While the first half of 2024 showed some early signs of economic resilience as global GDP growth remained steady and inflationary pressures eased², recent volatility in the financial markets has rekindled trepidation among investors and founders alike. The subdued IPO market saw several new listings this year. However, the varied performance of these companies reminds us once again of what we believe to be the undeniable need to have an exceptionally strong financial profile across both growth and efficiency.

Amid these trends, the theme of our growth and efficiency report this year is “Scaling SaaS: Forging Excellence Through Fundamentals”. We believe great companies are forged during difficult times, and while macroeconomic context will always be shifting, we believe the fundamentals of what makes a great company do not. The combination of persistent growth, strong unit economics, and a path to profitability can fuel companies on their journey and position them for long-term success as markets oscillate and, eventually, stabilize.

About our 2024 Growth & Efficiency Report

Since inception, ICONIQ Growth has sought to shine a light on what we believe it takes to scale a high-quality software company, leveraging comprehensive, proprietary, objective data and enriching it with the nuanced learnings and colored stories of operators and founders across our community. Our annual growth and efficiency report is one manifestation of this, powered by more than a decade’s worth of financial and operating data from over 100 enterprise SaaS companies. We are thrilled to share these insights publicly to support data-driven decision-making for leaders in the broader industry.

We invite you to read our full 2024 Topline Growth & Operational Efficiency Report. For additional insight on how to calculate mentioned metrics, including nuances of cost classifications, revenue recognition, unit economics, and more, please explore our SaaS Glossary.

The ICONIQ Growth Enterprise Five

Through this research, we’ve identified five key metrics we believe are highly representative of a SaaS company’s overall growth and efficiency. While we aim to tailor our quantitative evaluation of software businesses 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.

This scorecard summarizes our latest benchmarks against the ICONIQ Growth Enterprise Five by scale, serving as potential guiding principles for SaaS companies striving for best-in-class performance. While these benchmarks are grounded in the past decade of economic context, we still see top performing SaaS companies consistently falling at or above all-time measures of median performance.

Below, we explore in detail how performance against these five key metrics has evolved over the past few years in response to both headwinds and tailwinds, and the resulting operational and strategic changes we’ve seen implemented across software businesses.

YoY ARR Growth

YoY ARR Growth = (EOP ARR – Prior Year EOP ARR) / Prior Year EOP ARR⁴

Year-over-year ARR growth reveals how quickly and consistently a company is growing and has historically been one of the top two metrics most correlated with SaaS valuations across both the public and private markets.

When we conducted our growth and efficiency research just two years ago, we consistently saw top-quartile SaaS companies ~2-3x ARR in each of the first two years of growth after reaching $10M ARR.⁵ In nearly each of the eight quarters since then, we have seen continued deterioration in top-line performance, dropping this historical best-in-class benchmark closer to ~1.5-2x, a dramatic decline in such a short period.¹ To understand what’s driving this trend, we zoom in on the last four years in SaaS.

Looking at median growth rates over the last four years, our data shows year-over-year growth for companies with $25M+ ARR is at its lowest in the last eight quarters. Early-stage companies (<$25M ARR) have also seen a steep deceleration in growth during this period; however, they began to show signs of stabilization in the first half of 2024.¹

Based on our analysis, this decline in topline growth has been primarily driven by a deterioration in gross new ARR, rather than a significant increase in churn. That said, while churn has also increased slightly, it has remained more in line with norms over the last four years.

Breaking this down further, we believe the decline in gross new ARR has been primarily driven by a decline in new logo growth. As a percent of beginning of period ARR (a calculation that helps us compare the drivers of growth across companies of various sizes), gross new logo ARR has dropped from peak levels of 10-12% in the high-growth environment of 2021 to 4-5% in the last two years. While to a lesser extent, growth from customer expansion has also declined during the same period, further fueling year-over-year growth declines.¹

While median growth rates have declined in aggregate, we are still seeing companies out-perform historical benchmarks for best-in-class growth. Top quartile benchmarks for growth in the $1-$10M ARR stage have actually increased since we ran this analysis two years ago, from 430% in our 2022 scorecard to 485% in our 2024 scorecard.^1,5 In the coming weeks, we’ll dig further into these trends and publish a deep-dive report on what these and other benchmarks look like specifically for early-stage companies.

Net Dollar Retention

Net Dollar Retention = 1+ (expansion ARR - gross churn ARR) / average (BOP ARR + EOP ARR)⁴

Net dollar retention (NDR) signals the efficiency and predictability of a company’s revenue generation by measuring its ability to retain and expand existing customers. NDR can be used to measure everything from product market fit to customer satisfaction, making it, in our view, one of the most important gauges of business health and one of the strongest indicators of long-term success for B2B SaaS companies.

We’ve observed that software companies became increasingly reliant on retaining and expanding their customer base as securing new logo deals grew more challenging over the last two years. Many companies invested in customer efforts across marketing and communities, restructured their go-to-market teams to better align to customer expansion motions, and re-aligned employee incentives towards upsell and cross-sell (find our latest go-to-market research here).⁶ In spite of these efforts, it appears the combination of a decline in customer expansion velocity and steady churn rates over this period has led to a deterioration in NDR for many companies.

While growth- and late-stage software companies historically achieved top quartile NDR of 120%+, this benchmark has dropped to 105-115% in recent quarters.^1,5 Early-stage companies have displayed relative resilience in NDR compared to later-stage peers, though there is inherent volatility in this metric during the early stages given the small customer base.

