Why Capital Efficiency matters: Analysis from 48 publicly traded SaaS companies

Founding teams retain more ownership, obtain higher valuations, and require less capital to reach IPO.

As a part of our workshop at SaaStock in Dublin this year, we analysed 48 publicly traded SaaS companies looking for correlations between capital efficiency and the outcomes for founders. We found out that in companies with higher efficiency the founding team retains more ownership, their stake is valued significantly higher and they need significantly less capital to reach an IPO. We also found that companies with a higher founder ownership use non-dilutive funding more actively.

Summary of our findings:

• Higher founder ownership: Founders in the top quartile of sales efficiency have 3.7x more ownership at the time of IPO than their peers in the bottom quartile (avg. ownership top efficiency quartile 32.9% vs 8.9% bottom quartile)
• Better valuations: Businesses in the top quartile of sales efficiency are valued on average at 20.26x revenues at the IPO while their peers in the bottom quartile are valued at 8.28x
• Larger value creation for founders: Founders’ stake in highly efficient businesses is valued 7.5x higher than the stake of their peers in the bottom quartile (avg. stake value in the top efficiency quartile is $869m vs $116m bottom quartile)
• Lower capital needs: Businesses in the top efficiency quartile require significantly less capital to reach IPO. On average, companies in the top efficiency quartile have 3.8x lower capital needs than their peers in the bottom quartile (avg. pre-IPO raise top quartile $82m vs $302m bottom quartile).
• Financial debt helps: We found that companies with higher founder ownership are more active users of non-dilutive funding. The top quartile of companies in terms of founder ownership have on average a 58% higher debt load (Total Debt/Revenue) than their peers in the lowest quartile.

For the analysis, we use Sales Efficiency¹ as a proxy for Capital Efficiency. We believe this metric encapsulates a lot of aspects of the business beyond sales execution, such as product quality and differentiation, go to market strategy, capital allocation, etc.

I. Higher Efficiency leads to lower Dilution

Ownership of the founding team at IPO as a function of sales efficiency

Avg. ownership of the founding team in each quartile of sales efficiency. The companies are divided in quartiles of sales efficiency and the average ownership of the founding team at IPO of each group is plotted. Thresholds of the sales efficiency quartiles: 139%, 98%, 66%

In the graphs, a clear correlation between share ownership of the founding team² and sales efficiency can be observed. This is somehow an expected result but the ownership difference between the top and bottom efficiency quartiles is surprisingly high, particularly, taking into account that all companies in the sample have very similar businesses models with recurring revenues and high gross margins. If we look at the absolute value of the founder’s stake the differences between the high and low-efficiency companies are even bigger.

Left graph: Avg. stake value³ of the founding team at IPO in each quartile of sales efficiency. The companies are divided in quartiles of sales efficiency. Right graph: Avg. ownership of the founding team in each quartile of sales efficiency. Thresholds of the sales efficiency quartiles: 139%, 98%, 66%

While the ownership difference between the top and bottom efficiency quartiles is 3.7x, the difference in stake value³ is 7.5x. This means that not only do the founders of capital-efficient companies dilute less but also they obtain better valuations for their companies at the IPO.

II. Capital Efficient Businesses raise less Capital at higher Valuations

Average revenue¹ multiple obtained at IPO. The companies are divided in quartiles of sales efficiency and the average revenue multiple at IPO of each group is plotted. For the calculation only subscription revenues have been taken into account. Thresholds of the sales efficiency quartiles: 139%, 98%, 66%

Businesses with high sales efficiency are significantly more valuable than their peers. This effect can be seen in the revenue multiples obtained by such businesses at the IPO. While the top efficiency quartile obtains an average valuation of 20.26x revenue, the third quartile is valued at 13.00x revenue, second at 11.16x and the bottom quartile at 8.26x. For the revenue multiples, only subscription revenues have been taken into account¹.

Average funding needed to reach IPO. The companies are divided in quartiles of sales efficiency and the average funding per company pre-IPO of each group is plotted. Thresholds of the sales efficiency quartiles: 139%, 98%, 66%

Highly efficient businesses require significantly less capital⁴ to reach an IPO. On average, the top efficiency quartile raised $82m per company while the bottom quartile raised 3.8x more ($302m). This result is consistent with the higher dilution that founders of low-efficiency businesses suffer.

III. Use of financial Leverage significantly reduces Dilution

Financial Debt / Revenue for each of the quartiles of founder ownership. Thresholds of the founder ownership quartiles: 26.9%, 16.6%, 10.2%

In order to identify a connection between usage of non-dilutive funding and founder ownership, we divided the companies in quartiles of founder ownership and we looked at the debt load of each of the groups. Not surprisingly, the group with the highest debt load is also the group with the highest founder ownership (Financial Debt/Revenue¹ = 0,49 and avg. ownership of the founding team = 44.3%).

There are many factors that can influence the use of debt in a business (predictability, profitability, collateralizable assets, etc.), however, the willingness of the management teams to favour non-dilutive funding options against equity funding is probably the most relevant factor. We, therefore, assume that the debt load of a business is often an indicator of the founder’s mindset.

IV. Concluding Remarks:

The evidence that capital-efficient businesses provide better outcomes for founders and investors is not an argument against fundraising. In fact, companies with higher efficiency are able to deploy capital at higher IRRs thereby creating an opportunity to partner with VCs and build large businesses that change the economy for the better.

The key to making the right fundraising decisions ist to think independently about the implications of raising funds and how to efficiently deploy them. At Nauta Capital, we have developed an investment thesis around capital efficiency that we use as a framework for selecting investments and helping entrepreneurs make such critical decisions.

Footnotes and Data Repository:

1. Revenue definition: Only recurring revenues have been taken into account for the calculation. Revenues from perpetual licenses have been accounted for as 0.2 x perpetual license revenue = yearly subscription revenue.
2. Founder’s ownership: Founder´s economic ownership can include shares of different classes, restricted stock and stock option grants.
3. Stake value at IPO: For the calculation of the stake value at IPO the issue (stock) price and the total non-diluted number of shares (excl. options) have been used.
4. Capital raise to reach IPO: Secondary transactions and non-dilutive capital have been excluded from the calculations.

The list of companies used for the analysis can be found here.

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About myself: I’m VC @ Nauta Capital. I’d love to blog more often but I only do it when I’m not doing DD or helping our portfolio. Email: guillem.sague@nautacapital.com