At the end of 2023, TechCrunch ran a very influential piece that got forwarded around the SaaS world in a flash. The jolting punchline? The “Rule of 40 … is dead wrong,” proclaimed Bessemer’s Byron Deeter and Sam Bondy. Of course, outside of the tiny world of pre-IPO, venture-backed SaaS, the Rule of 40 was always misleading. But when Deeter declared it dead, the industry sat up and listened. At SaaS Capital, we had three main reactions. We agree with Deeter’s main contention: simply adding up growth and profitability as if they were interchangeable is wrong. Growth dominates. But, we have so ..read more

Median revenue growth rates of publicly traded Software-as-a-Service (SaaS) companies in the SaaS Capital Index™ (SCI) are decelerating, and have been for much of the past decade as these companies grew bigger. The more recent development is that growth rates are now decelerating for all company sizes, including smaller public companies, which historically had the highest growth rates in the Index. In the following post we cover these four key points:  Revenue growth rates are decelerating for public SaaS companies, in keeping with an established trend as companies mature: bigger compani ..read more

Artificial Intelligence will affect B2B SaaS very unevenly. Most companies will be affected only marginally, as AI becomes another tool in the toolbelt for technologists to deliver business value. However, there are some parts of the B2B SaaS ecosystem that will be utterly hollowed out by AI, as entire departments or functions disappear. We suggest here some mental models to use to help you estimate the risks to your SaaS business from the rise of AI. What we mean by “AI” What’s being called today “AI” (namely: generative language or image models, and good general-purpose classifiers) is a big ..read more

In November 2023, SaaS Capital launched a short survey to compare intra-year data against our long-running annual B2B private SaaS company metrics survey. We focused on just two areas: growth rates and profitability. The key takeaways from the results are: Growth rates have slowed considerably through 2023. More companies, as a proportion of the total, are shrinking than we’ve ever seen. Companies have responded by cutting costs – most are profitable or close to it. Growth rate + Profitability Ratio (aka GP Ratio or “Rule of 40” number) has increased for most companies through 2023 – their pr ..read more

In Parts I and II, we looked at public company data and private company valuation models (backed by data) in order to come up with some empirical guesses for the cost of equity capital for SaaS companies. In this part, we step back from the data for a moment in order to examine the theory. The result may surprise you. ARR growth rate is equal to the cost of capital (sometimes) Here’s the surprising conclusion: for a steadily growing SaaS company, with stable and typical SaaS metrics, paying no dividends, and over a time period where there is no expectation of macroeconomic changes, the cost of ..read more

This is the second in a series on “Exploring the Cost of Capital for SaaS Companies.” If you’re not already familiar with the challenges of estimating the cost of equity, it might be helpful to start by reading the introduction and Part I. In Part I, we estimated the cost of equity for public SaaS companies at 14.9% as a long-term average. However, you can’t just use numbers from public companies and apply them, unadjusted, to private companies. Private companies tend to have lower valuations than their public counterparts due to less liquid markets for their shares. Furthermore, size matters ..read more

Due to their compliance reporting requirements, there is plenty of data available about public SaaS companies. However, due to the size and funding of those companies, their metrics are typically not a good benchmarking metric for smaller, private SaaS companies. In order to provide peer-based benchmarking, SaaS Capital conducts a survey of private, B2B SaaS company metrics in the first quarter of each year. Our 12th annual survey, completed in March 2023, saw more than 1,500 SaaS companies respond. This post summarizes benchmarking data around the topic of Annual Contract Value (ACV). What is ..read more

This series of blog posts focuses on the equity cost of capital (sometimes called cost of equity, required return, or Ke) for private Software-as-a-Service (SaaS) companies. But what the heck does that mean, and why is it of interest? If your business needs money, you can “buy” that money by issuing debt (notes or bonds) or equity (stock or shares) – and buying that money comes at a cost. For debt, the price tag is usually written down up front: you pay an interest rate, possibly with some other fees or costs, but the overall cost is generally easy to determine in advance. However, the cost of ..read more

This series of blog posts focuses on the equity cost of capital (sometimes called cost of equity, required return, or Ke) for private Software-as-a-Service (SaaS) companies. But what the heck does that mean, and why is it of interest? If your business needs money, you can “buy” that money by issuing debt (notes or bonds) or equity (stock or shares) – and buying that money comes at a cost. For debt, the price tag is usually written down up front: you pay an interest rate, possibly with some other fees or costs, but the overall cost is generally easy to determine in advance. However, the cost of ..read more

As we have noted for many years, revenue retention is one of the most important metrics for ensuring medium- to long-term business health due to its compounding effect on growth. The relationship of new sale bookings to revenue retention is the SaaS version of “offense wins games, defense wins championships.” Measuring key metrics over time offers insight into how a company is evolving. It’s also essential to benchmark metrics against peers to understand what’s “normal” and gauge the potential impact of the macro environment. And for private SaaS companies, benchmarking retention against publi ..read more