2013 Pacific Crest SaaS Survey

We worked together with Pacific Crest, an investment banking firm with a specific focus on SaaS, to survey 155 SaaS companies on a variety of topics such as growth rates, CAC (cost to acquire a customer), gross margins, churn rates, etc. The goal of the survey is to provide useful operational and financial benchmarking data.

Many of the readers of this blog participated in the survey, and I would like to thank them for their time. I’d also like to thank David Spitz at Pacific Crest (@dspitz on Twitter) who did most of the work putting together the survey. The results of the survey are posted below.

Info about the Survey Participants

A broad diversity of SaaS companies participated:

  • $0-$60MM+ in revenues ($5MM median)
  • 25-250+ employees ( 50 median)
  • 10-2,000+ customers ( 78 median)
  • $100s to $MMs median annual contract value ( $20K median)
  • Participants from around the world, although primarily U.S.

Survey Participant Revenue Distribution

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Survey Participant Geography

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Growth Rates

How Fast Did / Will You Grow GAAP Revenues?

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Historical revenue rates for the group are centered just over 40%, while the median projected growth is 47% for 2013. Comparison with previous surveys: very similar historical growth rates, but more optimistic about forecast.

How Fast Did / Will You Grow GAAP Revenues? (Excluding companies <$2m in Revenue)

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We suspected that the high concentration of participants with >100% growth comes from the large number of small companies. Excluding companies with <$2m in revenues, we found growth rates showing a more traditional bell curve centered in the mid 30%s.

Median Growth Rate as a function of Size of Company

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Looked at more directly, it’s clear that the smallest companies experienced the highest growth rates. It’s also interesting to see that, at least among the sample, the mid-tier ($15MM to $40MM) is the slowest growing group.

Median Growth Rate as a Function of Contract Size

(Excluding Companies <$2MM in Revenue)

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Looking at the impact of median contract size on growth, we excluded the smallest companies (<$2MM in revenues), since most of them sell small deals. The resulting analysis, reveals marginal correlation between contract size and growth, with the fastest growers having median contract sizes between $1K and $25K.

Median Growth Rate as a Function of Sales Strategy

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Across the entire group, companies which mainly use internet distribution are realizing the highest growth rates.

Median Growth Rate as a Function of Sales Strategy

(Excluding Companies <$2MM in Revenue)

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However, eliminating the smallest companies again, we found growth rates for companies using mainly internet distribution actually lagged. Meanwhile, those using primarily inside sales experienced growth rates 10 points higher than field sales.

Median Growth Rate as a Function of Target Customer

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Growth rates among companies selling to very small businesses (VSB) are higher than those selling to SMB, which in turn are higher than those selling to Enterprise. The trend holds even after removing the smallest companies.

Go-to-Market

Primary Mode of Distribution

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Field sales remains the most popular way to sell, with 37% of participants employing it as their primary mode of distribution (50% if we exclude companies with <$2MM in revenues). Inside sales is not far behind, however, at 29%. Comparison with Previous Surveys: We saw a strong increase in the use of inside sales. For the 2012 survey, inside sales was the primary mode for just 20% of participants.

Primary Mode of Distribution as a Function of Median Initial Contract Size

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As expected, companies with larger median contract sizes tend to rely more heavily on field sales. Comparison with Previous Surveys: We found much heavier use of inside sales among companies in the mid-tier – in this survey, 54% of respondents in the $5-25k group used inside sales vs. only 33% in 2012.

CAC: How Much Do You Spend for $1 of New ACV from a New Customer?

(Excluding Companies <$2MM in Revenue)

Note: we used this question as a way to get at the metric “Months to recover CAC” that you will have seen me recommending in other blog posts such as SaaS Metrics 2.0.

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Respondents (excluding the smallest companies) spent a median of $0.92 for each dollar of new ACV from a new customer. The result drops to $0.85 if we include companies with <$2MM in revenues. Comparison with Previous Surveys: The result is consistent with the $0.90 and $0.93 we derived in the 2012 and 2011 surveys, respectively.

