Navigating Unpredictability: Introducing the "Resiliency Rubric" for SaaS Companies
By Vivian Guo | August 29, 2023
Current unpredictable market conditions have founders frazzled. With a pullback in overall spend throughout the economy, it can be tough to understand where to invest your startup’s time and funding. What will be the most impactful? Where can I gain efficiencies?
Based on financial and operating metrics from a dataset including certain of ICONIQ Growth’s SaaS partnerships and select public companies , we dive into these questions and the data behind effectively scaling SaaS businesses in the latest research from ICONIQ Growth Analytics. For more in-depth analysis and access to our comprehensive report on SaaS benchmarks and board reporting templates, visit our 2023 Growth & Efficiency research here.
Through this research, we identified five key metrics we believe are representative of a SaaS company’s overall growth and efficiency: The ICONIQ Growth Enterprise Five to be indicators of a company’s long-term success. However, in times of volatility, we recognize that the Enterprise Five is not a comprehensive framework of health for companies who often need to move quickly and understand which business levers to prioritize vs deprioritize.
To that end, we’ve identified five additional metrics SaaS companies should consider evaluating as measures of resiliency as they navigate periods of market unpredictability, which together comprise what we call “The ICONIQ Growth Resiliency Rubric.”
(New Logo ARR + Expansion ARR) / (Downsell ARR + Churn ARR) (Quarterly or Annualized)
The SaaS quick ratio measures how efficiently a company is growing by comparing bookings growth against contraction. As companies scale, the rate of growth tends to naturally slow while churn increases as a function of a growing customer base. This means that the quick ratio will naturally decrease. However, top quartile companies are able to maintain a quick ratio above 4x even after reaching $100 million ARR. In other words, for every $1 of lost ARR, these companies are adding $4 in recurring revenue.
This metric can be particularly relevant for early-stage businesses where metrics like Rule of 40 are typically less applicable due to the speed of growth and aggressive spend investment. For companies with multiple products or customer segments, breaking out the quick ratio by each segment can also help triage problem areas in customer growth or churn. However, it’s important to note that the quick ratio can only provide directional guidance on the health of a company’s growth and will not necessarily capture the capital efficiency of any business. Thus, it can be helpful to look at the quick ratio along with other efficiency metrics such as net magic number, CAC payback, and burn multiple.
Actual Net New ARR in Quarter / Planned Net New ARR in Quarter (Cumulative)
We believe that an important measure of both topline health and business predictability is topline attainment, which measures the actual dollars achieved each quarter against the original plan set at the beginning of the year.
It can be helpful to look at the attainment metric on a cumulative incremental basis rather than within a standalone quarter which can often be impacted by seasonal fluctuations. For example, calculating Q2 topline attainment as Q1 + Q2 (1H) incremental attainment, or in other words ending ARR in Q2 - beginning of year ARR (compared to the plan for that same time period).
Generally in stable macroeconomic conditions (circa-2019 and earlier), median attainment for companies with top performance in [metric] is in the 90-100% range each quarter, with most companies analyzed achieving closer to 100% attainment by year end.  In 2022, however, companies started the year with close to 100% attainment of plan in Q1 but saw median attainment drop to 62% by Q4.  Q1 of this year proved to be similarly challenging; persistent market pressures have led to deal slippage, weakened pipeline, and retention impact across the board with median attainment landing at 84%. 
This metric becomes particularly critical as companies scale. Once companies go public, the ability to perform against the original forecast for the quarter (known as “beat and raise”) will have significant impacts on analyst sentiment and stock price. It may be helpful for companies to start implementing a “beat and raise” model 1-2 years before going public to ensure companies have developed a sufficiently rigorous forecasting model.
Cash Burn / Net New ARR (Quarterly or Annualized)
Burn multiple is a metric that measures the effectiveness of a company’s capital expenditures, by comparing it against net new revenue being generated each quarter. There are various flavors of the burn multiple; however, we used the calculation above in our analysis which looks at burn as a multiple of revenue growth. In other words, how much is a company burning in order to generate each incremental dollar of recurring revenue?
