Every year, the ICONIQ Growth Analytics team analyzes the financial and operating metrics from private and public companies to understand the data behind scaling B2B SaaS companies. In this year’s report, we are excited to now have over a decade’s worth of SaaS data for companies from $1M ARR to post-IPO.
Along with a full refresh of the analysis, this year we dive into how the SaaS landscape has evolved over the last few years, the balance of growth vs efficiency, and the key metrics to watch to drive resilience in times of uncertainty. We are also excited to share three companion reports focused on vertical SaaS businesses, product-led growth companies, and scaling early-stage companies, in addition to a board reporting template with benchmarks from our ICONIQ Growth Enterprise Five scorecard.
Today's SaaS Landscape
2023 has seen continued deterioration in top-line performance as the macro environment continues to be challenging for SaaS businesses. While topline growth has fallen across the board, early-stage companies saw the biggest impact to ARR growth, falling from peak levels of 200%+ YoY growth to 111% YoY as of 1H 2023.
Median net dollar retention has also been impacted, falling from peak levels of 130+% in 2017 to ~105% as of 1H 2023.
The New Era of Efficient Growth
As growth has slowed, companies are focused on finding ways to reduce spend and conserve runway via levers such as hiring freezes, reductions in force (RIFs), tool rationalization, and performance management.
These efforts can be seen in improvements to ARR per FTE, likely driven by the organizational rightsizing many companies have undertaken. As companies have pivoted to improving profitability amidst the challenging macro environment, FCF margins have started to also slowly increase over the last year.
However, reductions in spend have either not been made quickly or dramatically enough to make up for the rapid slowdown in growth; efficiency metrics like Rule of 40 and Magic Number have continued to decline throughout 2022 and 2023.
The Trade-off between Growth vs Efficiency
One of the hardest decisions for SaaS leaders in the current environment is whether to invest in growth or improve efficiency. While we recommend looking at both in tandem, it is worth noting that in today’s environment revenue growth and the sustainability / predictability of that growth remain the primary driver of valuation in the public markets (which we know trickles down to the private markets).
As of June 2023, forward revenue growth is the primary driver of valuation in the public markets. Coefficients measure the slope of the linear relationship between different variables. From December 2021 to June 2022, the relative importance of profitability increased significantly. FCF margin had a larger impact on public multiples than revenue growth in June 2022, as shown by the greater coefficient in the table above. However, the balance has shifted back towards growth as the primary driver of valuation. As of June 2023 revenue growth once again had a larger impact on public multiples than FCF margin.
The ICONIQ Growth Enterprise Five
Through our research on SaaS performance, we’ve identified five key metrics we believe are highly representative of a SaaS company’s overall growth and efficiency. While our quantitative evaluation of software businesses is always tailored to the nuances of a company’s industry, product, sales motion, and more, we’ve found the “ICONIQ Growth Enterprise Five” to be consistently strong indicators of a company’s long-term success.
Given the current environment, we expect that median benchmarks shown here will be more realistic for companies to target in 2023, but have included top quartile as reference for "best in class" performance regardless of time period.
In our 4th year of publishing this report, we dive into which key growth and efficiency metrics have stayed consistent and which ones have changed over the last year.
The Pace of Growth
2022 and 2023 have had a significant impact on SaaS performance, with median and top quartile benchmarks for growth and retention metrics dropping significantly. Last year, we remarked on how top quartile SaaS companies have generally grown 2.0x-2.5x year-over-year until $100M ARR; the rate of ARR growth has now slowed to 1.0x-1.5x with the addition of 2022-23 datapoints.
In our 2022 analysis, expansion only became the primary driver of gross new ARR after companies reached $200M ARR. Companies are now prioritizing expansion earlier in the company lifecycle, with expansion exceeding 50% of gross new ARR as early as the $100M ARR range, a trend that has likely been accelerated by the rise of product-led growth. In addition to this focus on existing customers, many SaaS companies are also exploring channel and partnership strategy to accelerate growth.
Spend and Burn
Renewed focus on efficiency and path to profitability have started to move the needle on both gross and FCF margins; however, the pace and scale of spend reductions do not seem to have matched the speed at which growth slowed leading to efficiency metrics like Rule of 40 and magic number dropping across the board. Average spend per FTE has also increased since last year’s report, likely driven by a competitive job market in 2022 and inflationary pressure. However, cost allocation across G&A, S&M, and R&D has stayed consistent with prior years with S&M continuing to make up ~50% of total spend.
Budget constraints, increased scrutiny on the purchase of discretionary software tools, and tool rationalization / consolidation are among the many factors that have made selling SaaS harder, impacting both GTM efficiency and customer health. This has resulted in declines to magic number and expected customer lifetime, in addition to increased payback periods for customer acquisition. Explore more benchmarks on best in class go-to-market strategy and efficiency in our GTM series.
The Resiliency Rubric
In times of volatility, we recognize that the Enterprise Five is not a comprehensive framework of health for companies who need to move quickly and understand which business levers to prioritize. Below are five metrics we recommend all SaaS companies evaluate as measures of resiliency as they navigate periods of market unpredictability, which together comprise “The Resiliency Rubric.”