Profitability of the last 79 SaaS IPOs
Profitability is not a requirement in SaaS. Of the 79 SaaS IPO’s since October 2017, 60 of them were not profitable at the time they went public (76%), including nice of the last ten. Clearly a certain level of burn is ok so long as you’re growing and retention is strong, but what is that level?
On median, the operating margin was -21%, meaning for every $1 of revenue, there was $0.21 of operating loss. This level of operating loss is extraordinary, but clearly the market has shown a willingness to look past the burn. Even more alarming is the trend of the last 10 SaaS IPO’s: their median operating margin was -32%. Snowflake had an operating margin of -135% (not a typo), Asana had an operating margin of -84%, Samsara was at 81%, and Palantir came in at -78%.
Why is the market so forgiving? It’s not clear, although these companies do have a few things in common: they’re large and growing fast, the customer base is generally attractive enterprises, they’re retaining and growing existing customers (100%+ net dollar retention), nearly all of them have been backed by tier 1 VC, and investors believe there is a path to profitability (most had declining year over year net loss).
While it’s not a trajectory we would recommend for any startup, the market has shown a willingness to accept extreme operating losses for attractive SaaS businesses.
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