Michael Brown of Bowery Capital and Kelli Fontaine of Cendana Capital discuss trends and themes using Cendana Capital manager data.
2018 is right around the corner, where does the time go! To our closers finishing up the year, best of luck, and you can check out our guide here on tactics to help you reach your final goals. To our business planners (looking at you COOs, CFOs, Sales OPs leaders) it’s time for you to start thinking about 2018, if you haven’t already. To help you with that, I’ve put together some of my favorite SaaS business planning benchmarks and stats I’ve been using with Bowery Capital’s portfolio companies throughout this year. Enjoy.
1. About 70% is the aim for gross margin in SaaS. Account based marketing and sales, both top of mind right now, will help you improve this. As my colleague Loren Vittetoe mentioned in her piece on “How to Tell When a SaaS Company is Ready for an IPO,” gross margin as a percentage of your recurring revenue tends to be around 70% (or hopefully more) for most SaaS companies. This is a staple operational metric that a lot of SaaS companies build around, and investors look to when judging the health and sustainability of a company. Furthermore, you can optimize it as your startup matures by selling additional products into existing customers, or selling across an organization’s business units (which is usually cheaper to do, thus expanding your margins). You can utilize one of today’s favorite methods – account based sales and marketing strategies – to expand services across enterprise accounts more easily.
2. Your sellers should be compensated on a 5:1 Revenue to OTE ratio. Understand why and when to go above or below that. Anecdotally, this one of the key SaaS business planning benchmarks that our Director of Talent, Alex Adamson, and I have been seeing in the industry and using when it comes to Revenue to OTE for sales-people at startups. In other words, if you’re going to pay that new savvy seller an OTE of $150k, they better be expected to bring in $750k by end of year. Also, sellers be warned, if you want to negotiate up your starting package, that’s fine, but be ready to perform against it if your new boss is aware of this benchmark. The typical split for this is 50% base + 50% commission = OTE. For earlier stage companies that haven’t reached product-market fit, sometimes you can drop to 4:1 or even 3:1. Later stage, look to increase to 6:1 or 7:1 as your sales will be more predictable.
3. There are 4 sales levers at your disposal to control sales velocity. Diligently track them, and set goals or implement gamification to improve them. Speaking of sellers and their production, I wrote on this earlier this year with my sales velocity post. Essentially whenever a company asks me questions on other critical SaaS business planning benchmarks, like “Is my ACV too low to hit my goals? Do I need to get more deals in the pipeline? What should I be paying my reps?”, I also refer them to the sales velocity equation which looks at 4 main metrics in sales operations: Average Contract Value (ACV), # of Deals in Your Pipeline, Deal Cycle Time (aka days from start to close of a deal), and Close Rate. When you put all these to work in the equation, you’ll be able to accurately forecast your sales, and also what your sellers will get paid. Furthermore, I like to challenge our leaders to not only think about their end sales goal, but to also create team goals around improving these 4 levers to increase the overall amount they can achieve. Extra tip: put a quarterly spiff against improving one of them each quarter for a year, or gamify it amongst the team, and watch as your entire sales org becomes more disciplined and productive.
4. There are $250,000 of R&D tax credits (potentially) available to you. You fought hard for your funding, so take the free money too. If you’re a smart and disciplined startup COO/CFO, this is a hidden gem that you’re taking advantage of as an innovative new business. Uncle Sam is giving you a gift here for being an entrepreneur, but many others have missed out on it, simply due to not being aware of it, or forgetting to fill out the proper paperwork to receive it. Here’s the jist: qualified entrepreneurial small businesses who make under $5MM a year can save up to $250k by offsetting payroll tax liabilities with this tax credit. It can be applied retroactively as well. Pretty much every early startup qualifies for this, so it’s free money in a sense. You can learn more about it here, and I’ll give a shout out to a great group called Clarus, who will even help do the work for you to make sure you get the most out of this benefit.
5. $1.9 Million is the average ARR for companies raising their Series A. For many seed-stage companies, this is your “North Star” over the next 18 months. If you don’t read Tomasz Tunguz’s posts, I would highly recommend them. My favorite from last year stated key SaaS business planning benchmarks that should be top of mind to every seed-stage startup out there. The most interesting one that I took away was the average company to raise a Series A early last year did so with an MRR of $163k at the time of their round, or extrapolated, an ARR of about $1.9MM. Incredibly, Tunguz points out, this has actually increased by about 80% YoY for the past few years (so it’s likely even higher now in 2017). There are many ways to interpret this, but the bottom line is that founders need to think about how to generate revenue, and quickly, if they want to stand on solid footing when asking for their next big round of funding.
There are hundreds of metrics and benchmarks we could talk about, and certainly these are not the 5 most important, but I did find myself talking about them frequently with Bowery Capital’s seed-stage founders this year. Best of luck to all entrepreneurs out there as you kick off the new year, and hopefully these will help guide you on putting a plan to paper, and that paper to action in 2018.
If you liked “2018 SaaS Business Planning Benchmarks” and want to read more content from the Bowery Capital Team, check out other relevant posts from the Bowery Capital Blog.
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