The ICONIQ Growth Enterprise Five
By Claire Davis | September 12, 2022
Key Performance Indicators of Enterprise SaaS companies
ICONIQ Growth is proud to have partnered with more than 90 B2B SaaS companies to date. Working closely with these exceptional leaders has given us a deep understanding of what strength looks like at all stages of company growth—from first-revenue to IPO and beyond.
Based on financial and operating metrics from ICONIQ Growth’s SaaS partnerships and select public companies , we publish an annual in-depth research report that illuminates the data behind effectively scaling a B2B SaaS company. Explore our 2022 Topline Growth & Operational Efficiency report here.
Through this research, 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.
For insight into how these—and other SaaS metrics—should be calculated, including nuances of cost classifications, revenue recognition, unit economics, and more, we invite you to explore our SaaS Glossary.
This scorecard provides benchmarks for top quartile performance against the ICONIQ Growth Enterprise Five as B2B SaaS companies scale, and below we explore insights across these metrics from our research:
YoY ARR Growth
YoY ARR Growth = (EOP ARR – Prior Year EOP ARR) / Prior Year EOP ARR
YoY 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.
We consistently see top-performing SaaS companies double or triple ARR in each of the first two to three years after reaching $10M ARR. These companies also maintain double-digit growth in years four through six as they approach IPO (typically around $200M+ ARR).
This ARR growth is primarily driven by new logos until companies reach about $200M ARR, when customer expansion begins to make up more than half of gross new ARR, making early-stage new logo velocity critical to sustainable growth.
Net $ Retention
Net $ Retention = (BOP ARR + Expansion ARR - Gross Churn ARR) / BOP ARR
Net dollar retention (NDR) signals the efficiency of a company’s revenue generation by measuring its ability to retain and expand existing customers, making it one of the most important gauges of business health—from product market fit to customer health. We’ve found NDR to be one of the strongest indicators of long-term success for B2B SaaS companies.
Between $1-$10M ARR, top-performing companies achieve 130-150% NDR and maintain 120-130% NDR as they scale toward IPO. Strong net retention is driven both by customer expansion (upsell and cross-sell of existing customers) and bottom-line gross retention: top-performing companies maintain a churn rate of <10% regardless of scale, leading to >90% gross dollar retention.
Rule of 40
Rule of 40 = YoY ARR Growth + FCF Margin
Rule of 40 measures growth and profitability in tandem. The general rule of thumb is that a SaaS company’s combined YoY growth and FCF margin (a measure of profitability) should meet or exceed 40%.
Though Rule of 40 tends to decline as SaaS companies scale and growth slows, top performers exceed 40% regardless of scale, and typically achieve profitability within one to two years after IPO.
This year has brought the path to profitability back into focus in the public markets, with correlation between growth and profitability (Rule of 40) and SaaS valuations surpassing the correlation between growth (YoY ARR or revenue growth) alone . We expect the shift towards the importance of profitability to endure in the coming years, and recommend companies closely track their performance against Rule of 40.
Net Magic Number
Net Magic Number = Current Q Net New ARR / Prior Q S&M OpEx
Net Magic Number (NMN) measures revenue generation for every sales and marketing dollar spent while accounting for the lag of a typical sales cycle, making it a robust measure of go-to-market efficiency—perhaps the most critical driver of overall efficiency.
Early-stage SaaS sales are often highly efficient on this front, with top-performers achieving 1.3x+ NMN until ~$50M ARR. As these companies continue to scale, go-to-market efficiency generally trends down due to competitive dynamics and shrinking headroom and NMN stabilizes around 1.0x-1.2x.
Driven primarily by lower sales and marketing spend, companies with product-led growth tend to have higher go-to-market efficiency with top performance Net Magic Numbers between 2.0 and 4.0x.
ARR per FTE
ARR per FTE = EOP ARR / EOP FTEs
An average 60-75% of SaaS operating costs are people-related, making headcount productivity (ARR per full-time employee) and headcount efficiency (spend per full-time employee) two of the most robust measures of overall growth and efficiency.
As SaaS companies scale they are able to meaningfully increase ARR per FTE while steadily decreasing spend per FTE, leading to both increasing headcount productivity and efficiency. ARR per FTE tends to surpass spend per FTE when companies reach $100-$150M ARR.
A brief note on impact from the macro-environment:
Macro trends of the last few years have changed how markets, entrepreneurs, and investors think about the balance of growth and efficiency as SaaS companies scale. In the coming years, we predict renewed focus on four key categories of business health: growth and profitability, spend and burn, go-to-market efficiency, and customer health.
In our next posts, we’ll provide additional context on each of these four key categories of business health and the metrics we track for each. In the meantime, please reference our report on Topline Growth and Operational Efficiency for more on the impact from the macro environment and what to expect in 2022 and beyond.
Notes & Disclosures:
1 Based on quarterly operating and financial data through Q1 2022 from 92 B2B SaaS companies (79 of which are ICONIQ Growth portfolio companies, chosen based on data availability, and 13 of which are other public companies selected based on ICONIQ Growth’s IPO performance criteria).
2 Based on Market data and consensus estimates as of 07/29/2022