SaaS Growth in the time of a pandemic

In 2008 over 170,000 start-ups closed their doors. Currently estimates of economic contraction for 2Q/2020 range from 12% - 24% (and these estimates may be optimistic).

As a SaaS founder, you should be adjusting your strategy from growth mode to survival mode. This is the fifth economic contraction that I have experienced during my career. My advice, cut more than you feel you should. Cash is oxygen for start-ups.

On March 5 Sequoia Capital posted a blog on Medium Coronavirus: The Black Swan of 2020.

This blog provided a framework for founders and executive teams to take in assessing their strategy to ensure the health of their business.

On March 20, they posted a followup blog post The Matrix for COVID-19 that provided a very useful 3x3 matrix for assessing possible business scenarios outside a business's control with potential strategies that are within a business's control. This matrix is linked below.

At Smithers, we have developed a simple free tool Scenario Builder Lite that allows SaaS founders and executive teams to quickly run the 9 scenarios highlighted above, identify the key levers that maximize your cash runway, use the outputs to gain approval for your plan and also share and communicate your strategy and path forward to internal and external stakeholders.

A key part of this analysis is assessing and communicating revised growth estimates. The remainder of this article will address growth rates and how to correctly calculate them.

Year Over Year Growth Rate (YoY Growth)

Rory O’Driscoll wrote a great article in February 2018 that clearly highlighted the value of growth to venture investors. The article “Understanding the Mendoza Line for SaaS growth” demonstrated the trajectory that creates deal traction based on a company demonstrating a clear IPO trajectory.

The rule of thumb that Rory laid out was based upon two underlying premises.

1. Investors prefer to invest in businesses that have a chance to be a standalone public company. This implies an ARR run rate of $100M while growing at >25% at the time of the IPO.
2. The second rule was that over time, growth rates decline, but do so in a predictable manner. The rule of thumb is that once $10M ARR is achieved, growth should be between 80% and 85% of the prior year.

The article highlighted two companies as an example. Company A on a clear path to go public and Company B at the threshold where a clear path to IPO is not a given.

Source: https://techcrunch.com/2018/02/09/understanding-the-mendoza-line-for-saas-growth/

The article also provided a table demonstrating for each cohort of ARR the Mendoza Line Growth Rate for companies to use as a benchmark of potential IPO success.

Source: https://techcrunch.com/2018/02/09/understanding-the-mendoza-line-for-saas-growth/

This table can be visualized in the chart below:

Source: https://techcrunch.com/2018/02/09/understanding-the-mendoza-line-for-saas-growth/

As we highlighted in the introduction to this document, SaaS metrics are your business’s vital signs.

YoY Revenue Growth matters because it is the most important driver of value. As shown above there is a minimum required level of growth below which you will struggle to attract interest from venture investors.

YoY Revenue Growth matters because it is the most important driver of value

So what should your revenue growth look like based upon public benchmarks?

In Openview’s 2019 Expansion SaaS Benchmarks www.saasbenchmarks.com, on page 13 of the report, the author's Sean Fanning and Kyle Poyar found that SaaS YoY Growth ranged from 15% to 165% with businesses under $2.5M ARR achieving 80% average YoY Growth; those between $2.5M and $10M ARR averaging 50% YoY Growth; those between $10M and $50M ARR averaging 40% YoY Growth and those >$50M ARR growing on average at 29%. Source: 2019 OpenView SaaS Metrics Survey, N=639.

Scale Venture Partners provides a set of benchmarks within Scale Studio (www.scalestudio.vc) based upon data from more than 300 companies.

Using this table, a management team can quickly benchmark their company’s performance.

Scale has also provided a useful table that demonstrates the time to achieve $100M in ARR by quartile. It is interesting to note that the 75% quartile matches the T2D3 (triple-triple-triple-double-double) rule of thumb often quoted by investors.

Hopefully, this section has provided you with context as to the value of knowing your revenue growth rate. You need to be prepared to answer the question “How fast is your company growing?”

Calculating MRR as we demonstrated above looks at the short-term smaller picture. Looking at YoY Revenue Growth allows you to step back and look at long-term big picture trends. It allows you to step back from a short-term view and place your numbers in the proper context.

By looking at longer-term data over one year of longer periods you have a larger data set and a greater number of samples providing a more accurate measure of your business performance.

Year-over-year (YOY) growth is a key performance indicator comparing growth in one period (usually a month) against the comparable period twelve months before the previous year, hence the name). Unlike standalone monthly metrics, YOY gives you a picture of your performance without seasonal effects, monthly volatility, and other factors. You see a clearer picture of your actual successes and challenges over time.

Calculating YoY Growth

The first step is gathering the data you need for your analysis. Source the data for the monthly or quarterly period you are examining and the same information for the time period 12 months earlier.

Now that you have the data, it’s a simple three-step calculation:

1. Take your current month’s revenue number and subtract the revenue number from twelve months before. If the number is positive congratulations your business grew; if it’s negative, you had a loss and you have some work to do.
2. Step two is to take the difference and divide it by the revenue number from twelve months ago. This provides you with the Growth Rate for your twelve-month period.
3. Finally, multiply the Growth Rate by 100 to convert your rate into a percentage.

YoY Growth Calculation Example

Let’s go back to SaaSly and look at a real-world calculation to illustrate this further. 

In March 2019 SaaSly revenues were $1,750,000 and revenues for March 2018 were $840,00. To calculate growth our first step is to subtract last year’s revenue of $840,000 from this year’s revenue of $1,703,406.18 this shows SaaSly grew revenue by $863,406.82 YoY. Step two is to divide the $863,406.82 by last year’s revenue of $840,000 giving the YoY growth rate of 1.028. The final step is to multiply the growth rate by 100 to view this as a percentage of 102.8% YoY Growth. As you can see SaaSly is growing its business quite nicely and seems to be on an IPO track.

SaaSly YoY Growth 2019 2020

Revenue $840,000 $1,703,406.18

Growth $863,406.82

Growth Rate 1.028

YoY Growth % 102.8%

It’s important to note that tools like Smithers track all of the input data and can make this available to users in real-time.

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Managing a SaaS business in a user-driven world

Building a SaaS business relies on knowing your numbers. We now live in a subscription-based world. It is end-user driven.

You need to listen to your customers by identifying what is of value to them and understanding what they are telling you through their actions (or lack of action) and then act on those insights — in real-time.

If you can build a profitable customer relationship, you will build a successful business. Unlike the enterprise software business, your goal is not a single or small set of transactions but rather building a relationship for life.

You can manually build a spreadsheet-based control book but that is complicated, error-prone and takes many hours of executive and staff time to maintain. With Smithers link to your key systems of record once and have the critical business performance data you need at your fingertips you and your team can access your data anywhere that you work, live or play, 7/24.

Smithers amalgamates your payment data, financial data and marketing analytics into a single cohesive dataset that allows you to visualize your key performance metrics in real-time.

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