SaaS companies today are going public at significantly higher revenue run rates than in previous years. The median Annual Recurring Revenue (ARR) for a B2B SaaS company going public today is ~$286M — a 3x increase from just five or six years ago.
(Data + Analysis can be found here)
This is a very recent trend. For the longest time, SaaS companies went public at roughly $100M in ARR. Around 2016, we started to see a slight upward trend to this baseline — followed by a very sudden and dramatic spike in the last couple of years.
Not only are companies going public on higher revenue run-rates but many of them are also sustaining high growth rates at scale.
The best way to appreciate the full magnitude of this trend is to track growth indexed to revenue milestones (e.g. growth from $200M to $400M ARR) instead of to fixed time periods (e.g. growth in the year leading up to an IPO). This frees us to study growth independent of IPO timing, and make meaningful comparisons between businesses at similar stages of revenue.
When we compare how long it took the best SaaS companies to go from $200M to $400M ARR, we see a leaderboard dominated by recent IPOs. The top companies are all growing very fast —doubling ARR (from $200M) in 12 months or less — and all of them went public in the last two years!
Only three companies that went public before 2019 made the top 10: Workday and Salesforce and MongoDB.
Looking at the implied compound annual growth rate (CAGR) makes the contrast across cohorts very apparent.
Until recently, the median CAGR for a SaaS business going from $2000M to $400M ARR held steady around 40–50%. Since 2019, the median CAGR has jumped to almost 100% —or a 2x annualized growth multiple!
Looking at the implied compound annual growth rate (CAGR) makes the contrast across cohorts very apparent.
Until recently, the median CAGR for a SaaS business going from $2000M to $400M ARR held steady around 40–50%. Since 2019, the median CAGR has jumped to almost 100% —or a 2x annualized growth multiple!
The stylized facts driving this phenomenon are:
- The SaaS market has tipped. As software eats the world and SaaS eats on-premise software, the addressable market in every category is exploding. Businesses that have hit their stride today have a much higher service ceiling — and can therefore sustain high growth rates over longer periods of time than previously possible.
- Newer SaaS go-to-market motions, powered by product-led growth and bottom-up adoption, are inherently very capital efficient. We’ve written about this previously, highlighting the substantial efficiency advantages of bottom-up adoption relative to traditional top-down selling. Capital efficiency is a key lever to hyper-growth: it makes it both easier to justify the pursuit of growth and unlock growth trajectories out of reach for less capital efficient businesses.
Given that we’re still relatively early in the SaaS adoption cycle (SaaS spend was only 23% of the overall enterprise software market in 2020), the recent IPOs are best understood as a harbinger of things to come — the first wave of many, powered by a new business model archetype (with a radically superior performance envelope) operating in big markets that are rapidly adopting cloud.
The attractive financial profile of these businesses partly explains why many of them are staying private longer and going public at higher revenue run-rates: they can easily raise in private markets at premium valuations and have the luxury of going public at a time of their choosing, on the back of a stronger more resilient business.
It also explains why many of these companies are trading at historically high valuation multiples: a business that is growing fast with demonstrated growth endurance has an easier time convincing investors that it can quickly grow into a higher valuation.
Salesforce pioneered the SaaS category. It also gave us a framework on how to think about and value subscription businesses. For almost 16 years since its IPO, it has remained the ultimate benchmark to measure the best against.
The trailblazing product-led SaaS companies today are very different from their predecessors. It may be time for a recalibration: we will need not just new benchmarks, but also new models to measure and value growth.
