Scaling SaaS: Forging Excellence Through Fundamentals

Every year, the Analytics team analyzes financial and operating data from the ICONIQ Growth portfolio and select public companies to understand the drivers of success behind SaaS companies. Powered by more than a decade’s worth of data, this analysis culminates in our annual Growth & Efficiency report, which we share publicly to support operators and foster data-driven decision-making across the software landscape.

We’re thrilled to share this year’s report which is designed to address two key questions we frequently hear from operators: “How are companies performing in the current environment?” and “What does best in class performance look like?”. In response to these questions, Part 1 of the report covers recent trends over the last few years, while Part 2 focuses on identifying best-in-class performance, regardless of the time period.

The State of SaaS in 2024

The State of Public SaaS | An update on the public markets

In Q2 2024, valuation multiples for public SaaS companies compressed, with high-growth companies seeing the most contraction after a run-up in late 2023. While investor optimism around the ability for generative AI products to re-accelerate top-line growth and drive significant efficiencies remains, it has yet to significantly manifest in most SaaS companies’ operating results, feeding the rationalization of multiples in recent months.

Efficient growth remains crucial for public markets, with Rule of 40’s correlation to forward revenue multiples continuing to exceed that of revenue growth alone.

The State of Private SaaS | Impact to top-line

In the private markets, topline growth for growth-stage and late-stage companies is at its lowest in the past eight quarters, reflecting the ongoing challenges posed by a turbulent macroeconomic environment. The decline in ARR growth can be largely attributed to a significant reduction in the acquisition of new logos. Companies are finding it increasingly challenging to secure new customers, driven by tighter budgets, heightened competition, pricing pressures, and a more selective buying environment.

Net dollar retention over the same period has been similarly impacted, falling from peak levels of ~120-130% pre 2020 to ~110% in 1H 2024. This decline has been driven primarily by weakened customer expansion attainment paired with steady churn rates.

The State of Private SaaS | Impact to efficiency

As top-line growth becomes more challenging to achieve, companies have increasingly prioritized bottom-line preservation, leading to consistent improvements in FCF margins over the past eight quarters.

However, Rule of 40 remained stagnant over the same period, indicating that companies have not adjusted costs quickly or significantly enough to counterbalance the slowdown in growth. While FCF margins have improved, burn multiples have not yet returned to historical baselines for most companies. Early-stage and growth-stage burn multiples remain significantly higher than historical norms.

The State of Private SaaS | Impact to productivity

Go-to-market efficiency and productivity, as measured by net magic number, has significantly deteriorated as selling SaaS tools became increasingly difficult in the current environment. Magic number performance has steadily dropped over the past eight quarters, with the metric now stabilizing below 1.0x for the first time, marking the lowest point in sales efficiency in years and highlighting a serious challenge in achieving efficient growth.

However, despite the decline in top-line growth and sales efficiency, headcount productivity (ARR per FTE) has largely improved in the last eight quarters, implying strategic restructurings and performance management have led to a sustained increase in productivity, rather than just a short-term boost from headcount reductions.

Revisiting Our Predictions

1 The rise of usage-based pricing

Usage-based pricing (UBP) will soon become more prevalent, especially as products focus on driving efficiency for organizations and will need to price based on value rather than seats

Usage-based pricing models are inherently exposed to higher levels of volatility—particularly in times of macroeconomic turbulence. While we have not yet measured an increase in UBP, we expect the surge of AI-native products to accelerate this shift as companies increasingly prefer charging based on consumption or outcome over subscription fees.

2 Expansion contributes increasing to growth

As we see more companies powered by product-led growth (PLG) or leverage bottom-up sales motions, expansion will continue to become a larger portion of new ARR going forward

Companies have been increasingly reliant on expansion for driving topline growth over the last eight quarters as new logo velocity has slowed. We expect expansion to continue being an important growth driver through 2024, but we may see slight new logo recovery in the coming months.

3 Rule of 60

Rule of 40 may soon become the Rule of 60 with the introduction of AI which will bring about significant operational efficiencies to organizations and potential to unlock new growth vectors

While FCF margins improved, the slowdown in ARR growth has contributed to stagnation in Rule of 40. We still believe generative AI holds promise for driving growth and positioning companies closer to Rule of 60, but we do not think we are likely to see this impact for another 12+ months.

4 Profitability before IPO

Best-in-class companies will hit profitability earlier in their lifecycles (likely before going public), versus historical precedent of most SaaS companies being un-profitable at IPO

Top-quartile SaaS companies are now achieving positive FCF margins around ~$150M in ARR, typically about five years after reaching $10M ARR. With the IPO market much slower than in previous years, it's too early to tell if this trend will continue across the broader market​.