if a startup is top quartile, it will have to think hard about if other forms of financing (bootstrapping, growth equity, private equity, becoming profitable or debt funding) are better or more likely options than venture capital, and adapt the plan accordingly.
One thing in company presentations that makes me write down a bunch of questions is seeing extremely high profit margins in the forecasted financials.
Among all the great software and Internet companies I don’t think I’ve seen a company, with the exception of Evolution in 2021, that has grown more than 80 % year-over-year at scale and had profit margins over 50 %.
Obviously that doesn’t mean it is not at all possible, but in most cases it is likely that the company is underestimating the costs of growing or overestimating how quickly it will grow. It is a type of ‘error’ that is called base case fallacy, a.k.a. the plan is not fully taking into account how rare something is compared to the standard outcome.
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.
Related posts:
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
One interesting data point is their benchmark for payback time for customer acquisition costs for SaaS. Payback time can be longer for larger customers, not surprising as it often takes longer to acquire them, but should be below 12 months to be great for all types of customers.
Two other data points are that public cloud companies spend 20 % of revenue on R&D (mainly engineering) and 12 % on G&A (everything that is not sales & marketing or research & development). Those are numbers to aim for and try to beat as a SaaS company grows.
The Difficulty Ratio is a good read, by David Sacks, on sales, pricing and sales cycles. The idea is that in order for sales at a particular level of pricing to work, it cannot take too long to close a deal.
The article has some practical tips on how to fix the situation if you are pricing too cheap to your sales velocity (or selling too slow to your pricing), including pricing, features, targeting new customer segments and making your sales more efficient.
