Measuring Economies of Scale SaaS: Life-Time vs. Current Cash Efficiency
How can you tell if a SaaS business is benefiting from economies of scale? To measure this, you need to focus on two key metrics: life-time cash efficiency and current cash efficiency.
Understanding Life-Time Cash Efficiency
The first metric to examine is life-time cash efficiency. This is calculated using the formula:
Life-Time Cash Efficiency = Revenue / (Equity + Debt — Cash)
Put simply, it’s the ratio of current annual revenue to your historical net investment. Data from the last 77 SaaS IPOs shows that, at the time of going public, the median SaaS company generated $0.58 in revenue for every dollar of net investment up to that point. The average was even higher, at $0.91 of revenue for every dollar of investment.
Comparing with Current Cash Efficiency
To evaluate whether a SaaS business is scaling effectively, compare life-time cash efficiency with current cash efficiency. The latter tells us how efficient the company is in generating new revenue relative to its current expenses.
Current Cash Efficiency = (Current Year Revenue — Last Year’s Revenue) / Current Year Operating Loss
In simpler terms, it measures new revenue generated per dollar of current operating loss. If a SaaS company is scaling well, we should see this current cash efficiency figure outpace the historical life-time cash efficiency.
The data shows that the median current cash efficiency is $1.00, and the average is $1.62. This means SaaS companies are generating more revenue with less cash burn in recent times compared to their earlier days.
SaaS companies do become more efficient as they grow larger. While profitability is undoubtedly important, focusing on cash-efficient growth (not just profitability) and maintaining high customer retention rates (like a 100%+ net dollar retention) can lead to building a highly valuable business.
As your SaaS business scales and cash efficiency improves, profitability will naturally follow. With a focus on sustainable growth and scaling, you’ll be on the path to creating a significant amount of value in the long run.
Thank you for reading. Sammy is the Managing Partner and Co-Founder of Blossom Street Ventures. Visit us at blossomstreetventures.com for more blogs and SaaS metrics.
