Better Cash Efficiency Contributes Most to Private SaaS Company Excellence

Survey Highlights Key Differences That Set Best-In-Class Private SaaS Companies Apart

KeyBanc Capital Markets Inc. (KBCM), the corporate and investment banking unit of KeyCorp released results from its Technology Group’s 10^th annual Private SaaS Company Survey (formerly known as the Pacific Crest Securities Private SaaS Company Survey), the benchmarking report by which the Software-as-a-Service industry measures financial and operating performance.

Overall, growth remains strong among private SaaS companies, with survey respondents reporting a median of 40 percent year-over-year organic annual recurring revenue (ARR) growth. That being said, only one-in-five companies are operating at or above “The Rule of 40%,” a much-discussed key measure of best-in-class SaaS company performance calculated by adding a company’s growth rate and free cash flow (FCF) margin. Interestingly, the survey results found that “The Rule of 40%” performers do not necessarily distinguish themselves with lower churn rates compared to those that fall below the threshold—what sets them apart are significantly lower customer acquisition cost ($0.51 vs. $1.26) and capital consumption (0.7x vs. 1.5x) ratios.

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“As the SaaS industry continues to become more sophisticated, operators and investors are looking more closely at performance-driving metrics,” said David Spitz, managing director of KBCM’s Technology Group and primary author of the survey. “This year’s survey results show that while strong retention is clearly a necessary component of efficiency, the most elite performers differentiate themselves most in terms of high sales productivity and low capital consumption.”

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David Skok, investor at Matrix Partners, author of the SaaS-focused blog forentrepreneurs.com and active supporter of the survey for the past eight years, added: “SaaS businesses continue to play a pivotal role in our economy. As they’ve matured, it’s become increasingly important to benchmark and track core performance metrics so that they’re maximizing potential. The survey continues to be a yardstick for SaaS companies, especially those striving for ‘The Rule of 40%’ excellence.”

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