CAC on New Customers vs. Upsells vs. Renewals

(Excluding Companies <$2MM in Revenues)

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The median CAC for upsells is $0.17, or 19% of the CAC to acquire new customer dollars. The CAC for renewals is $0.14, or 15% of the CAC to acquire new customer dollars. Comparison with Previous Surveys: Similar result for upsells (was 20% in 2012); however, the renewal CAC is markedly higher this year (was just 10% in 2012).

CAC Spend by Primary Mode of Distribution

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The data suggest that field sales has the most expensive CAC at $0.96, with inside sales 10% lower at $0.86 and online distribution 43% lower at $0.55. Comparison with Previous Surveys: These trends were consistent with what we saw in our 2011 survey results, but not with our 2012 results, which showed less differentiation between field and inside, and surprisingly more cost for online distribution.

What Percentage of New ACV is from Upsells to Existing Customers?

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The median respondent gets 13% of new ACV sales from upsells; the largest companies rely more heavily on this “land and expand” phenomenon. Comparison with Previous Surveys: Consistent with our 2012 survey results.

Are the Fastest Growing Companies Relying More on Upsells?

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When we divide our respondent pool by growth rate, we find that the top growers in each size class generally upsell more than the slower growers.

Professional Services Impact on Go-to-Market

(Excluding Companies <$2MM in Revenue)

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Professional services play a minor role for most of the group, with the median company booking P.S. revenues equivalent to 11% of first year contract value. P.S. margins are in the high 20s%. (Note that we excluded companies with <$2MM in revenues, as most do not have significant P.S. revenues). Comparison with Previous Surveys: Very similar results to last year.

Professional Services (% of 1st Year ACV) as a Function of Target Customer

(Excluding Companies <$2MM in Revenue)

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As expected, companies which are focused mainly on enterprise sales have higher levels of P.S. However, at just 21% of first year ACV, we were surprised the number wasn’t higher.

Subscription Gross Margins

“What is your gross profit margin on just subscription/SaaS revenues?”

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Median subscription gross margins are 76% for the group. Note that, while not depicted here, the result does not change materially when removing the small companies from the group.

Freemium / “Try Before You Buy”

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Approximately 25% of companies make use of freemium in some way, although very little new revenues are derived here. Try Before You Buy is much more commonly used: two-thirds of the companies use it and many of those derive significant revenues from it. Comparison with Previous Surveys: Very consistent results with previous years.

Sales Commissions

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Median sales commission rate for the group is 9%. Comparison with Previous Surveys: Consistent with 2012 results.

Sales Commissions as a Function of Median Contract Size

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We were surprised to see very little relationship between sales commission rates and average contract sizes (except at the very low end). Comparison with Previous Surveys: In 2012, we saw the highest commission rates for the <$1k deal companies, and the lowest rates for the “elephant hunters” . That was not the case here.

Commissions for Renewals, Upsells and Multi-Year Deals

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Not surprisingly, commissions on renewals are typically deeply discounted, with a median rate of 2%. Upsells command a median rate of 6%, although roughly half of the companies pay full commissions on upsells. Comparison with Previous Surveys: Very similar results to 2012. The biggest change is in the third column, analyzing commissions on multi-year deals. In the 2013 survey, only 24% of respondents paid no additional commissions on the additional years; in 2012 almost half of the participants paid no additional commissions.

Cost Structure

Cost Structure

(Excluding Companies <$2MM in Revenue)

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The median numbers reflect the most operating leverage from improvements in gross margin, R&D and G&A, surprisingly more so than improvements in Sales & Marketing (Note that results from companies <$2MM in revenues have been excluded, and can be viewed in the breakout on the following page). Comparison with Previous Surveys: Very similar results as in previous years.

Median Cost Structure by Size

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For Comparison: Historical Results of Selected Public SaaS Companies

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Sales & Marketing Spend vs. Projected Growth Rate

(Excluding Companies <$2MM in Revenue)

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Surprisingly and interestingly, there is virtually no correlation in the survey results between sales & marketing spend (as a % of revenue) and growth rates. While this goes against conventional wisdom, it may simply reflect that CAC in some businesses is more efficient than in others. (Note that the smallest companies skew results due to more inflated growth and were thus removed from this analysis). Comparison with Previous Surveys: In the 2012 and 2011 surveys we saw the conventionally expected correlation, with higher S&M spend leading to higher growth rates.

