Cash efficiency in SaaS
Cash efficiency is one of the most important metrics in SaaS. Since the revenue at SaaS companies is largely recurring, we measure it as ARR / net investment. Formulaically it’s revenue / [equity + debt — cash].
We did an analysis looking at cash efficiency of the 73 most recent publicly traded SaaS companies at the time they went public. Using the equation above (revenue / [equity invested + debt — cash]), we were able to observe the cash efficiency of each company. The conclusion: if you can generate $0.60 cents of revenue each year per $1.00 of investment in SaaS, you’re at the median of successful SaaS businesses that went public. The average was $0.92. Below is the data.
A few observations:
The logic. Why does it make sense that $1 of investment generates only $0.60 of revenue? Because good SaaS businesses have net retention of 100%+, so that revenue is generated every year. Additionally, since recurring revenue is so valuable, SaaS businesses are valued as a multiple of revenue.
Exclude SEMRush and Doximity. SEMRush has been fantastically efficient, generating $10.86 for every $1 of net investment. Doximity actually has more cash on the books than net investment, meaning it’s been profitable for a long time. If we exclude them from the analysis, the average falls from $0.92 to $0.84. The median didn’t move.
The best businesses generate ~$2. The top 15 publicly traded SaaS businesses in our set on average are generating $2.66 of revenue for every $1 of net investment. The dataset includes familiar companies like Zoom Video, JFrog, and DataDog. If we exclude SEMRush and Doximity, which have been extremely efficient, then the average falls to $2.07.
The least efficient generate $0.20. The 10 least efficient businesses in the data set generate $0.20 of revenue for every dollar of net investment. This includes companies like Slack, Snowflake and Palantir, with the worst being Hashicorp.
If you can generate $0.60 of recurring annual revenue per $1.00 of investment at scale, you’re on your way to joining the ranks of successful publicly traded SaaS companies.
Sammy is the Managing Partner and Co-Founder of Blossom Street Ventures. Visit us at blossomstreetventures.com and email directly at sammy@blossomstreetventures.com. We invest in companies with run rate revenue of $3mm to $30mm, with year over year growth of 20% to 100%+ depending on revenue. We lead or follow in growth rounds and special situations like inside rounds, small rounds, rushed rounds, corralling investors with our term sheet, cap table clean up, and extensions. We can commit in 3 weeks and our check is $1mm to $4mm. Also visit https://blossomstreetventures.com/metrics/ for always up-to-date SaaS metrics.
