Metrics Benchmark Report
2022

One of the biggest mistakes you can make as an early-stage SaaS company is investing heavily into sales and marketing before establishing product-market fit.

So it’s no surprise that we see the majority of SaaS companies invest most of their money into product development before raising a Series A round. The median R&D spend as a percentage of revenue was 40% for angel/seed round stage SaaS companies.

Without establishing product market fit, you’re taking a bigger gamble with the money you spend on sales and marketing.

This doesn’t mean you need to perfect your product before raising your Series A round or investing in sales and marketing. However, you should, at the very least, have a working version of your product and know who your target market is.

Once you’ve raised a Series A round and are ready to focus on revenue growth, what should be your next priority? According to our analysis, investing in sales and marketing is a wise choice.

The median sales and marketing spend as a percentage of revenue is 28% pre-Series A. Once companies have raised their Series A, that number jumps to 33% and continues to increase.

Now, let’s compare that chart to the benchmarks for average revenue per employee.

The median revenue per employee starts at $43K for companies generating less than $2.5M of ARR. For companies in the $2.5-10M cohort, the median revenue per employee increases to $104K.

In our experience, this is often around the time when startups are in their Series A stage. As noted above, that’s when most startups invest in sales and marketing.

Since sales and marketing people are hired to generate revenue, they likely play a significant role in the increase in revenue per employee in the chart above.

Once you’ve established product-market fit (and continue to improve your product), the investments you make in sales and marketing can create a snowball effect and become a growth engine to reach your next milestone (fundraising, revenue, etc.)

Many B2B SaaS companies start by selling to the SMB market. Over time, they go upmarket and target enterprise companies.

Targeting larger companies typically means longer sales cycles and higher customer acquisition costs. According to our analysis, this results in longer CAC payback periods.

Average CAC payback periods start relatively short for SaaS companies generating less than $2.5M of ARR (around 12 months).

When SaaS companies reach $50-100M of ARR, the median CAC payback period nearly doubles to 21 months.

The takeaway is you shouldn’t be alarmed if your payback period starts to increase as your revenue grows—it’s normal.

Metrics like CAC payback period and the Magic Number help you gauge how efficiently you acquire customers.

However, one important piece of the customer acquisition puzzle is cost. Spending too much money to acquire customers will extend your CAC payback period and lower your Magic Number. A quick way to determine whether or not you’re overspending is to use the “OG” metric, LTV/CAC ratio.

Here are some benchmarks to compare.

The generally agreed-upon best practice for SaaS companies is to aim for an LTV/CAC ratio of 3:1. According to the data, the average startup has an LTV/CAC ratio between 3-5:1.

This means companies generate 3-5x more revenue from customers than it costs to acquire them.

Part of the reason larger SaaS companies can withstand a longer CAC payback period is that they’re able to retain and upsell customers better than their smaller counterparts.

As ARR increases, data shows that a higher percentage of new revenue comes from existing customers (expansion revenue) rather than new customers.

The median percentage of new ARR from existing customers for startups generating $100-250M of ARR is 53% compared to 29% for startups generating less than $10M of ARR.

On average, SaaS companies generating over $25M of ARR attribute over 50% of new ARR to upgrades and upsells of existing customers.

We can also see the importance of expansion revenue in the net retention rate benchmarks.

On average, SaaS companies generating more than $2.5M or ARR have a net retention rate of over 100%. This means the ARR generated by upselling existing customers is greater than ARR lost to churn.

This could be for a variety of reasons.

In the early stages of a SaaS company, customer acquisition is often the key focus.

You’re getting new customers, constantly iterating your product roadmap, learning more about why customers stay or churn, and you have a better understanding of customers’ high-priority needs.

As you hit the growth stage and establish Product Market Fit (PMF), you better understand how to retain customers and have a larger existing customer base to upsell. In addition, you can create more sophisticated features, which allows you to increase your prices.

Based on the benchmarks above, most SaaS companies generate 40-50% of new ARR from their current customers.

If you’re early on, it’s not uncommon to be in the 10-30% range. But the goal should be to increase revenue from existing customers and net retention as much as possible, so you’re not solely reliant on new customer acquisition to fuel growth.

This is critical as you scale because it makes it easier to grow without relying on new customer acquisition.

That’s the perfect segue to our next takeaway.

In an ideal world, you’d be able to grow revenue exponentially yearly. However, our analysis shows that’s not the case for SaaS companies.

The median growth rate for SaaS companies generating less than $2.5M in revenue is 84%. Once startups reach $10-25M of ARR, the median growth rate drops to 47%.

We also see a steep dropoff when startups reach $100M of ARR.

According to the popular “triple, triple, double, double, double” (T2D3) growth path outlined by Battery Ventures Partner Neeraj Agrawal, this isn’t surprising.

