During 2020, we saw several major events cause businesses to adapt to new conditions and adopt additional capabilities to not only defend against economic pressures but also to take advantage of opportunities. How does your company stack up to its peers in this regard?
SaaS Capital joined us for a webinar to share the results from their 10th annual B2B SaaS benchmarking survey. This survey is the largest survey of private SaaS companies in the world with over 1,500 responses. During the webinar, we cover:
- A deep dive on 2020 retention and pandemic impacts
- Lessons learned over the last year from the Customer Success community
- An overview of the current B2B SaaS market and valuation drivers
If you missed the webinar, you can watch it on-demand.
Q: How do you calculate net revenue retention for a usage-based model?
A [Rob]: We tend to not underwrite businesses that are heavily usage based because it’s a little more volatile. The cool thing is that there’s tremendous upside. The slightly nerve-wracking thing from our perspective as an investor is there’s also downside. If they stop using it, depending on what the metric is that it’s based on, it’s more volatile.
We have done lots of deals with companies that have a base license rate. Then they have a usage bonus on top of it, and that’s fine. But we lend off and track the retention of the core licenses. It’s too messy for us and a little bit too far afield for us to get deep into usage.
[You Mon]: In the end, how you service them is actually not much different. When they start to be onboarded, they still have to love your product and they still have to use your product. It just so happens they’re paying for usage rather than paying for access. I still think that net revenue retention works really well.
If you’re a successful company, you would imagine that overall, your customer base should not only be growing, but they should also be using more products. If you say that 100 customers in November gave us this much money, and in December they gave us that much money, it feels like net revenue retention. I think you can actually do it.
Q: What do you predict the SaaS market will be like in the next 12 months?
A [Rob]: We’re already seeing some come down. Zoom is already down significantly, even though it’s still growing 300%, because its growth will slow. It already is on a quarter over quarter basis, and its annual year-over-year hasn’t caught up yet, because it’s still based on very small numbers from Q2 of last year.
I think we will see multiples come down, but at the same time, we’re seeing private multiples finally catch up a little bit. Median range for private companies has been three to six times ARR for the last 10 years or so, gradually stepping up a little bit. Now we’re seeing numerous companies price 8 to 12, so it’s definitely jumped up a little bit. Public multiples will come down faster. But I think private multiples will come down a little bit as well. It’s tough for a private equity investor.
Public investors are a separate animal, and I can’t speak too much to that. But private equity investors are going to have a hard time, when their fund life is eight years, buying a company for more than their fund length of time worth of revenue. They’re looking for massive growth there. We assume growth rates will slow a little bit after the pandemic. I think things will come down a little bit but SaaS in software is a very bright spot for a long time to come.
Q: Growth is so valued, does burn matter? If you have a high growth rate and a high burn rate, does it matter anymore, or is it all about growth these days?
A [Rob]: That’s more of a question for the earlier stage investing in the public market. Nobody’s burning that aggressively. I will say this much. Growth is king. Growth alone describes 53% of what drives valuation multiple. The reason we got to an ARR multiple in the first place is that most SaaS companies were actually unprofitable, whether they were cash flow positive or not. Because they would do annual upfront contracts. Salesforce started it and they went public in 2004. They get all the cash upfront and then they’ve got to defer out 1/12th every month. They amortize the revenue 1/12th every month. They’re getting all the cash upfront and then presumably they get new bookings every month and they keep it rolling that way.
On that 1/12th revenue, their burn rate is geared towards the full annual contract coming in every month. But on a P&L, they’re only getting a little bit of that revenue each month and their cost structures are geared towards the full thing, so they’re negative. Price earnings doesn’t work. EBITDA doesn’t work. So, we’ve done ARR x Revenue. Growth is the name of the game here.
Early-stage certainly matters, especially a year ago when the pandemic hit. There was a pause, especially on high burn: “let’s get to breakeven.” We saw it in our own portfolio.
The cool thing is SaaS companies can get to breakeven if you want. Slow down sales and marketing and you can get to breakeven. It matters. There’s a turning point where your burn is such that you can’t get the breakeven and that’s the cutoff. Where’s that line? There’s a big difference in potential outcomes for fundraising or for selling on that breakpoint.
Growth rate and burn. The rule of 40, if you’re not familiar, is growth rate plus burn rate. A private equity investor once said that he only invests in companies where that’s 40 or higher. A growth rate of 40% and zero burn works. But 20% growth and 10% burn doesn’t work.
Q: It’s generally well accepted – not always true – but if you’re focused on SMB, you’re naturally going to get lower gross revenue retention and it will have an impact on your net revenue retention. Is the bar across the same for a SMB-focused company versus an enterprise-focused company?
A [Rob]: I have seen that it’s a little bit binary. There are investors that focus on SMB, and there are others that focus solely on enterprise. Rarely are folks doing both. Even consumer (B2C) operates very differently. There’s been a lot of successes in the SMB side, like Shopify. But it’s harder going. We’ve seen in the data that there’s higher churn. They just need to be aware of it and that’s why this kind of thing is helpful with the benchmarking data that you can compare. That’s something that should empower you as you go fundraise to say, “Here’s my peer group. I’m doing better than my peer group for where I am. My churn might be lower, but it’s relative to my peers for what I do and what my product is.”
If you’re interested in taking a deeper dive into SaaS Capital’s 2020 B2B SaaS benchmarking survey, watch the webinar now.
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Fighting Churn is a newsletter of inspiration, ideas and news on customer success, churn, renewal and other stuff and is curated by ChurnZero