2018 saas survey results

2018 SaaS survey results. Check out all these metrics

Tl;dr: An in-depth analysis of SaaS stats derived from a survey of 385 SaaS companies. Understand ACV, distribution channels, churn rates, efficiency ratios and efficacy of marketing. We go through about 50 slides and I share my thoughts on each of them

KBCM Technology Group undertook their 7th mega annual survey of ~385 private SaaS companies. I’m sharing the report here (only deleted a few slides) and adding my observations of their analysis. Some things don’t really make sense, likely due to sampling, but there is a heck of a lot to learn. You’ll prob need to spend an hour or two going over them but if you want to learn about SaaS this is a good place to start. It’s not super duper n00b friendly, but you can get by. I explain a few things.

What you really want to start doing is getting a feeling for what makes sense and what doesn’t. It’s not really focused on early stage, it’s better if you are $5m ARR+. But even if you are $1m ARR you should be putting in the time to learn for when you do get here.

To be clear, all credit goes to the KBCM team for the report and it can be downloaded here. I’m merely trying to help founders decypher this super technical and complicated landscape.

If you’re a bigger nerd and disagree with my observations, please sound out in the comments so I can update this. Thanks!

Who is in the survey?

Let’s start by understanding who participated in the study to understand who this applies to. Well, short version, we are talking series-B+ funded companies and trending to the enterprise spectrum.

If you are under $5m ARR, these aren’t the best benchmarks, but you can certainly get an idea of where you should be heading to.

Let’s dig into the company type more:

  • Median ARR of $6.7m with 345 customers at ACV of $20k
  • 21%, or 81 companies, have ARR over $25m
  • Median growth in ARR was 52% and 35% for larger companies with more than $25m
  • Median FTEs are 70 (So about $100k ARR per head)
  • 63% are unsurprisingly American

62% of companies are based in the US. I think the relative share of US SaaS is actually higher, more like 75%. If I were to guess, my bet the skew is to large ($25m+) companies in the US vs RoW. The largest concentration is in California with 74 companies. Overall there is a pretty good global spread.

 

 

A lot of the stats in this deck are going to preface that they excluded companies with less than $5m+ in ARR. It’s worth noting that there are in fact smaller companies in this survey. 167 of them are sub $5m. This report largely deals with companies to the right of the median. Clearly median is being used as a mean will be heavily skewed by the mega companies.

Let’s get into the SaaS survey analysis

Now we are getting into the analysis. Finally!

As companies get larger, the ARR per FTE gets larger. One conclusion one could draw is that larger companies are simply more ‘efficient’ but… that is a bit of a misnomer:

  • Larger companies have larger ARPA and focus on enterprise clients, and
  • The staff are likely more expensive

A clear conclusion is that as you get larger you need more ARR to compensate for your cost base and headcount and you focus on larger clients to grow.

Investors expect 10% month on month growth in the early days. When you are a large company that becomes pretty much impossible. Why? Law of large numbers. This indicates that a large entity that is growing rapidly cannot maintain that growth pace forever.

Simple math, 100% growth when you have $1m ARR is $2m. You just need a million bucks of new cash. If you are 100m ARR, then 100% growth is 100m! That’s 100 times the bang for the same growth rate. You think early stage startup is hard, try scaling!

With every interval, you should expect a steady drop off in annual growth rate as you scale.

Oh, note. They write ‘organic’ which might not make sense. As we are dealing with a lot of large companies, they tend to do M&A. Growth from an acquisition is ‘inorganic growth’.

 

Here we can see the distribution of companies with more than $5m ARR. The vast majority of companies are growing less than 100% per year. I’d bet my shirt that the companies after the 100% mark are the smaller ones.

The median is 39% which reminds us of the ‘rule of 40%’ though we don’t know what the profitability is to adjust the numbers.

This scatter plot maps companies with more than $10m ARR to their growth rates. It’s pretty much all over the place. As mentioned before there is a general drop off in growth as companies scale, with a series of exceptions, and smaller companies typically grow faster. I think we got the message now.