Contracting & Pricing

Median Annual Contract Size (ACV) per Customer

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The median annual contract size (subscription component only) for the group was $20k per year. Comparison with Previous Surveys: As expected, with the increase in smaller-sized participants, this was lower, with the 2012 survey at $24k and the 2011 survey at $37.5k.

Median / Typical Contracts for the Group

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The average contract length is 1.5 years; and the average billing terms are quarterly (three months in advance). Comparison with Previous Surveys: Virtually the same median contract length as in the 2012 survey; however the median billing in the 2012 survey results was much longer at just under a year.

Contract Length as a Function of Contract Size

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The phenomenon of longer contract terms for larger contracts is pretty clear. Comparison with Previous Surveys: We did see more use of shorter contract lengths than in previous surveys – e.g., roughly 30% of companies in the $5-$25k group used month-to-month or less than one year contracts (vs. none in 2012). Even some companies in the “elephant hunter” groups had shorter contracts.

What is Your Primary Pricing Metric?

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Comparison with Previous Surveys: These results are virtually identical to 2012 and 2011.

Churn

Annual Gross Dollar Churn

(Excludes Companies <$2MM in Revenue)

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Annual gross dollar churn (without the benefit of upsells) is 9%. Note that although we excluded companies <$2MM in revenues, the result was similar when including these companies. Comparison with Previous Surveys: This result is a lot higher (and more conventionally sized) compared with results from 2012 and 2011, which both had very low median gross dollar churn rates of 5%.

Annual Unit Churn (Customer Churn)

(Percentage churn of # of paid customers at year-end 2011 that were still customers at year-end 2012)

(Excludes Companies <$2MM in Revenue)

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We introduced unit churn (by customer count) for the first time in this survey, and derived a median annual unit churn of 9% – the same as gross dollar churn. (This is somewhat surprising as conventional wisdom is that unit churn is generally higher than gross dollar churn, as smaller customers tend to churn more often).

Annual Gross Dollar Churn as a Function of Contract Length

(Excludes Companies <$2MM in Revenue)

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Not surprisingly, companies with very long-term contracts (2+ years) have the lowest churn. It is surprising, however, that month to month contractors do not churn higher than the median. Comparison with Previous Surveys: Fairly consistent with previous years.

Annual Gross Dollar Churn as a Function of Contract Size

(Excludes Companies <$2MM in Revenue)

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Companies with the largest deal sizes (>$250K) have the lowest churn, and those with the smallest deal sizes have the highest churn. However, churn rates in the broad middle range, for companies with average deal sizes between $1k and $250k, don’t show much of an explainable pattern. Comparison with Previous Surveys: Lack of correlation in the broad middle ranges was not the case in 2012 or 2011.

Annual Gross Dollar Churn as a Function of Primary Distribution Mode

(Excludes Companies <$2MM in Revenue)

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Those companies employing primarily field sales have lower churn rates than those employing primarily inside sales or online distribution. Comparison with Previous Surveys: Consistent with 2012 and 2011 survey results.

Annual Net Dollar Retention From Existing Customers

“How much do you expect your ACV from existing customers to change, including the effect of both churn and upsells?”. We define this as the “net retention rate”

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The median annual net retention rates, including churn but also including the benefit of upsells, is 110%. Comparison with Previous Surveys: Very similar (slightly higher) than 2012 and 2011.

Capital Requirements

Capital Raised So Far

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Companies in the survey group have raised a median of roughly $9MM in capital so far. Comparison with Previous Surveys: Well below the $23MM and $22MM in capital raised by participants in the 2012 and 2011 surveys, respectively.

Analysis of Companies by Capital Raised

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Comparison with Previous Surveys: The 2013 group has generally received more investment relative to their size than the 2012 or 2011 groups (e.g., those receiving $5-$15M in investment so far had median revenues of $4MM, versus the same group in the 2012 survey having $8MM in revenues).

Capital Efficiency Expectations – Median Levels for the Group

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Comparison with Previous Surveys: Identical median historical growth vs. last year (40%). More conservative outlook (38% vs. 44% last year).