Agrawal suggests that within five years after establishing PMF, revenue growth for venture-backed startups should look like this:

• Triple revenue in each of the first two years
• Double revenue in each of the subsequent three years

He proposed that after the T2D3 period, revenue growth begins to slow down.

In other words, your revenue is growing, but not at the rate it was in the earlier stages of your startup.

One metric that goes hand-in-hand with revenue retention is Growth Endurance—the rate at which you retain growth from one year to the next. Even though your growth rate may decay over time, you need to maintain as much revenue growth as you can each year to stay on a positive growth trajectory. Your growth endurance rate will help you monitor that.

To calculate your Growth Endurance rate, divide the current year’s growth rate by last year’s.

According to data from Bessemer Venture Partners, VC-backed SaaS companies should strive to retain at least 70% of their growth rate year over year (YoY).

Bessemer’s research also noted that growth endurance is typically higher for public companies—around 80% compared to 70% for private companies.

The chart below illustrates how growth endurance impacts your company’s growth trajectory. It compares three scenarios of reaching $100M of ARR based on 70, 75, and 80% growth endurance:

It takes a company with an 80% growth endurance rate half the amount of time to reach $100M of ARR as a company with a 70% endurance rate.

Most VC-backed startups are familiar with the “Grow at all costs” concept.

Essentially, it’s the idea that startups will operate at a loss for some time to focus on growing their user base and revenue as fast as possible with the end goal of a successful exit (typically an acquisition or IPO).

Our analysis found that this is often the case, but startups tend to tighten up over time.

Looking at the benchmarks for free cash flow margins, we can see that most startups operate with significant negative margins early on.

The median FCF margin for SaaS companies with less than $2.5M of ARR was -308%.

That number improves by nearly 50% for companies generating $2.5-10M of ARR, but it’s still at -175%.

SaaS companies can often sustain a low FCF margin in the early days because investors understand they’re in the process of figuring things out—from optimizing operating costs to managing expenses.

As you can see from the benchmarks, however, the expectation is that your FCF margins will improve as you scale.

By the time SaaS companies reach $50-100M of ARR, the median FCF margin is -27%.

One of the benefits of the SaaS business model is high gross margins.

There are no physical materials needed to produce SaaS products in most instances. The main Cost of Goods Sold (COGS) for SaaS companies involve hosting and any software your product is built on.

These expenses also scale with growth.

For instance, a SaaS company’s server expenses may increase as the customer base grows. The revenue growth from the new customers either keeps pace with or outpaces the added server costs needed. These high margins help venture-backed SaaS companies sustain despite being unprofitable.

According to the reports we analyzed, the median gross margin for SaaS companies tends to be between 70-80%, regardless of annual revenue.

We also compared gross margins based on funding rounds and found a similar trend. Although we did notice that gross margins increase more once SaaS companies reach the Series A stage.

Although growth at all costs has been a widespread mindset in the VC world for some time, things are shifting.

In 2022, we saw a slowdown in VC funding due to economic uncertainty. Startups weren’t able to raise funds as easily as they did in 2020 or 2021, and according to Crunchbase data, global funding has been on a downward trend.

This pullback could signal a push towards efficient growth.

At the same time, we’re seeing more startups tracking efficiency metrics like The Magic Number, which we highlighted earlier, Rule of 40, and Burn Multiple.

Burn multiple is a metric created by venture capitalist David Sacks to measure how much money a startup burns to generate each dollar of revenue. To calculate your burn multiple, divide net burn by net new ARR. The result is your burn multiple.

Here are the benchmarks set by Sacks.

According to Sacks, VC-backed SaaS companies should aim for a Burn Multiple under two, with the most efficient companies reaching a Burn Multiple of one or lower.

During times when investors are becoming stricter about which companies they invest in, Burn Multiple will likely become increasingly important.

Startups with a proven track record of turning cash into revenue (i.e., a low burn multiple) will be much more appealing to investors than startups that burn through cash with little to no revenue to show for it.

When comparing your burn multiple to the benchmarks above, consider the stage of your startup.

Take a look at this example from Sacks:

“Q1 just ended and it’s time for a board meeting. The startup reports that it burned $2M in the quarter while adding $1M to its ARR. That’s a 2x Burn Multiple — reasonable for an early-stage startup. On the other hand, if the company burned $5M in Q1 to add $1M of net new ARR, that’s a terrible Burn Multiple (5x). It should probably cut costs immediately. That company is spending like a later-stage company without delivering later-stage growth.”

A high burn multiple early on is a sign of inefficient growth. In other words, it costs you too much money to grow revenue.

This puts you in a difficult position because:

• You’ll be in a constant chase to raise money to grow, and
• Raising money will be more difficult.

Some investors will naturally be concerned with how much you’re spending relative to revenue growth. And the investors who aren’t scared off likely won’t give you the best terms due to your startup’s financial state.

As you can see, while burn multiple is a relatively simple metric, it can tell you a lot about your company.