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Growth & Efficiency

The New Era of Efficient Growth

Explore our research on best-in-class SaaS growth and efficiency

The New Era of Efficient Growth

Explore our research on best-in-class SaaS growth and efficiency

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https://www.iconiqcapital.com/growth/insights/2023-growth-and-efficiency-series

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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.

What's Changed

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.

Growth Drivers

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.

GTM Efficiency

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.”

Disclaimer:

Disclaimer:

Unless otherwise indicated, the views expressed in this presentation are those of ICONIQ Growth (“ICONIQ" or the “Firm"), are the result of proprietary research, may be subjective, and may not be relied upon in making an investment decision. Information used in this presentation was obtained from numerous sources. Certain of these companies are portfolio companies of ICONIQ Growth. ICONIQ Growth does not make any representations or warranties as to the accuracy of the information obtained from these sources. 

This presentation is for general information purposes only and does not constitute investment advice. This presentation must not be relied upon in connection with any investment decision. The information in this presentation is not intended to and does not constitute financial, accounting, tax, legal, investment, consulting or other professional advice or services.  Nothing in this presentation is or should be construed as an offer, invitation or solicitation to engage in any investment activity or transaction, including an offer to sell or a solicitation of an offer to buy any securities which should only be made pursuant to definitive offering documents and subscription agreements, including without limitation, any investment fund or investment product referenced herein. 

Any reproduction or distribution of this presentation in whole or in part, or the disclosure of any of its contents, without the prior consent of ICONIQ, is strictly unauthorized.

This presentation may contain forward-looking statements based on current plans, estimates and projections. The recipient of this presentation ("you") are cautioned that a number of important factors could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements. The numbers, figures and case studies included in this presentation have been included for purposes of illustration only, and no assurance can be given that the actual results of ICONIQ or any of its partners and affiliates will correspond with the results contemplated in the presentation. No information is contained herein with respect to conflicts of interest, which may be significant. The portfolio companies and other parties mentioned herein may reflect a selective list of the prior investments made by ICONIQ.

Certain of the economic and market information contained herein may have been obtained from published sources and/or prepared by other parties. While such sources are believed to be reliable, none of ICONIQ or any of its affiliates and partners, employees and representatives assume any responsibility for the accuracy of such information.

All of the information in the presentation is presented as of the date made available to you (except as otherwise specified), and is subject to change without notice, and may not be current or may have changed (possibly materially) between the date made available to you and the date actually received or reviewed by you. ICONIQ assumes no obligation to update or otherwise revise any information, projections, forecasts or estimates contained in the presentation, including any revisions to reflect changes in economic or market conditions or other circumstances arising after the date the items were made available to you or to reflect the occurrence of unanticipated events. Numbers or amounts herein may increase or decrease as a result of currency fluctuations.

Disclaimer:

The views expressed in this presentation are those of ICONIQ Growth ("ICONIQ" or the "firm"), are the result of proprietary research, may be subjective, and may not be relied upon in making an investment decision.  This presentation is for general information purposes only and does not constitute investment advice. This presentation must not be relied upon in connection with any investment decision. The information in this presentation is not intended to and does not constitute financial, accounting, tax, legal, investment, consulting or other professional advice or services. Nothing in this presentation is or should be construed as an offer, invitation or solicitation to engage in any investment activity or transaction, including an offer to sell or a solicitation of an offer to buy any securities which should only be made pursuant to definitive offering documents and subscription agreements, including without limitation, any investment fund or investment product referenced herein.  Any reproduction or distribution of this presentation in whole or in part, or the disclosure of any of its contents, without the prior consent of ICONIQ, is strictly unauthorized. This presentation may contain forward-looking statements based on current plans, estimates and projections. The recipient of this presentation ("you") are cautioned that a number of important factors could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements. The numbers, figures and case studies included in this presentation have been included for purposes of illustration only, and no assurance can be given that the actual results of ICONIQ or any of its partners and affiliates will correspond with the results contemplated in the presentation. No information is contained herein with respect to conflicts of interest, which may be significant. The portfolio companies and other parties mentioned herein may reflect a selective list of the prior investments made by ICONIQ. Certain of the economic and market information contained herein may have been obtained from published sources and/or prepared by other parties. While such sources are believed to be reliable, none of ICONIQ or any of its affiliates and partners, employees and representatives assume any responsibility for the accuracy of such information. All of the information in the presentation is presented as of the date made available to you (except as otherwise specified), and is subject to change without notice, and may not be current or may have changed (possibly materially) between the date made available to you and the date actually received or reviewed by you. ICONIQ assumes no obligation to update or otherwise revise any information, projections, forecasts or estimates contained in the presentation, including any revisions to reflect changes in economic or market conditions or other circumstances arising after the date the items were made available to you or to reflect the occurrence of unanticipated events. For avoidance of doubt, ICONIQ is not acting as an adviser or fiduciary in any respect in connection with providing this presentation and no relationship shall arise between you and ICONIQ as a result of this presentation being made available to you. ICONIQ is a diversified financial services firm and has direct client relationships with persons that may become limited partners of ICONIQ funds. Notwithstanding that a person may be referred to herein as a "client" of the firm, no limited partner of any fund will, in its capacity as such, be a client of ICONIQ. There can be no assurance that the investments made by any ICONIQ fund will be profitable or will equal the performance of prior investments made by persons described in this presentation. Any information in this presentation is directed at, and intended for, only persons who are experienced institutional or professional investors (“professional investors”) as defined by applicable law and regulation. Any person that is not a professional investor is not an intended recipient of this presentation and the matters discussed herein.

