The Official SaaStr Podcast: SaaS | Founders | Investors
00:12:08 · Doug Pepper
[00:12:08] S1: So diving into efficiency by function, not a lot of surprises here. You can see, again, year zero is when a company is around 10,000,000 ARR, and this is kind of the average of this great dataset, and then on to year five. And of course, at that 10,000,000 level, companies are spending a lot more than they are in revenue. But then over time, by year five, they're now spending less than revenue and flipping over into profitability. In those early years, of course, we're all investing and backing and building product oriented companies. So you see R and D is a very significant expense in year zero, around 10,000,000 ARR, but it shrinks as a percentage of OpEx from about 30% to 25% as you go through the years. But of course, we all know these products don't sell themselves. And so interestingly, even as companies get more efficient overall, they actually spend more in sales and marketing as a percentage of OpEx over time, kind of going from 50% of OpEx to 60 over those five years. To put some numbers on it, in our dataset of our companies by year five, companies are spending typically about $100,000,000 in R and D product and $160,000,000 in go to market by year five. So obviously another metric that I'm sure you've all read about and heard about the last few years to measure efficiency is burn multiple. And it's a very simple but pretty effective way to measure the efficiency of growth of the businesses that we're all involved with. And the obvious definition there is for every dollar that I'm spending, what am I adding in net new ARR? And you can see here, again, this is our dataset and this is the average. When a company's adding about 10,000,000 net new ARR, they are typically burning about 20. And so it's 2X. This is actually an old slide. So the real number here that we typically see is 2x burn rate multiple. And then it trends down over time. Typically what we're seeing, and again this slide is a bit off, we can give you the updated slide. By year five, companies are typically adding 50,000,000 net new ARR and burning about 50,000,000. So it's kind of one to one. And this is obviously a bit confusing here, but I will make kind of a nuanced point. The data set, again, as Christine said, is companies that are really far along.
00:14:37 · Doug Pepper
These are public companies, these are late stage private companies that largely went through this phase, call it five years ago or so. And what we've seen in the last two years, given the green line of growth was much more valuable than efficiency, companies really ramped their burn multiples. And we've been meeting with companies all the time in the last two years that are burning three, four, five times what they're generating in net new ARR, which you could understand given they were being rewarded for that in the private and public markets in terms of valuation. That's over. And so I think collectively investors, founders, entrepreneurs are having to reorient their burn multiples to what these great companies were doing five or ten years ago, and that's a hard process. We'll talk more about that.
00:15:32 · Christine Edmonds
[00:15:32] S2: Great. So on that note, let's start to think about growth and efficiency in the context of today and what's happening both public and private markets. We're gonna spend some time going into a few case studies and anecdotes to share how our founders navigating this time and what are they doing. But before we do that, just wanted to level set in terms of what is the impact that we're actually seeing from a quantitative standpoint. So we'll start with with 2021 here just to provide some context. And in... Specifically, we're looking at net incremental bookings and attainment to that. So if you were growing from... If you were planning to grow from 10 to 20,000,000, of that 10 incremental million dollars, how much are you actually attaining in that year? 2021, I think we all know, was an exceptional year across the board, and the median attainment for the companies analyzed here was very close to a 100%. Q one in particular tends to be a fairly healthy quarter just given the proximity to annual planning and a little bit more visibility. But I think, you know, Doug and and any investor that's been in the business for a long time can attest to the fact that never before have we seen so many companies outperform their plan, which I think just speaks to the markets in general last year. So what does that look like this year? Of course, early in the year, there was some changes starting to happen both in public and private markets. But when we actually looked at the impact on attainment, it it was still a very strong quarter. 99% median attainment. And that coupled with really robust balance sheets, most companies had somewhere between two and a two and a half years of runway. So definitely in a solid place, I think the other way to look at this is the easiest reference point that most of us have in the recent past would be q one of twenty twenty. So what happened in COVID when there was similar volatility and a lot of quick changes to buyer behavior. In q one twenty twenty, media entertainment was closer to 80%. So I think really speaks to the health of many of these companies coming into the year despite some of those changes. Of course, impact has accelerated through q two and and now with early indications into q three. So in in q two, that median attainment number moved from 99% down to 87%.
00:17:38 · Christine Edmonds
The other way that we looked at this was for companies ending quarter in June versus July, what was median attainment and really did see each incremental month add to some of the pain and the misses that we saw here. So again, we'll talk through some of the lessons that were applied in in 2020 and how they're being used today to manage this. But I think one thing to point out here is just how quickly these things can change and the importance of really getting ahead of some of the decisions that need to be made through times like these.
00:18:09 · Doug Pepper
[00:18:09] S1: So that was the impact for the private companies. This is showing what we're seeing in terms of the impact in the current environment on the public companies, and it's actually quite a similar story. If look you at the column on the left, that's kind of Q1 earnings. What were companies communicating to The Street in terms of their results? And it was a great quarter. 95% of companies beat their management plan. 91% beat the consensus analyst estimates. And maybe most important, if you look at the box at the bottom, almost 80% of companies that announced in Q1 raised their guidance for revenue for the full year. It's a good sign, actually quite typical over the last few years. That's what analysts expect you to do. Q2, things changed. The actual results of Q2 weren't that much worse, a little lower. People were still largely beating their management and their consensus plans. The big change, and a pretty dramatic one, is that now only 50% of companies raise their guidance for the year, and that's communicating real conservatism, maybe pessimism, about the back half and their ability to continue growing at the original pace for the year. And even those that did raise, you can see the median beat raise was like 2% raise on their plan. So even the raises were a little bit anemic. And so that's indicating, just like the private companies, that the impact of the demand environment is showing up more in q two and the pipelines for q three and q four than we may have expected.
00:19:38 · Christine Edmonds
[00:19:38] S2: Great. So again, we'll get into some more tactical case studies in just a moment, but maybe one last quantitative view to share here. When we bumped up top line performance against bottom line performance, so we looked at how much are companies attaining of their plan from a revenue standpoint and how much are they spending relative to what they had budgeted, we found most companies fell in one of two buckets. So the first bucket is this top right quadrant in the light green, and these are companies that actually managed to both beat their top line plans while burning less than anticipated. One thing to note is on average, these companies were about three times the scale as their counterparts in other cohorts, which, again, I think speaks to more mature go to market motions, probably a more stable and robust customer base as well. The other bucket that many companies fell into were companies that were missing top line, but again, were able to very quickly pivot some of their operations to manage costs so they could extend their runway, and that's the top left quadrant you have here. Again, 2020 was the first time that many of these leaders had to even think about scenario planning, think about how to manage costs and make a lot of these really tough and emotional decisions. And I think in 2020, there were some companies that may have over rotated and hindered their growth by being too conservative when it came to cutting costs. And so what we're seeing so far is many of those lessons and learnings being put into action with a much more proactive and a much more measured response so that they can extend that runway and not have to make as drastic decisions later on.