Scaling cash efficiently in SaaS

Right now there is an extreme focus on profitability in SaaS, but perhaps we’re overdoing it. The real focus should be on cash efficient growth. Cash efficient SaaS companies that retain the customer scale really nicely and build a lot of value. The math below shows good SaaS gets more cash efficient over time (yes, this blog contains math).

The first metric we look at is historical cash efficiency. We measure cash efficiency as revenue / [equity + debt — cash] or simply put, revenue / historical net investment. The data below for the last 77 SaaS IPO’s shows at the time of IPO, SaaS companies generated on median $0.58 of revenue for every dollar of net investment up to the IPO. The average is higher at $0.91 of revenue for every dollar of investment.

In order to show that SaaS scales, we compare the revenue / net investment metric of $0.58 to another metric we really like, which is [current year revenue — last year’s revenue] / current year operating loss, or simply put new revenue / current operating loss. If SaaS companies get more efficient over time and truly scale, we would expect to see this figure which, is a more current metric, be higher than the historically looking revenue / net investment. Sure enough, it is. The new revenue / operating loss median is $1.00 and the average is $1.62. Those metrics are materially higher, meaning SaaS companies have been more efficient in generating recent revenue as opposed to revenue since day 1.

The math shows SaaS does scale as companies get bigger, so while profitability is great, so long as you’re growing cash efficiently (not necessarily profitably) and retain the customer (100%+ net dollar retention), you’ll build a fantastic business. Eventually, profitability comes with cash efficient scale and you’ll create a lot of value.

Thanks for your readership. Visit blossomstreetventures.com for more SaaS data.