The 2021 Edition of the ICONIQ Enterprise Five
By Claire Davis and Christine Edmonds | October 11, 2021
Key Performance Indicators of Best-in-Class Software Companies
ICONIQ Growth has been proud to partner with more than 75 leading enterprise software companies, 40 of which have been named the world’s best cloud companies in the Forbes Cloud 100¹.
Working closely with these exceptional leaders has given us a deep and unique understanding of what strength looks like at all stages of company growth. As we help leaders achieve their goals, we also listen and learn. Our collaboration with these companies has made us better investors and, more importantly, better partners.
Since 2019, we’ve published our annual cornerstone Growth and Efficiency Report, along with a summary of the ICONIQ Enterprise Five (a bespoke assessment rubric) in which we explore what it means to be a top performing SaaS company. This year, along with a full refresh of the analyses, we are excited to share additional perspectives and focus on what we think it means to be a “best-in-class” SaaS company across various stages of growth.
Our report, aspects of which are summarized below, details the key metrics we use to understand and evaluate growth and efficiency across these companies. We also explore how COVID-19 has impacted these KPIs and identify signs of recovery. All analysis is based on proprietary ICONIQ Growth portfolio data², which we also compare to benchmarks from third-party SaaS industry reports.
We hope this quick summary of key enterprise SaaS metrics is useful to you and helps illuminate both why these metrics are valuable and how they evolve over time. To request access to our full report on growth and operational efficiency, please reach out to the ICONIQ Analytics team.
The Enterprise Five Scorecard
While our quantitative evaluation of software businesses is always tailored to the nuances of a company’s industry, product, operating model, go-to-market motion, or other specifics, the following five metrics are consistently core to our understanding of topline growth and operational efficiency.
This scorecard details the core questions each of these metrics address, and how our portfolio companies stack up against each metric across various stages of maturity:
We explore the details of each metric below, with additional color and key takeaways on how the best-in-class companies perform against each as they scale.
ARR Growth (YoY, %) = (EOP ARR — Prior Year EOP ARR) / Prior Year EOP ARR
We believe Annual Recurring Revenue (ARR) growth rate is key to understanding the trajectory of enterprise SaaS companies, especially in the early and growth stages when strong ARR growth typically indicates early product market fit and market traction.
The enterprise SaaS companies classified as “best-in-class” in our dataset consistently double or triple ARR in each of their first 2–3 years of growth as they scale from the $10M ARR threshold, and maintain ~2x YoY ARR Growth through $100M-$150M ARR.
This ARR growth is mostly driven by new logo deals in the early stages, and as companies scale, they increasingly rely on expansion (upsell and cross-sell) ARR to drive growth. This is especially true best-in-class companies, for which expansion ARR makes up ~50%+ of total gross new ARR after reaching $100M ARR.
Net Dollar Retention
Net $ Retention (%) = (BOP ARR + (Expansion-Downsell-Churn)) / BOP ARR
We believe annual Net Dollar Retention (NDR)³ is one of the most important gauges of business health for software companies. NDR measures both the efficiency and predictability of a company’s revenue generation by accounting for customer expansion, downsell, and churn, rendering it a robust measure of everything from product market fit to customer success motions.
Notably, we’ve found NDR to be one of the strongest early predictors of best-in-class company performance. The best-in-class companies in our dataset maintain ~135–150% NDR as they scale from $10M to $50M ARR, and consistently maintain ~125%+ NDR after reaching ~$100M ARR.
The NDR benchmarks shown here are higher than industry average. Broader industry benchmarks show only ~10% of SaaS companies with $0–50M ARR are able to achieve 125% net dollar retention or more⁴. In comparison, more than 40% of the Enterprise SaaS companies in our dataset achieve 125%+ net dollar retention during this stage.
Rule of 40
Rule of 40 (%) = ARR Growth (YoY, %) + FCF Margin (%)⁵
“Rule of 40” is the principle that a high-performing SaaS company’s combined YoY growth rate and FCF margin should generally meet or exceed 40%. Simply put, Rule of 40 says that growth and profitability should be considered in tandem: a company growing at 40% should target at least breaking even. When analyzed in concert with growth and retention, we believe Rule of 40 provides great insight in a company’s efficiency.
Due to the inherent volatility of ARR growth and FCF margin at early stages of growth, we typically only begin to place real weight against Rule of 40 for companies with at least ~$25M ARR, and believe it is most applicable to companies with >$50M ARR.