Here we see that companies that sell a higher contract size typically grow less fast. That’s going to be due to law of large numbers, maybe sales cycles and the nature of enterprise. It’s larger companies that typically do large contract sizes. Nothing revolutionary here but ‘good to know’. Don’t know what’s going on with the $25-50k, but tbh, it’s not a huge contract. You can still do that with website sales.

This slide shows types of customer and growth rates. Basically backs up the previous slide. If you are selling to bigger companies you are growing less. I personally think this is not so much due to the ‘category’ but again more that larger companies typically sell to enterprise. Enterprise sales is a balls. It can take over a year. You need the resources to stomach that.

This slide is pretty interesting actually. It shows the importance of making more money out of the clients you have for companies with more than $5m ARR.

There are two concepts here I will explain in case you don’t know:

  • Upsell: You have basic, premium and pro package. Upsell is getting the client to go from basic to say pro
  • Expansion: This is selling more of the same thing. If you are selling 10 seats and you increase that so now there are 20 people in the company using it, you have expanded 10 extra seats

Smaller companies grow by acquiring new users, about 80%. If you look at the largeste companies, it’s pretty interesting though. About 45% of new ARR bookings come from existing clients.

When you make more money from clients the strategy is called ‘land and expand’. Buy a cow and milk it.

This is useful for the SaaS financial model to know that you can expect 10-30% expansion, or more if you are later stage.

 

Distribution means how you get clients. The main takeaway here is that smaller companies do more inside sales and to some extent internet than larger companies. Larger companies do more field sales. If you have been reading, I’m sure you can guess why? They have larger contract sizes. Those do’t get done via email, you buy them a steak dinner before you get into bed. I would be interested in seeing this for larger companies as would expect inside sales to be less.

Channel sales are the same. All this says is this isn’t a key driver.

Excluding sub $5m companies the means of distribution reflects growth rate. As usual, later stage companies likely do field sales so grow at 30%. Inside sales is 50% faster. Channel sales is not a key driver of  a lot of companies, but those that focus on it grow the fastest. People in the ‘mixed’ bag are likely smaller.

You can’t really draw a conclusion that one channel means companies grow faster because of it as there are a cause and effect question. If you need to grow by big tickets you do field.

If we look more into distribution in a scatter plot, there are no real conclusions to draw. To be honest, there are lot of different kinds of SaaS company and this probably shows aggregating everyone doesn’t work.

This chart shows the initial contract size by distribution and things start tranding a little more clearly.

If you do tiny tickets like those I pay for regularly to run this site to give you all this free stuff (!) you mainly sell online because the CAC doesn’t make sense otherwise.

The bigger you get the more you do field sales. Contracts over $250k are exclusively field.

Inside dominates at the start and peters out as field takes over. This makes sense.

This is pretty interesting as it indicated the value of relationships. They’ve pulled out the middle section (of the chart above) and plonked people into $5-50k initial contract size and split the stats between field and inside focused.

Let’s look at Inside first.

  • ARR is 2x at $20m… interesting, I wouldn’t have guessed that they were larger
  • They grow 70% faster and the ARR to FTE is 21% higher. This would be more interesting if it was by S&M headcount as field could have less efficient operations?
  • They spend a little more on S&M as a % of revenue
  • The ACV is 35% less and the close less professional services, presumably as the integrations are easier?
  • Churn is higher and expansion less
  • The CAC ratio which is basically total S&M cost divided by the new ARR it got is less. So it costs them $1.06 to get $1 of revenue

Ok, now field:

  • It’s the opposite of the above… duh
  • What’s interesting is:
    • Average contract length is 6 months more
    • Professional services is 2.5x
    • Commission is the same? I would expect base to be higher though
    • $ churn is a lot less
    • There is more expansion revenue
    • Net dollar retention is higher
  • This all implies to me that there is probably a relationship factor at play and/or that there are more integrations involved so that the product is more sticky

Shock, horror. The more money you blow on S&M (not the fun kind) the faster you grow.

