This article is a study of 50+ publicly & internationally traded SaaS companies, looking into the performance metrics of the top performers in the market.
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This article provides the context and more insightful background information around metrics for public SaaS companies in November 2020. The research critically reflects and explains the developments of the performances of these companies. Knight Capital has utilized public sources in order to establish its own analysis of SaaS companies listed on the NYSE and NASDAQ. This article is provided for information purposes only and does not constitute or form part of any recommendation to buy or sell stocks, nor is it purport to be all-inclusive. Conclusions are drawn from an overall sample of 80 SaaS companies where possible and narrowed down to a more specified sample in case of lacked data. The information contained in this article has not been independently verified and certain of the sample data has been obtained from published sources and/or prepared by other parties. While such sources are believed to be reliable, Knight Capital does not assume any responsibility for the accuracy of the information.
The median multiple for SaaS companies in November 2020 amounts to 16. It is found that for the 25% best performing SaaS companies the median revenue multiple equaled 36.2 (25% worst-performing: 5.6). This group of great SaaS companies tends to meet the requirement of a 40%-score on the sum of profitability margin and growth, whereas our research points out that 52% of the SaaS companies fail in doing so. The vast majority of the SaaS companies are sector-agnostic, yet the vertically focused SaaS companies have generally higher sales in November 2020. Furthermore, horizontally focused companies tend to outperform vertically focused companies in gross margins, but for other metrics, the performance is roughly in line. Moreover, it is demonstrated that younger SaaS companies tend to have, as expected, higher growth rates, and higher net retention rates. Knight Capital reports these trends and insights on a regular basis.
The Valuation of SaaS Companies in November 2020
Revenue multiples across a wide range of SaaS companies, as displayed in Appendix 1, are ranging widely in November 2020. The median revenue multiple for the selection of SaaS companies equals slightly north of 16. The average of the same sample approximates 19.5, driven by outliers such as Snowflake (129), Coupa, Zoom, and Cloudflare (all in the range of 40-45).
An important contributor to a high(er) revenue valuation multiple is the annual growth rate of a company. For the sample of SaaS companies in November 2020, a correlation coefficient (which is a proxy for relationship) of 0.57 is found which tells us that higher growth rates positively contribute to higher valuations. This is further validated when examining sub-groups (or quartiles). Where the median growth rate of the sub-group with the highest valuation multiple approximates 49%, this gradually decreases to 31% (second group), 29% (third group), and 19% (fourth group). All of this is displayed in the graph at the right.
Gross Margins and Financial Viability
The median gross margin for the selection of SaaS companies amounts to 76% in November 2020, slightly above the generally targeted level of 75% for SaaS companies. Scalable SaaS companies are generally known by their high growth rates and increasing gross margins once critical mass has been achieved. Though, the metric is generally a poor indicator for financial viability or even profitability.
Instead, investors are increasingly interested in the Rule of 40. This performance metric looks at the sum of the respective company’s growth rate and its profitability margin. Usually, investors deem a minimum of 40% as acceptable. When looking at our sample of SaaS companies and embracing the benchmark of 40%, it is notable that only 48% of the companies meet this requirement. As the growth rate for all companies is positive (median of 32%), it becomes clear that a considerable number of SaaS companies are suffering from ample loss-making operations. This is primarily driven by the expansion aspiration and the search for scalability which often comes with higher customer acquisition costs at the expense of profitability. These findings are illustrated by the graph in Appendix 2.
Underlying Customer Profiles
Beyond the main performance metrics such as valuation, sales, and margins, it is interesting whether trends among the sample of SaaS companies can be observed in terms of customer segmentation. Within our own practice, we primarily deal with Series A and Series B companies that have accomplished a replicable sales model across one or more verticals. Oftentimes, product-led-growth strategies are deployed to acquainting the customer with the product, sometimes even followed by upsell activities that subsequently lead to increased average revenue per account (“ARPA”). As such, companies will boost the customer base and revenues.