For avoidance of doubt, ICONIQ is not acting as an adviser or fiduciary in any respect in connection with providing this presentation and no relationship shall arise between you and ICONIQ as a result of this presentation being made available to you.

ICONIQ is a diversified financial services firm and has direct client relationships with persons that may become limited partners of ICONIQ funds. Notwithstanding that a person may be referred to herein as a "client" of the firm, no limited partner of any fund will, in its capacity as such, be a client of ICONIQ. There can be no assurance that the investments made by any ICONIQ fund will be profitable or will equal the performance of prior investments made by persons described in this presentation.

Any information in this presentation is directed at, and intended for, only persons who are experienced institutional or professional investors (“professional investors”) as defined by applicable law and regulation. Any person that is not a professional investor is not an intended recipient of this presentation and the matters discussed herein.

Copyright © 2024 ICONIQ Capital, LLC. All rights reserved.

Disclaimer

The views expressed in this presentation are those of ICONIQ Growth ("ICONIQ" or the "firm"), are the result of proprietary research, may be subjective, and may not be relied upon in making an investment decision.  This presentation is for general information purposes only and does not constitute investment advice. This presentation must not be relied upon in connection with any investment decision. The information in this presentation is not intended to and does not constitute financial, accounting, tax, legal, investment, consulting or other professional advice or services. Nothing in this presentation is or should be construed as an offer, invitation or solicitation to engage in any investment activity or transaction, including an offer to sell or a solicitation of an offer to buy any securities which should only be made pursuant to definitive offering documents and subscription agreements, including without limitation, any investment fund or investment product referenced herein.  Any reproduction or distribution of this presentation in whole or in part, or the disclosure of any of its contents, without the prior consent of ICONIQ, is strictly unauthorized. This presentation may contain forward-looking statements based on current plans, estimates and projections. The recipient of this presentation ("you") are cautioned that a number of important factors could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements. The numbers, figures and case studies included in this presentation have been included for purposes of illustration only, and no assurance can be given that the actual results of ICONIQ or any of its partners and affiliates will correspond with the results contemplated in the presentation. No information is contained herein with respect to conflicts of interest, which may be significant. The portfolio companies and other parties mentioned herein may reflect a selective list of the prior investments made by ICONIQ. Certain of the economic and market information contained herein may have been obtained from published sources and/or prepared by other parties. While such sources are believed to be reliable, none of ICONIQ or any of its affiliates and partners, employees and representatives assume any responsibility for the accuracy of such information. All of the information in the presentation is presented as of the date made available to you (except as otherwise specified), and is subject to change without notice, and may not be current or may have changed (possibly materially) between the date made available to you and the date actually received or reviewed by you. ICONIQ assumes no obligation to update or otherwise revise any information, projections, forecasts or estimates contained in the presentation, including any revisions to reflect changes in economic or market conditions or other circumstances arising after the date the items were made available to you or to reflect the occurrence of unanticipated events. For avoidance of doubt, ICONIQ is not acting as an adviser or fiduciary in any respect in connection with providing this presentation and no relationship shall arise between you and ICONIQ as a result of this presentation being made available to you. ICONIQ is a diversified financial services firm and has direct client relationships with persons that may become limited partners of ICONIQ funds. Notwithstanding that a person may be referred to herein as a "client" of the firm, no limited partner of any fund will, in its capacity as such, be a client of ICONIQ. There can be no assurance that the investments made by any ICONIQ fund will be profitable or will equal the performance of prior investments made by persons described in this presentation. Any information in this presentation is directed at, and intended for, only persons who are experienced institutional or professional investors (“professional investors”) as defined by applicable law and regulation. Any person that is not a professional investor is not an intended recipient of this presentation and the matters discussed herein.

For avoidance of doubt, ICONIQ is not acting as an adviser or fiduciary in any respect in connection with providing this presentation and no relationship shall arise between you and ICONIQ as a result of this presentation being made available to you.

ICONIQ is a diversified financial services firm and has direct client relationships with persons that may become limited partners of ICONIQ funds. Notwithstanding that a person may be referred to herein as a "client" of the firm, no limited partner of any fund will, in its capacity as such, be a client of ICONIQ. There can be no assurance that the investments made by any ICONIQ fund will be profitable or will equal the performance of prior investments made by persons described in this presentation.

Any information in this presentation is directed at, and intended for, only persons who are experienced institutional or professional investors (“professional investors”) as defined by applicable law and regulation. Any person that is not a professional investor is not an intended recipient of this presentation and the matters discussed herein.

Copyright © 2024 ICONIQ Capital, LLC. All rights reserved.

The ICONIQ Growth website does not present information relating to ICONIQ Capital, its investment funds, or its advisory business and should not be consulted for any advisory purposes. The ICONIQ Growth content is intended for the use of company founders and executives.