Conclusion

The survey contained some incredibly valuable data, as well as some surprising results. I look forward to seeing your comments on what you found to be surprising.

My strong thanks to David Spitz and Pacific Crest for allowing me to reprint the survey here. To sign up to contribute your data to the 2012 survey, click here. I also recommend following David Spitz on Twitter (@dspitz) to stay in touch with their other findings on SaaS businesses.

Important Disclosures from Pacific Crest:

Analysis of these survey results have been prepared by Pacific Crest Securities. Pacific Crest cannot verify accuracy of responses.

Observations and commentary contained herein relate solely to the survey results and cannot necessarily be applied elsewhere.  Certain other information contained herein has been obtained from sources believed to be reliable, but the accuracy and completeness of the information, and that of the opinions based thereon, are not guaranteed. This analysis is for information purposes only and is not an offer to buy or sell or a solicitation of an offer to buy or sell any securities mentioned.

Pacific Crest Securities and entities and persons associated with it, including its analysts, may have long or short positions or effect transactions in the securities of companies mentioned in this report, and may increase or decrease such holdings without notice. Pacific Crest Securities may make a market in the shares of any such company. These markets may be changed at anytime without notice. Pacific Crest Securities may have acted as lead or co-managing underwriter in one or more of such company’s U.S. equity offerings, and it may perform or seek to perform other investment banking services for any company referenced in this document.

Pacific Crest’s specific disclosures can be seen here:

http://www.pacific-crest.com/disclosures/

Pacific Crest’s privacy policy can be seen here:

http://www.pacific-crest.com/privacy-policy/

Survey respondents participated anonymously and confidentially.

About the Author

David Skok

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  • I am sure that there are some, but apart from another startup called Alignable, I can’t remember any.

  • ramesh

    Fantastic report.

  • Andrew Ryan

    David,

    As always, amazingly useful content. For a long time I’ve been telling investors that as a SaaS company, we’ve been incredibly capital efficient – we got to $1m ACV with only $200k investment; but being out of market where folks don’t understand SaaS, it has fallen on deaf ears. This article allowed me to quantify our performance again other companies and has greatly increased our credibility.

    Keep these coming,
    Andrew

  • Great to hear. Educating boards and investors was a key goal of the article.

  • Peter Thomson

    David, thank you for this post and all your SaaS information… We’ve
    built our metrics around your recommendations. And to have this Survey
    to match up against is a big plus. We’ll be striving to fall within the
    upper quartile of SaaS performance – CAC and Churn will be key
    drivers… Please include us in your next Survey – would love to provide
    feedback on our positive traction!

  • Great. We will add you to the invite list!

  • gues

    I spent my weekend digging into and understanding our ACV before I found this and many other articles you have written. My company falls exactly in your median survey results. Thank you for this information, it will help our business tremendously to have standard KPIs that we can use to measure our own progress and compare to your survey.

  • Thanks for taking the time to write and let us know. Glad to have been of help.

  • Thank you David for sharing these results. Very informative.

  • Krishnan Gopalan

    Hi Could you clarify what mixed means in the primary mode of distribution vs growth rate?

  • It means that they are using some mix of the other distribution channels. Given that there were multiple respondents, it is impossible to give you an accurate picture of what the breakdown of that mix was.

  • John Winkenbach

    Great data as usual! I see the average gross margin is around 76%……any idea on the breakout of that 24% COGs? Would love to see hosting costs and customer support costs as a % of revenue.

  • Sadly we don’t have that data. Sorry!

    Best, David

  • Pierre

    Hello David! Thanks a lot for this so helpful information! Could you explain me why we don’t have in any table of cost structure EBITDA = Gross margin – Sales & marketing – R&D – G&A?

  • That is because most SaaS companies have decided to focus on growth, which means that EBITDA will come later. Since there are companies at many stages in their lifecycle, there are strongly varying levels of EBITDA as a % of Sales, which means there is just too much variance for this number to be meaningful.

  • Pierre

    I perfectly understand that EBITDA is not top priority compared to the conquest of new client during first years, that explains a rather”bad” EBITDA, but in the table name “cost structure”, why the formula EBIDTA = Gross margin – S&M- R&D – G&A is not correct (0 = 74 -26 – 24 – 16)?