Burn multiples for SaaS companies skyrocketed between 2020 and 2022 as companies focused on “growth-at-all-costs” . We believe it’s now time for companies to reorient and target burn multiples of <1.5x or even <1.0x—figures we saw pre-2020. During times of uncertainty, SaaS companies often need to develop a leaner organization muscle that favors efficiency and extends runway as needed. Companies may find it helpful to carefully evaluate areas of spend to ensure there is clear ROI.
(Sales & Marketing Expenses in Period) / (Gross New Customers x ARPU) x Gross Margin Quarterly or Annualized
CAC payback is a metric that could be helpful to look at in conjunction with net magic number . Another measure of sales efficiency, CAC payback measures how long it takes to break even on acquiring a new customer.
The topic of CAC and customer lifetime value can be complex. There is also not a universally accepted framework for calculating and impacting CAC in subscription business models with sales cycles and customer lifetimes of various lengths. Even across the companies in our dataset, we see various flavors of CAC that incorporate gross margin, include or exclude expansion, use different time periods of sales & marketing expense based on the sales cycle, etc.
However, in our analysis we looked at the average revenue generated for gross new customers and incorporate gross margin into the calculation to understand the true payback on new customer acquisition. For companies with sales cycles longer than 3 months, it may make sense to also offset the sales & marketing expense by a quarter (or the appropriate sales cycle length).
We consider a CAC payback period of under 12 months as exceptional; in today’s environment where acquiring new customers has become much more challenging, we are seeing CAC paybacks closer to 20-30 months for companies analyzed . It is also important to note that CAC paybacks will vary significantly based on a company’s sales motions (e.g. PLG companies typically have much lower payback periods ), customer segment (enterprise-focused companies tend to see longer payback times ), and other business model nuances.
Average ARR per FTE / Average OpEx per FTE
The last metric in the ICONIQ Growth Resilience Rubric is what we are terming the “productivity ratio.” This metric looks at the ratio between the average ARR per FTE and average total OpEx per FTE; in other words, how much revenue is being generated per employee vs how much spend is being invested per employee. This metric can help inform business decisions around hiring or reductions of force and can highlight the tradeoffs between headcount, revenue growth, and profitability.
As companies scale, the productivity ratio generally surpasses 1x, at which point the average ARR being generated per FTE starts to outpace total spend. This target of 1x+ usually becomes achievable and more relevant once companies get close to the $100M ARR mark. Companies with a productivity ratio under 1x may find it helpful to look at not only people costs (i.e. payroll, headcount, onshore vs offshore mix) but also the direct investments in its workforce to improve productivity (i.e. L&D, training, performance management, etc.).
In times of volatility, we hope these five metrics can provide actionable insights, guide business decisions, and ensure adaptability to changing circumstances. By understanding and leveraging "The Resilience Rubric," we believe SaaS companies can forge a path of growth and profitability even amidst uncertainty.
(1) This research summarizes quarterly operating and financial data from 96 B2B SaaS companies. An overview of our methodology and data sources, including a list of the companies included in the dataset, can be found on page 8 of the Topline Growth and Efficiency report here [link]. All ICONIQ Growth portfolio companies were included where data was available. The dataset also includes 13 public companies that are not (and have not previously been) ICONIQ Growth portfolio companies. All data was collected from public filings information. Top IPO performers are top quartile in two or more of the following:
1. Indication of Success of IPO: Forward Revenue Multiple at IPO
2. Indication of Success Post-IPO: Current Forward Revenue Multiple
3. Indication of Value Creation: Ratio of Change in Stock Price Since Day 1 Close vs. Market (S&P)
For a full list of ICONIQ Growth companies, please visit our website here.
(2) Internal analysis based on quarterly operating and financail data from 47 ICONIQ Growth portfolio companies
(3) Internal analysis based on quarterly operating and financail data from 47 ICONIQ Growth portfolio companies
(4) Internal analysis based on quarterly operating and financail data from 47 ICONIQ Growth portfolio companies
(5) Full analysis included in 2023 Topline Growth & Efficiency Report
(6) Net magic number is a measure of sales efficiency and can be calculated as current quarter net new ARR / prior quarter S&M OpEx
(7) Full analysis included in 2023 Topline Growth & Efficiency Report
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