Acceptable cash burn in SaaS
Sammy is the Managing Director and Cofounder of Blossom Street Ventures. Connect on LinkedIn or email him directly at email@example.com, especially founders at all stages.
Most SaaS companies burn cash as they grow, but what is the acceptable level of burn? We looked at the last 41 SaaS IPOs to find out. The data is below and shows that on median, SaaS companies have a revenue to burn ratio of 3.39:1. In other words, for every $1 of operating loss, SaaS companies on median generate $3.39 of revenue. The average is even higher, at 5.68:1.
A few observations:
Some are profitable. 9 out of the 41 companies shown generate a profit, or nearly 1 in 4. There is no rule that a SaaS business must burn cash in order to grow and go public.
Only a few allow extremely high burn. Only 2 companies have a revenue to burn ratio below -1x. Snowflake and Qualtrics are the violators here, for instance Snowflake at IPO had operating loss of -$358mm versus revenue of $264mm. It’s a fraught road to allow a business to generate such a high level of burn relative to revenue, and as you can see only 2 out of 41 SaaS companies that went public in the past few years have pulled it off.
In our view, an acceptable or healthy level of burn coincides with the data; the revenue to burn ratio should be in the 3x to 5x range for a fast growing SaaS company (50%+ YOY). If you can do better than that or even run profitability, all the better. Allowing burn to get out of hand, falling to a 2:1 or 1:1 ratio is not a common path to success.