Another hypothesis, albeit untested, for the relative resilience of early-stage NDR over the last few years is the rise of usage-based pricing (UBP). Last year, we predicted UBP would become more prevalent with the rise of artificial intelligence. As software companies increasingly focus on driving efficiencies for customers, we expect pricing based on value and usage, rather than pricing per seat or feature, to become the norm. Even though UBP is inherently more volatile to fluctuations in customer expansion and churn, we tend to see UBP companies achieving higher NDR, particularly in the early stages.¹

Rule of 40

Rule of 40 = YoY ARR Growth + FCF Margin

While the first two Enterprise Five metrics focus on top-line growth and health, Rule of 40 measures both growth and free cash flow (FCF) margin (a measure of working capital and profitability) in tandem. The combination of growth and profitability has become increasingly important in SaaS markets over the last few years, with Rule of 40’s correlation to forward revenue multiples for public companies exceeding that of revenue growth alone for each of the last eight quarters, suggesting efficient growth is imperative.⁷

The general rule of thumb for Rule of 40 is that a SaaS company’s combined year-over-year growth and FCF margin should meet or exceed 40%. As exceptional year-over-year growth inflates Rule of 40 performance for early-stage companies, we typically only begin to place real weight against Rule of 40 for companies with at least $25M ARR.

While we do expect Rule of 40 to decline as SaaS companies scale and year-over-year growth naturally slows, historically we have seen top quartile companies exceed 40% regardless of scale.⁵ However, our analysis shows Rule of 40 has been increasingly difficult to achieve in the last two years. SaaS companies did showcase a deliberate shift towards efficiency and improved FCF margins during this period, but overall efficiency gains did not counterbalance the decline in growth rates, resulting in relatively stagnant Rule of 40 performance that fell below historical norms.¹

Looking forward, we expect increasing adoption and effective utilization of generative AI to drive significant operational efficiencies in technology organizations. Generative AI still only represents ~10% of software procurement spend for large enterprises, indicating we are still in the early stages of adoption.⁸ As these new technologies move into production and enterprises start to see real business outcomes and returns from AI investments, we believe AI-forward companies will have the potential to position themselves closer to Rule of 60 in the future primarily via increased FCF margins. Adoption of generative AI is likely to require significant upfront investments across data infrastructure, change management, upskilling, and the hiring of specialized roles which means that near-term benefits and efficiency gains may be marginal for many companies; however, we predict that the long-term impact of generative AI on efficiency will be outsized.

Net Magic Number

Net Magic Number = Current Q Net New ARR / Prior Q S&M OpEx

The “magic” of magic number lies in its ability to measure revenue generation against sales and marketing spend while accounting for the lag in a typical sales cycle, signaling the efficiency of a company’s go-to-market motion (an important driver of overall efficiency). While there are multiple flavors of magic number, we believe net magic number (NMN) to be the most comprehensive, as it takes churn into account by calculating the ratio of a company’s net new ARR for every dollar spent on sales and marketing.

Like Rule of 40, NMN is expected to decline as companies scale due to a relative decline in net new ARR growth, competitive dynamics, and shrinking headroom. However, companies have historically been able to maintain top quartile net magic number above 1.0x - where revenue generation exceeds sales and marketing spend, regardless of scale.⁵

Over the last two years, NMN performance mirrors that of Rule of 40. Declines in year over year ARR growth and net new ARR generation outpaced reductions in sales and marketing expenses, leading to top quartile net magic number performance to dip under 1.0x for the first time in the last four years.¹

While we have not yet seen evidence of recovery in NMN as of 1H 2024, we hope to see improvements to GTM efficiency in the coming years. Some of the most tangible efficiencies gained via early AI adoption to date have occurred within the sales organization, with more than 80% of enterprises reporting at least some return on investment for sales AI use cases such as lead identification, outreach, and targeted messaging.⁸ Though the up-front costs of investing in these technologies may be driving GTM efficiency down temporarily, we expect significant sales productivity and efficiency gains for AI-forward GTM organizations in the future.

ARR per FTE

ARR per FTE = EOP ARR / EOP FTEs

ARR per full-time employee (FTE) simply divides a company’s annual recurring revenue by number of employees to measure headcount productivity. As most of the typical SaaS company’s operating costs are people-related, we have found headcount productivity to be a robust measure of overall growth and efficiency—especially when considered in tandem with and headcount efficiency (total operational expenses per FTE).

In aggregate, ARR per FTE is the only Enterprise Five metric that has seen significant and consistent improvement over the last two years. While headcount productivity temporarily declined in 2022 as the market turned, companies adjusted to the market throughout 2023 and the technology ecosystem experienced a significant wave of workforce restructuring, performance management, and lay-offs, resulting in more productive, performance-driven cultures.⁷ Since then, rather than a short-term boost in productivity from headcount reductions (resulting in a smaller denominator), we’ve seen an increase in headcount productivity that has been sustained through the first half of 2024.¹

While headcount productivity has improved, there has also been a decline in headcount efficiency (i.e., an increase in OpEx per FTE) during the same period.¹ There is usually a lag between adjustments in operating spend and efficiency gains, but this increase in OpEx per FTE may also be driven by a combination of inflationary pressures, competitive compensation programs, and a relative increase in spend on programs and strategic initiatives, including artificial intelligence.

While performance against many of the ICONIQ Growth Enterprise Five metrics has declined over the last couple years and we expect to remain in an era of efficiency for the near-term future, we remain cautiously optimistic about the second half of 2024. The excitement around the potential of generative AI infrastructure and applications is beginning to revitalize the software market, and we will be tracking these trends carefully as we enter 2025.