Once you start spending 60-80% there is a jump., but it quickly diminishes. This actually seems to be the sweet spot.

There’s a cautionary tale in the >100% bucket as the median is near the 25th % which implies money might be getting spent poorly.

S&M consists of sales and marketing. Sales is Glengarry Glen Ross. Marketing is Facebook ads and those annoying people that make you adhere to ‘brand guidelines’.

Sorry, let me be real.

  • Marketing: You do this to 1/ get leads and 2/ so clients have heard of you when slick Rick dials them
  • Sales: You get a lead and you close it. Boom!

The obvious trend here is that 30/70 marketing/sales is the rule.

It makes sense, internet-focused sales is about getting people to your site. You can’t kill a rat till it literally enters the rat trap.

What is a little surprising is that inside sales is very similar to field. You’d think you would be doing more inbound marketing. This isn’t SaaS, but at Groupon we had a team that made leads for the inside team to dial. So that’s not marketing but it gets results on the supply side. Ultimately your lead velocity rate matters.

I don’t know enough about channel sales to comment on the 40/60 split. If someone does, sound out in the comments and I’ll update this.

All this next slide shows is that some companies do in fact spend more on marketing. Whatever, this isn’t an academic exercise.

If you are doing inside sales, make sure your sales team have enough leads. Spend marketing till they have too many or you can’t hire enough people.

Ignore the left and right comparison.

The quick takeaways are that on average:

  • New customers cost $1.32 for new revenue
  • Total new and retention of clients is $1.11 for new/renewed revenue
  • It’s cheaper to upsell new revenue as it’s $.72 per dollar (the cheapest customer is the one you have)
  • Milking clients to expand is the best at 38c on the $

What does this mean to you? Keep clients happy, get them to give you more money.

This scatter shows growth to blended CAC ratio. So the red is bad and green is good.

There is some huge company that is nailing it. They truly have product/scale/market fit.

Generally, the bigger companies have a higher CAC and are growing slower as they may have tapped out the market or may be less relevant now.

Companies with less than $30m ARR have raised less and are growing faster with a lower CAC. That makes sense. They’ll go red soon 😉

I mentioned this in the summary slide a few slides above, new customers are more expensive. Retention is key.

So what is the CAC by distribution channel?

Well, interestingly some people are killing it in channel, and some are not. Seems you are either doing it well or you are not.

Internet sales is great if you can make it work, but that depends on your business model.

People who ‘mix’ their styles end up with a blend of inside and field. I presume they segment customers.

This slide is actually kind of scary. The payback times are really pretty high! If we look at the median new payback time it’s nearly 2 years! You better have a high lifetime in years and a sticky ass product for this to work! They effectively never recycle marketing money from clients and so are likely dependent on daddy ‘VC’ money…

And OMG, some companies are more than 4 years. THAT IS NUTS!

They calculate this by taking the CAC ratio and dividing it by the gross margin and times by 12. Gross margin just deducts the COGS.

It’s not just new customer CAC payback that ain’t great. The difference from new to blended is only 2 months.

Looks like the whole ‘a great SaaS startup has a payback under 12 months’ doesn’t hold up once you are in a growth stage.

One of the great things about SaaS is high gross margins. 70% of companies have a gross margin over 70%. 8 companies have a GM less than 50%. I don’t know what the reason for that would be.

Not really a huge point to learn about metrics, but pretty interesting. AWS dominates. Only Google has some positive prospects.

Another irrelevant but interesting slide. Look at the decline of self managed servers over the 5 years (the bit in green).

Professional services are used to implement a product, customise a setup and the like. You don’t want these to be more than about 20%.

Smaller companies with simpler offerings are likely going to have less of a relative % of ARR as an enterprise-focused company which makes sense. We can see enterprises are 16% of first-year ARR whereas the smaller end is 7%.

Now looking at how you motivate sales folk with $. It’s interesting to see that both insife and field sales approaches pay about the same- 10% of ARR.

