Is Your Company Growing Efficiently? Sales Efficiency Benchmarks for SaaS Startups

Follow me on Twitter for my thoughts on startups and venture capital.

I recently published a post on revenue growth benchmarking for startups. The data is helpful to benchmark whether your company is growing fast enough to be on the path to IPO. The data on its own, however, ignores how much is being spent for that growth. It is easy to grow by spending wildly on sales & marketing (S&M), but growing quickly and efficiently is difficult to accomplish. This follow-up post is focused on helping put into context the revenue growth benchmarking so you can understand how fast your company should be growing… relative to how much you are spending on S&M.

Sales Efficiency Benchmarking for SaaS Companies

This analysis focuses only on SaaS companies as the consumer dataset was fairly noisy. In order to normalize sales efficiency across all companies, I created a ratio that takes both forward revenue growth and sales & marketing spend into account. While some companies may have different target customers (e.g. enterprise vs SMB), sales cycles, and rep ramp times, this formula still provides a good proxy for efficiency across all companies. The metric is a bit of a spin on ‘magic number’ but uses forward revenue growth which ties to my prior post (more on that in a minute).

Let’s put this formula to the test so you understand the methodology:

  • Company A: Generated $20M of revenue in 2017 and $40M of revenue in 2018 (100% Y/Y growth), spending $10M in S&M in 2017 (50% of revenue on S&M). The resulting sales efficiency ratio would be 2.0x (100% / 50%).
  • Company B: Generated $100M of revenue in 2017 and $140M of revenue in 2018 (40% Y/Y growth), spending $80M in S&M in 2017 (80% of revenue on S&M). The resulting sales efficiency ratio would be 0.5x (40% / 80%).
  • Note: S&M excludes stock-based compensation expenses

I applied this formula against all SaaS companies that have gone public over the last decade. This includes sales efficiency ratios from 96 companies, representing over 275 data points. The chart below allows you to benchmark the sales efficiency of your company against all other SaaS companies that have gone public since 2010. Where does your company stack up?

How to interpret the data: if your company generated $50M in revenue in 2018, a ratio of 2.0x is considered the 90th percentile. This means that if you spent $20M in S&M in 2018 (40% of revenue), you would need to grow by at least 80% growth in 2019 to have 90th percentile efficiency. Similarly, if your company generated $50M in revenue but spent $50M in S&M in 2018 (100% of revenue), you would need to grow by at least 200% growth in 2019 to have 90th percentile efficiency. There’s a higher bar for growth when you spend more on sales and marketing.

The special group of SaaS companies that had 90th percentile efficiency during their growth phase includes, but is not limited to:

Combining Revenue Growth and Sales Efficiency

It becomes really interesting when we combine the revenue growth benchmarking from my prior post with the sales efficiency benchmarking from above. Below is a map that looks at every SaaS company that has gone public across both dimensions. Because these metrics may move around annually, this is a snapshot of how each company looked in the year prior to its IPO.

Note: Data for each company based off the year prior to IPO

The Impact of High Growth and Sales Efficiency on Valuation

To more easily visualize the chart, I shaded the 90th (dark green), 75th (light green), and 50th percentiles (yellow) as well as the bottom 40th percentile (red). The best companies sit above the 50th percentile on both dimensions and are rewarded in the public markets, with double-digit NTM revenue multiples. See below for averages of multiples and market cap at IPO and as of May 10, 2019.

Note: Based on averages and current multiples exclude companies that have been acquired

The special group of companies that exhibited both 90th percentile growth and efficiency traded on average at an 8.6x NTM revenue multiple at IPO and currently trade at a whopping ~17x NTM multiple. Each of these companies is worth at least $10B today and combined represent over $250 billion in market value. Conversely, the companies in the bottom 40th percentile on both dimensions traded on average at only 3.4x NTM revenue at IPO. Few of these companies are worth more than $3B today and many have been acquired for modest amounts.

Another way of demonstrating valuation is by plotting each company’s percentile rank before IPO against that company’s NTM revenue multiple at IPO.

For the X-axis, I’m showing the product of both percentiles. For example, a company at the 90th revenue growth percentile and the 80th sales efficiency percentile would be displayed at 72% (.90 * .80). There’s a strong positive correlation. Companies above 75% trade between 6–12x at IPO, companies between 25% and 75% trade at between 2–8x, and those below 25% trade at between 1–6x. There was a stronger correlation between growth and valuation than between sales efficiency and valuation which highlights that public market investors place a stronger emphasis on revenue growth. It’s clear though that success on both dimensions is the holy grail.

How to Achieve 90th Percentile Metrics?

Nakul Mandan of Lightspeed wrote a great post discussing how to scale in hyper-growth. He discusses that B2B companies are often constrained by 1) market awareness, 2) sales capacity, 3) deployment and implementation capacity, and 4) capital. In his view, a company can push through these constraints to achieve non-linear growth by either 1) going self-serve or 2) having a large enterprise motion from day one. These go-to-market models create leverage on sales and marketing resources, which is the key to efficient, non-linearity. It is no surprise that the companies in the ~90th percentile on both growth and efficiency fell into one of these two categories:

  • Self-Serve / Bottoms-Up / Freemium: Slack, Atlassian, Twilio, Elastic, and Zoom took advantage of bottoms-up distribution models, whether that be from building developer mindshare and/or having a free/freemium product that penetrated within a company over time.
  • Enterprise from Day One: Workday, ServiceNow, Veeva, and Palo Alto Networks all sold into the enterprise early on.

It goes without saying, but reaching the 90th percentile also requires a strong product, large market, and incredible execution over many years.

It’s Your Turn

Now that you are armed with revenue growth and sales efficiency benchmarking data, see where you stack up. Here are links to two calculators for more precise figures:

  • Sales Efficiency: Type in your company’s annual revenue and S&M figures to benchmark your sales efficiency ratios. (LINK)
  • Revenue Growth: Type in your company’s annual revenue to benchmark your revenue growth rates. (LINK)

Take these benchmarks to your next board meeting and have a discussion on where and how you can improve. Good luck!

If you found this post valuable, please clap and share on social media. Special thanks to SunTrust for providing valuation data.