Alex Clayton assembles end of year reviews for SaaS IPOs of the year. You can read his reviews for 2018, 2019, and 2020 here. I feel grateful to Alex for his efforts; his reviews and S-1 breakdowns provide valuable benchmarks for founders.
In this post, I build on top of Alex’s reviews from 2018–20. He reviews thirty-nine¹ SaaS companies that went public in these years, a healthy dataset to learn from. These companies have a broad spectrum of go-to-market strategies and resulting price points; from the bottom-up and self-serve motion of Dropbox with an average contract value (“ACV”)of $111 to the top-down and enterprise sales motion of Medallia with an ACV of $507,696. Founders choose the market segment, GTM motion, and ACV of their startup early on their journey. These decisions are impactful and often hard to reverse. In this post, I surface benchmarks by ACV cohorts so founders know what excellence in their chosen segment and motion looks like.
I separate companies into these ACV cohorts and describe the accompanying motion in general terms:
- X-small²: ACV < $10k, e.g. Dropbox, Slack, and Zoom. Because of the low ACV, this cohort specializes in bottom-up, self-serve, product-led GTM with monthly payment plans and credit card swipes. Their product delivers value in days. They specialize in SMBs, but may move upmarket over time. The sales cycle spans from days to weeks.
- Small³: $10k <= ACV < $50k, e.g. Datadog, PagerDuty, and ZoomInfo. This cohort often has both bottom-up and top-down motions focusing on SMB and Mid-Market. The product is easy to get started on. A mix of inside sales and field teams services customers. The sales cycle spans from weeks to months.
- Medium⁴: $50k <= ACV < $100k, e.g. Fastly, Sumo Logic, and ZScaler. This cohort focuses on Mid-Market and Enterprise. It is rare for a customer to buy without talking to the sales team. The sales cycle spans from months to quarters.
- Large⁵: $100k <= ACV < $1m, e.g. Anaplan, Medallia, and Snowflake. This cohort does large deployments in the enterprise often involving professional services. The product does not “sell itself” and often requires significant integration. The sales cycle spans from quarters to years.
Now, the analysis.
The majority of IPOs had an SMB/Mid-Market Focus
X-small is the largest cohort of IPOs. In fact, close to 2/3rds of IPOs have an ACV < $50k. Bottom-up, product-led sales to SMB/MidMarket is the playbook of choice in SaaS IPOs.
This has several implications. Founders who prefer this motion should choose investors who have backed successful companies with that motion. Moreover, the most important job of the founder is finding a product-led, viral distribution channel. If a company cannot find such a channel, it will fail.
SMB/Mid-Market focus takes longer to IPO
The downside of this motion is that it takes longer to IPO, approximately 3 years longer than companies with ACV >= $50k. It takes time to find virality, remove self-serve friction, and rack up a large customer base to be IPO ready. This is also why it is important to choose your investors carefully; they will have to be more patient with your growth trajectory.
This graph also shows why it is so attractive to go up-market quickly. At Split, a company I founded, we went up-market fairly quickly because of similar reasons.
A fight through churn
A reason for this slower path to IPO is that SMB/Mid-Market is a fight through churn. It is common for customers to go out of business. Even if you retain them, SMB and Mid-Market accounts may not expand significantly. On the other hand, a beachhead in an enterprise offers years of growth in that account. This difference shows up in their Net Dollar Retention⁶ (“NRR”).
Of course, there are exceptional companies like Slack (x-small ACV) with an NRR of 143%. But, the pattern is one of NRR growing with ACV.
As Jason Lemkin shows, this pattern shows up even within a single company, e.g. Asana (IPO ACV $2,538, x-small cohort).
The lesson for x-small or small ACV companies is to perfect their motion and accept higher churn in the beginning. It is critical not to lose focus. They can go up-market later which will lift NRR and accelerate growth.
The lesson for medium to large companies is to focus on NRR . It is a major lever of growth and if you are not expanding with enterprises, take a closer look at your product and pricing. You are making things harder for yourself.
Payback period grows with ACV
Since x-small and small ACV companies face significant churn, they are expected to have a low CAC payback period⁷. Medium to large ACV companies have more breathing room.
