The general rule of thumb for spending in SaaS is 40/40/20. In other words, 40% of operating expense should be on R&D, 40% should be on sales and marketing, and 20% should be on G&A. Rules of thumb are just generalizations, so we wanted to see what the data really is. 28 SaaS companies have gone public from 2018 to today and below are their margins. Perhaps the rule of thumb should be 30/50/20. The data is below.

30/50/20. On median, 30% of opex is R&D, 47% is on sales and marketing, and 22% is on G&A. …

I read “Chaos Monkeys, Obscene Fortune and Random Failure in Silicon Valley.” The book is a 2015 vintage, but a lot of the lessons and take-aways are relevant today. It’s a great read that I would highly recommend; key excerpts are below.

FB’s data isn’t that valuable. “The miserable conclusion was that Facebook, though assumed to be a rich repository of user data, did not in fact have much commercially useful data at all. Social plugin data, despite its ominous and all-pervasive nature, might fall into that same depressing category.” [pp. 7]

There are two jobs. “To paraphrase the very quotable Silicon Valley venture capitalist Marc Andreessen, in the future there will be two types of jobs: people who tell computers what to do, and people who are told by computers what to do. To take the theory further, computation would no longer fill some hard gap in a human workflow process, such as the calculators used by accountants. Humans would fill the hard gaps in a purely computer workflow process, like Uber drivers.” [pp. …

Profitability is not a requirement in SaaS. Of the 71 SaaS IPO’s below, 59 of them were not profitable at the time they went public (83%). Clearly a certain level of burn is ok so long as you’re growing, but what is that level?

On median, the operating margin was -24%, meaning for every $1 of revenue, there was $0.24 of operating loss. This level of operating loss is extraordinary, but clearly the market has shown a willingness to look past the burn. Even more alarming is the trend of the last 10 SaaS IPO’s: their median operating margin was -36%. Snowflake has an operating margin of -135% (not a typo), Asana has an operating margin of -84%, and Palantir comes in at -78%. …

Churn, no matter how low, will never go to zero. Peloton’s prospectus is a great example of this: while user engagement increased dramatically, churn was not declining. Below is a more detailed graphic which shows the trend. As you can see, old cohorts are increasing their usage and newer cohorts are more prolific users than older cohorts, but quarterly churn was steady over 2019 and there is no long term discernable trend either up or down.

We spoke with Haley Altman, founder of Doxly. Doxly is enterprise grade software that helps attorneys manage the documentation process. Recently Doxly sold to Litera and below are some key take-aways from Haley’s story.

Startups require you to leave comfort. Before starting Doxly, Haley was a practicing attorney and partner at Ice Miller LP. She kept seeing the same pain points in administration, deal closings, tracking down signature pages, editing multiple docs quickly and at once, missing signatures from signature packets, etc. Haley decided to build a workspace in the cloud for deals as opposed to relying on manual check lists. …

That’s an aggressive title for a blog, but the data shows it may be true. We looked at the quarterly revenue growth of 47 tech companies before and after the 2008 recession and remarkably, the sector performed well. Below is the data.

Software. Only 4 companies showed real YOY drops during the recession and as a group, there was no quarter where median growth fell YOY. Calidus Cloud performed the worst, but their story was about transitioning from a services & license business model to subscription. Additionally, they were doing shorter and less expensive on-demand implementations, which they knew would shrink service revenue. Adobe was also undergoing shifts in business model for some of their segments, specifically “platform revenue.” …

Price Intelligently put out phenomenal content on how to price your SaaS product. A link to the full report is at the end of this blog and it’s well worth the read. Below are our biggest takeaways.

Don’t use competitors’ pricing as your basis. “the biggest downside of competitor based pricing should be obvious. You don’t have your pricing strategy, you have their pricing strategy. Your company exists to offer customers something different to what is already on the market. You are offering more value and a better product, otherwise you shouldn’t be building it.” The other problem with this approach is “it is also static, with no chance of adding value by raising prices without pricing yourself above your competitors. The moral of the competitor-based story is look, but don’t touch. You want to know where your competitors are pricing their products so that you’re in the same ballpark, but they should not be guiding your decisions.” …

Someone wants to buy your business? Awesome. Before you spend a bunch of time with the acquirer, below are the details you’ll need to know. Much of the language is taken verbatim from a bid instruction letter that one of our investment bankers supplied us with.

Purchase price and form of consideration. The purchase price ideally will be for 100% of the outstanding shares of the company. To make things simple, it should be for the equity only (equity value), which means cash and debt on the balance sheet are not included (enterprise value). The offer should be for an all-cash transaction. …