Rule of 40 for the best-in-class companies we examined averages 72% after reaching $25M ARR, driven higher in early stages due to high ARR growth. Notably, over 60% of the Enterprise SaaS companies in our dataset meet and exceed the Rule of 40, compared to ~30% of global private SaaS companies⁶.
Net Magic Number
Net Magic Number = Current Quarter Net New ARR / Prior Quarter S&M OpEx
The “magic” of this metric lies in its ability to measure revenue generation against sales and marketing spend, while accounting for the lag of a typical sales cycle. In other words, magic number tells you how much ARR was created for every S&M dollar spent to generate that ARR. Though there are a few different ways to calculate magic number⁷, we believe net magic number provides the cleanest insight into the efficiency of spend and go-to-market motion.
Net magic number can trend slightly downward over time; however, we believe a good general long-term goal is 1.0x+. Net magic number can also vary significantly by sector, where variables such as category saturation and total addressable market have high impact on go-to-market efficiency. As companies scale, net magic number is also closely tied to customer retention and lifetime value.
We find it particularly interesting to analyze magic number in tandem with Customer Acquisition Cost (CAC) and CAC payback period. Sometimes, magic number can be too high which — especially paired with a short CAC payback period (<6 months for enterprise SaaS) — may indicate a company is not investing optimally in sales and marketing spend.
ARR per FTE
ARR per FTE = Total EOP ARR / Total EOP FTEs
ARR generated per full-time employee (FTE), especially for companies at scale, helps us gauge human capital productivity and provides further insight into a company’s overall operational efficiency. ARR per FTE is especially interesting when analyzed against OpEx per FTE.
Our best-in-class companies have, on average, ~30% lower ARR per FTE compared to other emerging leaders until reaching ~$50M-$100M ARR, when best-in-class companies begin to significantly outpace other emerging leaders in FTE productivity. This is primarily due to best-in-class companies investing heavily in growth during the early stages, as their absolute headcount and OpEx per FTE exceeds that of other emerging leaders.
When looking at ARR per FTE vs. OpEx per FTE, best-in-class companies tend to optimize for growth over efficiency until they reach about $130M ARR, compared to $50M ARR for other emerging leaders.
 This includes current or former ICONIQ Growth portfolio companies that have been included on the Forbes Cloud 100 list from 2016–2021. ICONIQ advised funds invested in SurveyMonkey prior to the existence of ICONIQ Strategic Partners funds. Had ICONIQ Strategic Partners funds existed at the time of investment, this investment would have been offered and allocated to ICONIQ Strategic Partners funds.
 This analysis is based on 50 of the ~75 enterprise software investments ICONIQ Growth has made to date, based on quarterly data through 1Q 2021. Of the 50 companies we included in our analysis, 16 companies qualified as “best-in-class” based on the following criteria. Best-in-class companies have achieved scale (reached a minimum of $100M ARR) and growth (after reaching $50M ARR, the company maintains above median YoY ARR growth) or efficiency (after reaching $50M ARR, the company maintains above median Rule of 40). We classified the remaining 34 companies as “other emerging leaders”.
 There are multiple ways to calculate net retention, including annual net retention, annualized quarterly retention, and customer cohort analysis. We typically use annualized-quarterly net retention to better capture quarter-over-quarter changes, which is particularly important when companies are smaller in scale and greater variation in net retention (%) is driven by a smaller denominator. Sometimes, especially when looking at inconsistent periods, we will use the average of BOP and EOP in the denominator.
 Based on a comparative analysis with a broader set of companies included in the OpenView 2020 Expansion SaaS Benchmarks report, in which our portfolio’s Net Dollar Retention metrics consistently outperformed industry-wide average.
 While either FCF or EBITDA margin can be used in the Rule of 40 calculation, we typically prefer to use FCF for software companies. Deferred revenue/payment terms are important and usually more positive than EBITDA, especially in software companies. Using EBITDA for a business that is self-hosted would also not be a good fit (since the company has to factor in PPE, financing debt, or lease expenses).
 Based on a comparative analysis with a broader set of companies included in the 2021 KeyBanc Capital Markets SaaS Survey, in which our portfolio’s metrics consistently outperformed industry-wide average.
 There are four “flavors” of Net Magic Number (gross and net, each with or without a gross margin adjustment. Gross and Net Magic Number calculations can be multiplied by a company’s gross margin percentage to account for the payback required to fully break even.