When taking annual contract values as a proxy for average revenue per account (“ARPA”), Christoph Janz’s approach of analogizing 5 types of sales strategies with animals  can be extended to our sample of 51 SaaS companies. The findings are depicted below.
From the graph above, it becomes clear that nearly 95% of the SaaS companies in our sample focuses on elephants, deers and rabbits in terms of customer categories (and the corresponding ARPA). Nevertheless, it should be noted that the companies part of the sample generously exceed the $ 100 million in annual revenue whereas the model introduced by Janz is addressed to less mature SaaS companies transitioning to a $ 100 million sales machine.
As such, it can be said that, in order to scale up the company beyond $ 100 million in ARR, companies will have to increase their ARPAs from flies and mice to at least rabbits. The exceptions to this rule are Dropbox, Wix, and SurveyMonkey who have managed to reach sales of $ 2 billion, $ 1 billion, and $ 344 million respectively with lower ARPAs. It should be said, nevertheless, that product-led-growth is a relatively new strategy which means that some companies are likely to still be in the process of further scaling this.
Below, performance metrics are illustrated for each respective class. It should be noted that mice and flies classes are highly affected by single values due to the limited sample size.
Annual Contract Values
Annual contract values among SaaS companies range from as small as $1,000 for Survey Monkey to more than $1,200,000 for Veeva Systems. As illustrated in the previous paragraph, the vast majority of the SaaS companies are aiming for larger contracts based on the model of Janz. Nevertheless, when adjusting the scales to the size of listed companies, conclusions can be drawn on whether high-end enterprise customers are indeed preferred above SME customer profiles.
1. Smaller ACV Companies
Around 35% of the SaaS companies from the sample, have an average annual contract size of lower than $ 10,000. This group of companies often deploys a product-led-growth strategy and includes companies like Wix, Bill.com, Shopify and Atlassian. Previous research has already demonstrated the rise of product-led-growth companies. OpenView’s SaaS Metrics survey shows a staggering growth of 200% of SaaS companies using this strategy to further scale-up their sales.
2. Medium ACV Companies
The majority of the sample of SaaS companies (53%) have annual contract sizes ranging from $ 10,000 - $ 250,000. A significant portion of this group still has annual contract sizes below $ 100,000. On aggregate, this means that 73% of the SaaS sample has annual contract sizes below $ 100,000.
3. Higher ACV Companies
The remaining 12% of the SaaS companies have higher average annual contract values, indicated by annual contract sizes exceeding $ 250,000. This sample includes companies like Veeva, Coupa and Anaplan. These companies have may achieve higher contract values due to upsell activities or sell generally higher valued services.
It is notable that the median payback period, a metric that illustrates the timespan after which a company has gained back its customer acquisition costs, is substantially higher for companies with higher annual contract values (29 versus 21 months). This ratifies the assumption that these companies may need more time to persuade companies to acquire higher valued services. Similarly, the median operational expenses payback period (“OEPB”) of the latter group exceeds the median OEPB of the first two groups, by 21 months (44 versus 65). Due to these reasons, it cannot be said that higher average contract values lead to a more scalable business, as, in Q3 2020m, gross margins tend to be higher for SaaS companies with a lower average annual contract value (77% versus 69%).
The previous paragraph has described one growth strategy of SaaS companies by locking in customers and increasing revenue per account. One indicator to measure the loyalty of the customers and to gauge whether SaaS companies have managed to ramp up sales per customer is the Net Dollar Retention Rate (“NRR”). This metric demonstrates how much revenue the company has retained over the past 12 months (or any other interval) after corrections for churn, down-sell and upsell. Generally, SaaS companies should target an NRR of >100%, and for November 2020 our sample has a median NRR of 117%.
In the graph below, the NRRs are projected for a sample of 46 SaaS companies against their respective valuation per November 2020.
Having an NRR of nearly 160%, Snowflake exemplifies a SaaS company able to upsell additional features, products or services to existing customers which further fosters the growth of the company. Other successful examples are nCino (147%), Unity (144%) and Twilio (137%).
