Quote Info

Characteristic 1: Product Is Core to the Operation of the Business The product is essential to the operation of a customer’s business. For example, Zuora enables subscription billing; Expensify manages employee expenses; ZenDesk builds customer support systems. Customers can’t function without it.

Characteristic 2: Cost/Value Proposition is Straightforward The product is either cheaper than the alternative: hiring an engineering team to build and maintain a custom implementation of the product;

Or provides network effect benefits otherwise impossible to find: LinkedIn’s network effects drive the adoption of LinkedIn’s applicant tracking system;

Or offers sophisticated technology that is difficult to replicate: Infer builds machine learning models on top of sales data to improve company performance. Not every company has ML expertise.

Characteristic 3: Finances Its Own Growth
The company benefits from negative working capital and shorter time-to-market.

Negative working capital means customers pay at the beginning of a month or quarter or year to use the product. These customers pay to improve the software over time by providing cash up front, reducing the cash needs of the business. Because customers are paying to improve the product, rather than buying a “production-ready” enterprise product, the company can go to market much earlier in their development.

At the outset, the company targets the less sophisticated SMB segment which doesn’t demand the compliance, heavy security and integration features needed by enterprise customers. This also decreasing time to market and provides revenues and product feedback in the short term.

Characteristic 4: Efficient Sales Model
The company is able to recoup its cost of customer acquisition, be it online marketing or inside/outside sales, in less than a year. Ideally, the company offers 12 month contracts and the company can be profitable on a customer before the customer has an option to churn. Hand-in-hand with this idea is strong customer retention.

Characteristic 5: Market Leadership The company is already a market leader, is on the path to becoming the market leader, or is operating in a segment with little viable competition. In SaaS, sales and marketing execution are critical to the success of the business. Competition increases customer acquisition costs and increases sales complexity.


Tomasz Tonguz

More SaaS + Software Stats

The top 50% of the fastest growing SaaS businesses generate much higher upsells than their competitors. The larger the business, the greater the impact of upselling

If your Net Revenue Churn is high (above 2% per month) it is an indicator that there is something wrong in your business

The average company gets 16% of new ACV sales from up-sells and expansions, though companies with revenue between $10MM-$40MM are relying more heavily on up-sell and expansions

If your Net Revenue Churn is high (above 2% per month) it is an indicator that there is something wrong in your business; this will become a major drag on growth

The average company booking professional services revenue on new deals is equivalent to 16% of the first year subscription value. Professional services margins are approximately 22%

SaaS businesses face significant losses in the early years (and often an associated cash flow problem)

Moving from $1.5 million with an eye towards $10 million in ARR is a tough a task and will take an excellent VP of sales to get you there

The very best SaaS businesses have a negative revenue churn rate and will have a Revenue Retention Rate of greater than 100%

For a SaaS business of almost any scale, the valuation impact of better retention is in the tens of millions over time

To establish a revenue or lead-commitment based on your funnel metrics and revenue-growth goals, work backward from the gross revenue amount that marketing is responsible for generating (generally around 40%)