Measuring SaaS cash efficiency
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.
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