  • pgombert

    David – Thanks for the data – I always look forward to this report.

    I could be wrong (been a long time since statistics class), but I think some of the median numbers need to be checked. For example the Median on Annual Net Dollar Retention From Existing Customers does not make sense. With 101 respondents to that question you should see 50 companies above the median of 110% and 50 below, however the chart shows from 105% and up there are only 39 companies. It looks like the median should fall somewhere in the 100 to 105% range. Am I missing something?

    There are several others like that as well.

    Thanks again.

  • Thanks for the comment. David Spitz and his team who did this work are investigating.

  • Very likely typical $100K per employee. Those with higher margins and ACVs likely were somewhere in $150K-$200K range. $200K+ range is a territory of those in enterprise and government contracts and zero customers in VSB, SMB, or B2C. Just going from financials I have seen in the last couple of years. That all said, my sample size isn’t what Pac Crest got their hands on.

  • Malcolm Locke

    Does the analysis of sales commissions as % of ACV refer to the commission paid to the sales rep only or is it the aggregate commission paid on deals (i.e. commissions for sales rep+sales manager+pre-sales staff+ an other).

  • It is the aggregate.

  • Great, helpful data and viz, thank you very much. But for young SaaS companies, I would love to have the same analysis excluding >$2MM companies (instead of excluding the <$2MM).

  • Thanks for the input!We’ve had the same comment made before, and it is very likely we will do two sets of survey results next year for that reason.

  • Nils Rooijmans

    thanks, very interesting read.

    Would like to know more about what percentage of COGS is in Employees versus IT/other. Is that part of the data as well?

  • Unfortunately that is not part of the data collected. Sorry!

  • Saratogan

    This is great data. Can the data be stratified? I am very interested in the subset of company size of ~$10M to ~$30M .

  • David, this is tremendous–thanks! Two thoughts: (1) Benchmarks like these concern me a bit because I worry they have an aligning effect. By becoming widespread, they cause further congregation to the mean, whereas I argue dramatic outperformance tends to come from (thoughtfully) breaking rules like these. In other words, I like to tell folks these things are useful information but not roadmaps. (2) On that point, what did you think of Veeva Systems’ S-1? I updated a post I wrote about Veeva with some of the info here. I would love to hear your thoughts: http://farooqjaved.tumblr.com/post/61515656173/veeva-is-different

  • Hi Farooq, strongly agree that these should not be used as roadmaps to avoid congregation to the mean. I have not had a chance to look at Veeva Systems S-1. I will take a look. Thanks!

  • We don’t have an easy way to stratify the data. We are considering taking a cut to get at the data for companies less than $2m in revenue, as that is a common request. Sorry!

  • markdhansen

    Really interesting results – helpful to anyone working on building a SaaS business. Some SaaS markets seem to support an endless stream of new entrants. I wonder what happens to most of them? I took a look at one that caught my eye in my blog today: http://learnedbydoing.com/post/66083453504/thousands-of-saas-niches

  • Markt

    Are these really annual churn numbers, or are they monthly? How was the question framed to the companies? Almost everyone in the SaaS business I know thinks of churn on a monthly basis, and I’m wondering if they responded assuming that was the question. The implied monthly churn rates would be incredibly low if these were truly annual figures…

  • They are real churn numbers on an annual basis. I believe they are skewed by a set of larger SaaS companies that sell to enterprises. We are trying to find the time to cut these numbers to show SaaS companies below $2m, which will likely show a different picture. If we don’t manage to pull that off this year, we will do it next year.

  • AlexLym

    could it be that upsells and renewals to bigger contracts are the reasons of those S&M 25%? and what do you mean not realist “for the size of companies in the survey”, would you share for what size it is realistic?

  • Preethi Kasireddy

    Thank you for the thorough and incredible report! Are you able to provide the back-up data for the analysis?

  • Sorry – no.

  • James Scott

    John – did you ever find this information? I too would be interested to see how COGs breaks down. I’m particularly interested in the support piece.