With Snowflake as a clear outlier, the NRR is an important metric for investors to monitor the stickiness of the companies’ service. The relevance of the metric to investors for assigning a valuation to the stock is indicated by the correlation between the two variables. For November 2020, this coefficient equaled 0.56, implying a moderate positive relationship between valuation and NRR.
Other Performance Indicators for Global SaaS Companies
Lastly, our research on SaaS companies in November 2020 provides some interesting, sometimes less intuitive, findings. It is generally assumed that SaaS companies are among the initiators of a wave of disruption and innovation across several industries. Across our sample, only 11% of the SaaS companies serve a particular vertical. This group includes companies like 2U, Veeva, AppFolio, and Unity. The high number of companies targeting several industries means that the software solutions from the biggest SaaS companies worldwide are generally scalable across different industries. With a median ARR of slightly above $ 500 million in November 2020, these SaaS companies are likely to expanding markets to maximize their addressable markets. This does, however, not necessarily lead to higher revenues. Our research points out that SaaS companies having a horizontal sales strategy have a median ARR of $ 500 million, 41% less than SaaS companies targeting a vertical market ($ 850 million). Based on the small sample size of vertical targeting companies (which should one take into consideration when drawing conclusions), we can state that vertically-oriented companies have managed to create powerful positions in their respective market, or are simply active in big markets with more demand for specialization. Other benchmark analyses between horizontal and vertical companies are depicted below, which generally show smaller differences. Thus, except for gross margin, it seems that the performance of horizontal and vertical companies in November 2020 was roughly in line.
Another general assumption is that the wave of SaaS companies over the past 15 years has triggered further disruption and initiated a transformation in business models from incumbents too. We do see, across our sample of SaaS companies, that a positive, yet moderate, relationship exists between the founding date on the on e hand, and revenue growth rates and net retention rates on the other hand (0.44 and
0.45 respectively). This means that, as expected, younger SaaS companies generally have higher growth rates and net retention rates. The relatively (unexpected) weak relationship between the founding year and growth rates is striking, though. One of the reasons for this might be the expansion of SaaS companies in different verticals, and their ability to build replicable sales models in markets that are big enough to sustain their growth rates (to some extent). Essentially, if the market is big enough and the salesforce is strong enough, the growth rates of SaaS companies do not necessarily slow down.
The below table benchmarks the best-in-class, moderate performing, and least performing SaaS companies based on the respective metrics in November 2020.
Based on the findings in the table, it seems that the top 25% of SaaS companies meet the (widely recognized) criteria of a great SaaS company. Furthermore, our research points out that only 48% of the SaaS companies meet the 40% rule requirement. Thus, it seems that, despite the successful record of scaling the SaaS company to an IPO, more than half of the SaaS companies have still not found a sustainable, financially viable business model.
Growth projections are not taken into consideration for assessing the performance of a company, as this is considerably impacted by the maturity of the company. Based on the medians above, as well as previous findings in this report, a large variety between performances among SaaS companies persists.
 Our proprietary database consists of data from several public SaaS resources such as the SaaS Capital Index, the Bessemer Venture Partners Index, and Meritech Capital comparables
 Based on a sample of 80 SaaS companies
 Based on a sample of 69 SaaS companies
 Based on a sample of 54 SaaS companies
 Based on a sample of 80 SaaS companies
 Based on a sample of 69 SaaS companies
 Based on a sample of 54 SaaS companies
About Knight Capital
We from Knight Capital are B2B SaaS investors from Amsterdam, the Netherlands. We help founders from exceptional European B2B SaaS companies from their Series A to Series B and beyond. Our team of investment professionals bring in capital, growth expertise and access to our global ecosystem of partners. We believe in long term partnerships with founders and management teams to create highly successful businesses. To date, we have invested in successful start-ups such as Dealroom.co, Stream.io, Smart Protection and Zephr.
Appendix 1: Revenue Multiple per November 2020 Across a Selection of SaaS Companies
Appendix 2: Rule of 40 and Annual Growth Rates per November 2020 Across a Selection of SaaS Companies