Inside is actually slightly larger on a fully-loaded basis. Typically fully-loaded adds in vacation pay, recruitment, and training as well as commission that is made to other people which is mainly sales managers, though there could be going to BDRs. They haven’t spelled it out.

Across contract sizes, there isn’t a lot of variances.  What is a bit funny here is the variance in some of the fully-loaded. Regardless, assume base sales of 10% and account for about 14% on a fully loaded basis.

Ok we saw what you will have to pay out on acquiring customers, what about retention which we have seen is important?

Commission on renewals and upsell are much lower. A third of the time no commission is paid at all.

For renewals, 35% pay none and the median rate is 3%.

For upsells, 68% pay full commission which is at median 9%.

If salespeople extend an initial contract 27% get paid nothing, 19% get a little summin summin, and 10% get a full commission.

Ok let’s look into margins.

Subscription gross margin isn’t a common term. I think it’s just subscription revenue and excludes professional services and the like. Median is 77% and the gross margin is 70%. one of the key differences here is the involvement of customer care costs. I should note as I haven’t before, but all numbers in their analysis they exclude stock based compensation.

It’s not clear what the operating expense margins are. I image it’s a % that can be aggregated so in totality costs are 93%. S&M is the largest component at 41%.

Everyone’s losing money. EBITDA margins ate negative 24% and FCF (free cash flow) are negative 21%.

Slide 9 says the median growth rate is 52%. If we deduct out the FCF of 21% then the median is 31%. This is a bit less than the rule of 40%.

Gross margins for companies are generally around 70%.

S&M is generally your largest expense. When you are $60m+ your R&D goes down from 20 to 20% and your G&A decreases too. It seems like you only start getting to profitability after $60m ARR, and you’re burning cash till you get there.

The guys have then shared examples from public companies. There’s not that much to pick up.

 

I did a quick calc on the rule of 40% above. They’ve mapped it out now. They key takeaway is that only 20% of companies with $10m+ ARR exceed this.

When you look at companies over the rule of 40 there are some interesting insights. On this slide, they show who is above and below. Ther commonality is that they both have similar ARR and dollar churn. Other than that pretty much everything is different

  • ARR growth is 2.5x
  • They are break even on an FCF basis so I presume on a median basis that ARR growth is pretty much equal to their % rule.
  • Customer acquisition is far more economical on both new CAC and blended and more than 2x better
  • The GTM is different too. They are vertical and mixed focused (Meaning they do anything that works I guess)
  • They consume far less capital! Almost 4x less
  • It costs them 60c on the dollar instead of 1.6 to get revenue. It’s not there but my bet is that their payback time is great

 

Here they show public companies mapped like the private companies.  70% of the market cap (not the # of companies) is above the 40% line.

So what is the average contract length these companies are selling?

54% are one year or less. 13% are month to month. 20% are 2 to 4 years or more.

49% charge annually and 32% monthly. 18% have some semi-annual or quarterly system which is probably related to enterprise contracts. Only 1% charges multiple years in advance (Good if you can get it!).

It’s going to be no surprise that the higher the ACV the longer the contract length.

70% of monthly contracts are for contracts less than $1k in value. Yearly rapidly starts dominating till around 25/50k when multi-term contracts start coming in.

I find this pretty interesting. 39% of pricing is done by seats. 25% is usage. These are the main methods in the Enterprise SaaS financial model. Sites and database size are very clearly delops type business models. Total employees would be for say Workday or HR companies. Modules/functionality is sort of an extension of seats and usage, well there are hybrid models.

Churn is the biggest killer to SaaS. The median $ churn is 13.2%.

Woaaaaah! 13 companies have more than 40% churn! They’re losing almost half their ARR to churn every year. That’s expensive!

It’s a bit hard to draw conclusions on this churn scatter graph. It would seem that companies sub $25m and under 70% growth have the highest churn.

The saving grace to churn is expansion and upsell. When you look at the dollar retention the median is in fact 101.7%- that’s what you call negative net churn. The central range is between 90 and 110%.

Dollar churn is median at 13% though logo churn is far greater at 21%. This would imply that companies lose their lower paying companies, which is frankly good if you are going to lose clients.