This is because selling to the enterprise takes time and people. The cost of acquiring a customer is usually not covered by the “land” revenue, however, expansion of the account will payback its acquisition cost over a longer horizon. How much longer? 10 months longer for the median large ACV company versus median x-small ACV company.
The lower the ACV, the more important it is to manage Gross Margin
Gross Margin⁸ is in the denominator of the equation for CAC Payback Period. So to reduce Payback Period, x-small and small ACV companies work hard to manage their Gross Margin.
In engineering terms, they optimize their AWS infrastructure, build knowledge bases to reduce support calls, and control infrastructure costs.
Medium to large ACV companies have a lot more breathing room in Gross Margin. In engineering terms, their product roadmap has more room for feature development. Their support team can be much more hands-on with customers.
Snowflake (large ACV) is an example of how enterprise companies can afford to have a lower gross margin. As Jason Lemkin shows in this tweet, Snowflake improved its gross margin in the years leading up to IPO.
The fastest-growing companies at IPO have the highest ACV
To be more accurate, the fastest-growing companies at IPO either have x-small ACV or large ACV. This difference between x-small and large ACV companies vs. small and medium ACV companies speaks to the power of focus. At either extreme, they only focused on one end of the market; perfecting their product, distribution, and technical moat. Over time, they went up or down market, but that initial focus paid off in growth. That’s why you can have a Snowflake growing 120.7% with $500m in ARR at IPO with an ACV of $160k and Zoom growing 108% with $423m in ARR at IPO and an ACV of $8,331.
Public markets reward lower ACVs with bigger IPO
The focus on efficient distribution and product-led growth pays off in significantly better valuation at IPO for x-small ACV companies. A difference of over $1b in valuation, even accounting for 3 extra years to IPO, is a significant reward for these companies. I do not claim a causation between ACV and IPO market cap; I highlight a correlation.
What it takes to IPO — and hence, the standard for excellence for other startups — depends on sales motion and resulting ACV.
Companies with no-touch, product-led, bottom-up, SMB rooted motion need low payback periods and higher gross margin. They get leeway on retention.
Companies with top-down, field sales heavy, enterprise motion need stronger retention but get leeway on payback periods and gross margin.
Regardless, growth is the deodorant that masks all odors. A high revenue growth rate is rewarded well at IPO irrespective of the motion.
For founders who get disheartened looking at these numbers, don’t lose hope. These companies have spent years perfecting their metrics in the lead up to the IPO. You have time. Focus on your product and motion; trust yourself, you can do it.
: ADIN, AVLR, CBLK, DBX, DOCU, DOMO, ESTC, PLAN, PS, SMAR, SVMK, TENB, XM, ZS, ZUO went public in 2018. BILL, CRWD, DDOG, DT, FSLY, MDLA, NET, PD, PING, SPT, WORK, ZM in 2019. API, ASAN, BIGC, BSY, FROG, JAMF, MSP, NCNO, SNOW, SUMO, VERX, ZI in 2020. I removed PVTL and DCT from this analysis as recurring revenue from the last twelve months (LTM) was less than half of total revenue when they went public. I also removed AI and PLTR for they were the only two companies in an X-Large cohort with ACV in millions of dollars.
: X-small companies: DBX, SVMK, BILL, DOCU, SMAR, BIGC, ASAN, NET, SPT, WORK, JAMF, TENB, ZM
: Small companies: PS, PD, BSY, FROG, ZI, MSP, ADIN, AVLR, XM, ESTC, DDOG, CBLK
: Medium companies: ZS, DOMO, VERX, SUMO, NCNO, FSLY
: Large companies: API, CRWD, ZUO, PING, SNOW, PLAN, DT, MDLA
: In layperson’s terms, Net Dollar Retention, represents the value today of $1 in revenue acquired a year ago after taking into account churn, contractions, and expansions over the year. The higher this value the better.
: CAC Payback Period is the time it takes a customer to pay back the cost of acquiring them. Naturally, lower is better.
: Gross Margin is total revenue minus cost of goods sold (COGS). COGS includes support, engineering infrastructure etc.