Why VCs Love SaaS Businesses

A couple weeks ago, I shared a chart with the stock performance of recent tech IPOs along with this tweet:

there are two dominant startup models in tech today. (1) You can make money selling software. (2) You can lose money selling anything else.

Lots of people wrote back, and one person pointed out that a better metric to look at (than stock price) would be revenue vs. capital raised. He also pointed me to this fantastic TechCrunch article with the data, so here is a closer look at the efficiency of different businesses models, thanks to Boris!

This chart shows that most public SaaS companies need less than $1 of capital to acquire $1 of ARR. For example, Smartsheet (hidden behind PagerDuty) burned $55M of cash prior to IPO and grew to ~$130M of ARR, so it only cost ~$0.40 for Smartsheet to acquire $1 of ARR.

On the chart, companies “below the line” like Domo have had a harder time finding efficient growth, while Zoom (far left, middle of the way up) was actually able to grow to $423M of ARR with negative cash burn (i.e., they had more cash at time of IPO than they raised). Pretty incredible!

So SaaS companies build their businesses quite efficiently… Now here’s what it looks like when you add other recent (non-software) IPOs to the plot (note: instead of ARR, I used last twelve month…