Companies with 2.5 years + contracts experience almost half the churn of companies more along the lines of a yearly contract. I don’t know how old the companies are and how long they have been doing multi-year-contracts so it’s not quite clear that multi-year contracts are better for churn. Prima faces they are. Another thought it that companies with multi-year contracts are more deeply tied in to a product and so are less likely to churn. If you have an ARPU of $1000 you are probably selling something like a newsletter system. Those are way easier to shift from as opposed to an ERP.

Companies that pay for a lot of professional services have lower churn. This makes sense as if customers are properly experiencing the benefit they are less likely to leave. Contracts which have higher professional services also have higher contract lengths which one would assume comes with a higher sales cycle- the decision tobuyt was pre-meditated.

So, if you can stick clients for a lot of professional services and can take the sales cycle, you will benefit with less churn. I don’t know the RoI on this though.

The smaller your ACV the higher your churn. Higher ACV is harder to get but it is also harder to lose. Some of the companies under $5k are taking a total hammering and will struggle tremendously to scale as they are figuratively a leaky bucket.

So what about $ churn by channel? Before you look at the chart, take a guess? What do you think?

Yup, field sales have the lowest churn.

Funnily enough inside sales and internet are the same. One would hope channel partners would have solid reelationships, but it doesn’t quite seem the care. Finally, curiously mixed use distribution is almot as bad as channel. We aren’t talking huge amounts, but every little helps.

I find this pretty interesting. It shows how much capital and the number of years to get to an ARR threshold.  I read that it takes on average 4 years to get to $1m ARR… so either people are growing super fast after that or this illustrates survivorship bias (It’s the later).

Some companies are really kicking ass. Think of it this way, it takes some companies just 6 months longer to get to 10m ARR instead of 5, and some just 9 months more to get to 25m than 10.

A lot of people want to get to 100m ARR (the threshold for a great IPO) in 7 years. This doesn’t really seem realistic.

Looking at the dollar to revenue it seems companies get more efficient with money over time.

If you have checked out the future fundraising model you might find the ratios instructive.

 

The median dollar raised to ARR achieved is 1.5x. I’d like to know what this is for earlier stage companies. The median doesn’t stay consistent here and jumps around. What is clear is that companies with more than $75m ARR are far more capital efficient in scaling getting a dollar for 70 cents.

Now we are talking about debt, this is not one typically associates with startups but it’s likely venture debt, right? The numbers don’t really make sense but there are some useful heuristics.

BTW, don’t know what venture debt is? Basically, it ain’t coming from banks. There are these quasi-VC funds that give you debt like instruments which allow founders to get diluted less. They care about your lead investor and who it is is a big factor. It ranks high in the pecking order for pay outs so they get paid out before VCs if shit goes wrong. They charge interest which is pretty high and sometimes get warrants to juice it (it’s negotiatible btw). They generate about 15% IRR with a good Sharp ratio. I think it’s a super cool asset class, but one not understood well. There’s not many in Europe and Asia doing it.

What you can tell is that:

  • Few people use debt under $10m
  • Almost everyone is using it over $10m
  • Typical debt to MRR multiples is 3-4x. The numbers wobble about a bit as I think it’s a mater of $ exposure

So let’s look at top quartile performance companies.

Median ARR is growth is considerably less than the ideal path around 2T3D. The numbers may be what the median of companies are doing but they aren’t indicative of what you need to do. If you follow the median ARR growth path from 1m ARR you will only end up at 10m in 5 years.

Blended CAC ratio moves about a bit so one casn assume if you are efficient you can get a $1 or revenue for about 50c. Dollar churn is around 13%. trhe best companies have pretty strong negative net churn.

For the companies that are in the survey, only the people around series-a are hitting the rule of 40. Otherwise, numbers are eh.

That was a slog! You aren’t going to find perfect answers in this but it’s really going to contribute to your learnings about what you need to focus on and what matters.

If you have anything to add, let me know and I’ll chuck it in!

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