Lessons from SaaS IPOs in 2018–2020

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

Percentage of IPOs by ACV

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

How many years does it take to IPO by ACV
How many years does it take to IPO by ACV

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

How does net dollar retention vary by ACV
How does net dollar retention vary by ACV

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).

How Asana’s net dollar retention varies by market segment
How Asana’s net dollar retention varies by market segment

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

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

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.

How gross margin varies by ACV at IPO
How gross margin varies by ACV at IPO

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

Revenue growth variation by ACV at IPO
Revenue growth variation by ACV at IPO

Public markets reward lower ACVs with bigger IPO

How IPO valuation varies by ACV
How IPO valuation varies by ACV

Summary

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.

Footnotes

[2]: X-small companies: DBX, SVMK, BILL, DOCU, SMAR, BIGC, ASAN, NET, SPT, WORK, JAMF, TENB, ZM

[3]: Small companies: PS, PD, BSY, FROG, ZI, MSP, ADIN, AVLR, XM, ESTC, DDOG, CBLK

[4]: Medium companies: ZS, DOMO, VERX, SUMO, NCNO, FSLY

[5]: Large companies: API, CRWD, ZUO, PING, SNOW, PLAN, DT, MDLA

[6]: 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.

[7]: CAC Payback Period is the time it takes a customer to pay back the cost of acquiring them. Naturally, lower is better.

[8]: Gross Margin is total revenue minus cost of goods sold (COGS). COGS includes support, engineering infrastructure etc.

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