  • Mike

    Dave, in the graph labeled “Primary Mode of Distribution as a function of median initial contract size” I’m assuming internet is defined as eCommerce transactions. I am very interested in knowing how new logo’s are broken out by source (how was the booking originated) and average deal size. This graph tells me that as ASP increases companies move more towards a field sales model. However, if there is a lack of leads to feed field sales this strategy may not work. Is there any data on this?

  • Unfortunately no data on that particular question. What I am seeing is that companies with that kind of field sales force are using Market Development Reps to generate leads in their selected target markets. If you haven’t already seen this, you might find it interesting:
    http://www.forentrepreneurs.com/predictable-revenue/

  • CuriousBoardMember

    David, great post!

    Do you have a data (or a sense) of what a 2014 revenue multiple range for $2M ARR SaaS companies with 40-50% annual growth rates might be? I understand revenue multiples are significantly up for larger companies.
    Thanks for any thoughts you might have.

  • At that size, company valuations are not so clearly driven by revenue multiples. There is a whole variety of factors at play, and valuation is more art than science. If it’s an investor that is looking at this, they will be heavily focused on the long term growth potential. I can say that at the $2m revenue stage, investors are looking for very high growth rates that are in the 250-400% per annum range to show evidence that the company can become very large. As you are below that range, it is really hard to give any kind of indication without knowing a ton more about the company. Sorry to be so vague, but that is the nature of valutions on early stage companies.

  • Andrew Marks

    Thank you for posting this. I found the information very useful. Can I assume the vast majority of these responding companies are true SaaS companies in the purest sense? They have an actual application or business process that they are selling? The reason I ask is because I have been working with a number of BI SaaS vendors. While they do provide a set of BI tools, I don’t considered them SaaS as much as PaaS. In the BI Saas world, because it is a more complex implementation with a lot of integration and development work up front, and less about “configuration”, we typically see much higher services expense as a ratio to first year ACV. I’ve seen numbers that are typically in the .5:1 – 1.5:1 ratio of services to first year ACV.

  • Jim Jacobsen

    I do not see CAC or AVC defined in the article. What are they?

  • Hi Jim, here is an article that should help:

    http://www.forentrepreneurs.com/saas-metrics-2/

    And the definitions page that goes along with it:

    http://www.forentrepreneurs.com/saas-metrics-2-definitions/

  • Hi Andrew, that would be a good assumption.

  • Scot Fredo

    Hi David,
    Any idea whether companies in this survey are capitalizing their commissions or expensing in full each period? The accounting treatment can certainly impact the ratio of commissions as a % of ACV. My guess would be that companies sub $60MM, with the median at $5MM, are not mature enough to capitalize commissions over the customer life. If possible, it would be great if future surveys made that distinction and broke out the ratio for each method of accounting. Thanks

  • Hi Scot, that question is a very interesting one, and deserving of discussion. Unfortunately that question was not asked. We have recently changed from expensing in the period to capitalizing at one of my portfolio companies as we were getting hit with high swings in the expenses in good bookings periods due to commissions, but not able to show the revenue in that period, due to the delay in revenue recognition. The negative associated with this is that it takes a lot of work to compute the recognition of the commissions. You will need to get agreement from the auditors as well. In this case we had no issue with that.

  • Tanushree Jana

    Super useful, thanks a ton ! Would you have a sense of cac for the freelancer based companies such as odesk and utest? Are they similar to saas companies?

  • Hi Tanushree, I think you meant to say CAC instead of CAV? If that is the case, then no unfortunately I don’t know their CAC. It would not be safe to assume it was the same as SaaS companies. That number varies quite widely from company to company. Was I right that you meant CAC?

  • Tanushree Jana

    wow u r super prompt ! yes, u got it right :). I did edit it earlier but I guess when you read it, it still showed cav.

    would u know if the freelance companies’ cac is higher or lower than the saas chaps? they are all very similar after-all or am i missing something?

    Thanks a bunch

  • I would expect it to be lower, as their sales cycle should be simpler. It’s so easy to try out the services at low cost, that I would expect most customers would try the service first, without needing much human touch, and then if they liked it, purchase more. Many SaaS products are more complex to explain, try out, and implement. Those would have higher CAC.
    I hope that helps. Best, David

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