High-growth companies offer a return to shareholders 5 times greater than medium-growth companies

SaaS + Software
Statistic in SaaS & Tech Growth Strategy

Statistic Info

Software and online services are in a period of dizzying growth. Year-old companies are turning down billion-dollar buyouts in the hopes of multibillions in a few months. But we have seen similar industry phases before, and they have often ended with growth and valuations fizzling out. The industry’s booms and busts make growth, an essential ingredient in value creation, difficult to understand. To date, little empirical work has been done on the importance of revenue growth for software and Internet-services companies or how to find new sources of growth when old ones run out.

In our new research, we analyzed the life cycles of about 3,000 software and online-services companies from around the globe between 1980 and 2012. We also surveyed executives representing more than 70 companies and developed detailed case studies of companies that grew quickly and others whose growth stalled. The research produced three main findings.

Growth trumps all. Three pieces of evidence attest to the paramount importance of growth. First, growth yields greater returns. High-growth companies offer a return to shareholders five times greater than medium-growth companies. Second, growth predicts long-term success. “Supergrowers”¬ócompanies whose growth was greater than 60 percent when they reached $100 million in revenues¬ówere eight times more likely to reach $1 billion in revenues than those growing less than 20 percent. Additionally, growth matters more than margin or cost structure. Increases in revenue growth rates drive twice as much market-capitalization gain as margin improvements for companies with less than $4 billion in revenues. Further, we observed no correlation between cost structure and growth rates.

Sustaining growth is really hard. Two facts emerged from the research. Companies have only a small probability of making it big. Just 28 percent of the software and Internet-services companies in our database reached $100 million in revenue, and 3 percent reached $1 billion. Of the approximately 3,000 companies we analyzed, only 17 achieved $4 billion in revenue as independent companies. Moreover, success is fleeting. Approximately 85 percent of supergrowers were unable to maintain their growth rates, and once lost, less than a quarter were able to recapture them. Those companies that did regain their historical growth rate had market capitalizations 53 percent lower than those that maintained supergrowth throughout.

There is a recipe for sustained growth. While every company’s circumstances are unique, the research found four principles that are essential to sustaining growth and from which every company can benefit. First, growth happens in phases: from start-up to billion-dollar giant, growth stories typically unfold as a prelude, act one, and act two. In act one, there are five critical enablers of growth: market, monetization model, rapid adoption, stealth, and incentives. A third principle is that the drivers for growth in act two are different. Successful strategies in act two include expanding the act-one offer to new geographies or channels, extending the act-one success to a new product market, or transforming the act-one offer into a platform. Finally, successful companies master the transition from one act to the next. Pitfalls include transitioning at the wrong time and selecting the wrong strategy for the next act.

Mckinsey

More SaaS + Software Stats

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

The fastest growing SaaS companies scale their organizations rapidly, growing their teams by an average of 56% each year

SaaS solutions have the highest security features with 95% security failures due to human error

Unlike many other industries, if a software company grows at only 20%, it has a 92% chance of ceasing to exist within a few years

The median startup spends 92% of first year revenue on customer acquisition, taking 11-months to payback their Customer Acquisition Cost

If you are charging $500 per month, you can afford to spend up to 12x that amount (i.e. $6,000) on acquiring a new customer

After $10M in ARR, the median growth rate slows to just under 50%

SAAS companies with >$250K median ACV book nearly 25% of their contracts at 3 years or longer

55% of SaaS companies rate Customer Retention as the key metric to measure

A 2017 SaaS Capital survey showed that young companies actually have higher retention rates than more mature SaaS businesses

More SaaS & Tech Growth Strategy Stats

How Often Should The Pricing Committee Be Meeting And Making Changes?

54% treat upselling and add-on sales as high priority

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

The metrics that matter for each sales funnel, vary from one company to the next depending on the steps involved in the funnel

It’s 4x cheaper to upsell existing customers than acquire new customers: costing just $0.28 to acquire an additional dollar of revenue

In 2020, China is expected to generate 55 billion U.S. dollars in the global medical technology market.

The median annual unit churn for SAAS companies was 10% in 2016

Net-revenue churn improves with larger Average Contract Value (ACV), likely due to more structural churn among SMB customers and higher switching costs associated with larger contracts

Companies with longer contracts (2+ years) reported the lowest annual unit churn

26% of SAAS companies with at least $15MM in GAAP revenue had a revenue growth rate + EBITDA margin of 40% or higher.

Looking for SaaS focused services?
SaaS Website Design
SaaS SEO Agency
SaaS PPC