The right level of SaaS burn
Fast growing SaaS businesses are usually unprofitable, but what is level of operating loss or burn is acceptable? We looked at the last 66 software IPOs to answer the question, going back to MongoDB in 2017. The data is below and observations follow.
Revenue to burn is 3.58x to 1. That’s the acceptable level of SaaS operating loss. In other words for every dollar of burn or operating loss, you need to be generating at least $3.58 of revenue. We arrive at that figure by isolating only those companies that are losing money. Note that while the median is 3.58x, the average is materially higher at 5.6x. Since all of these companies are very successful (they IPO’d after all), it’s safe to say that so long as SaaS revenue is growing nicely, you’re retaining the customer, and your burn isn’t out of control as per this ratio, you’re ok to burn.
Some are profitable. Only 19 of the 66 SaaS companies that went public were profitable at the time. That’s 29%. Some of the companies had excellent operating margins including Zoominfo (32%), Certara (28%), Doximity (26%), and Definitive Healthcare (41%).
A few are very unprofitable. Qualtrics at the time of going public had an anemic margin of -168% (-0.59x revenue to burn ratio). Snowflake was -135% (-0.74x). Gitlab was -141% -(0.71x).
Visit us at blossomstreetventures.com and email me directly at firstname.lastname@example.org. All founders and funds welcome! We invest in companies with run rate revenue of $2mm to $30mm, with year over year growth of 20% to 50%+ depending on revenue. 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, extensions, and founder secondary. We can commit in 3 weeks and our check is $1mm to $2mm. Email us!