Measuring cash efficiency in SaaS

Sammy is the Managing Director and Cofounder of Blossom Street Ventures. Connect on LinkedIn or email him directly at sammy@blossomstreetventures.com, especially founders at all stages.

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 in the latest year / [equity + debt — cash].

We did an analysis looking at cash efficiency of the 33 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 $0.58 cents of revenue each year per $1.00 of investment in SaaS, you’re at the median of successful SaaS businesses that went public. Below is the data.

A few observations:

The logic. Why does it make sense that $1 of investment generates only $0.58 of revenue? Because good SaaS businesses have net retention of 100%+, so they generate that revenue every year. Additionally, since recurring revenue is so valuable, SaaS businesses are valued as a multiple of revenue, so it’s important to know how much of that valuable revenue has been generated by the capital invested.

The best businesses generate ~$2. The top 10 publicly traded SaaS businesses in our set on average are generating $1.91 of revenue for every $1 of net investment. The dataset includes familiar companies like Zoom Video, JFrog, and DataDog. The most efficient is the lesser known PubMatic, at $3.41.

The least efficient generate $0.29. The 10 least efficient businesses in the data set generate $0.29 of revenue for every dollar of net investment. This includes companies like Slack, Snowflake and Palantir, with the worst being Palantir at $0.22.

If you can generate $0.58 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.

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