SaaS cash efficiency needed to exit

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

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 42 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 $0.59 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 $0.59 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.

Exclude SEMRush. SEMRush has been fantastically efficient, generating $10.86 for every $1 of net investment. If we exclude them from the analysis, the average falls from $1.12 to $0.88. The median barely moves of course, from $0.59 to $0.58.

The best businesses generate ~$2. The top 15 publicly traded SaaS businesses in our set on average are generating $2.30 of revenue for every $1 of net investment. The dataset includes familiar companies like Zoom Video, JFrog, and DataDog. If we exclude SEMRush, which generates $10.86, then the average falls to $1.75.

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 $0.59 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.

BSV invests in companies with run rate revenue of $2mm to $25mm and year over year growth of 50%+. We lead or follow in growth rounds and special situations like inside rounds, small rounds, rushed rounds, corralling investors with our term sheet, bridges, inbetweeners, cap table clean up, and founder secondary. We can commit in 3 weeks and our check is $3mm, but can go as low as $1mm. We’ve made 24 investments. Contact Sammy directly at sammy@blossomstreetventures.com