Comparing profitable and unprofitable SaaS is surprising

We closely monitor ever SaaS company that has gone public since October 2017. Now that they’ve all reported their 2023 earnings, we can compare the performance of the profitable and unprofitable companies, and some of the findings are surprising. Below is the data and our key observations.

Profitable companies are larger. On median, profitable companies did $715mm of revenue in 2023 versus $582mm for unprofitable companies. That’s a 23% difference which is very material. It does make sense that larger companies would be more likely to be profitable as they theoretically enjoy greater economies of scale.

S&M spend is similar, but the unprofitable spent more on R&D. Whether profitable or unprofitable, median S&M spend was identical at $322mm in 2023 for both types of company. Notably unprofitable companies spent more on R&D ($177mm on median) versus profitable companies ($133mm), even though unprofitable companies are 23% smaller. As you’ll see later, the higher spend may also be resulting in much stronger growth for the unprofitable companies.

The profitability is ok. The median operating margin for profitable companies in 2023 was 8%, whereas unprofitable companies had a margin of -25%. That is a surprisingly wide spread, and frankly while the unprofitable companies are arguably too unprofitable, the profitable companies may be giving up too much growth for such an incremental margin (see below).

The cost of profitability. The cost of profitability is the growth you forego by not burning cash. In this case, the profitable companies had median growth of 13%, which is pretty ho-hum, while the unprofitable companies grew at 23% on median (that’s a 77% difference!). Further, the unprofitable companies were pretty cash efficient getting to 23% YOY growth, generating $0.81 of new revenue for every dollar of net loss on median (that’s very good, especially if NDR is over 100%). The difference between 23% YOY growth and 13% growth is staggering, and when compounded over many years it’s even more meaningful. So long as you’re cash efficiently growing (and $0.81 means a payback period on your operating loss of 1.24 years, which is excellent), trade the profitability for growth.

Thank you for your readership. See more blogs and SaaS data at blossomstreetventures.com. Email the author at sammy@blossomstreetventures.com.