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Original article and report

ICONIQ | Scaling SaaS: Forging Excellence Through Fundamentals

ICONIQ Growth + Insights - Growth & Efficiency 2024.pdf

Key takeaway

• For entrepreneurs: Focus on maintaining strong unit economics and a path to profitability while pursuing growth, as the fundamentals of building a great company remain constant despite shifting market conditions.
• For investors: Look for SaaS companies that demonstrate a balance between persistent growth and improving efficiency metrics, as these are likely to succeed in both challenging and favorable market environments.

Summary

The ICONIQ Growth report, "Scaling SaaS: Forging Excellence Through Fundamentals," provides a comprehensive analysis of financial and operating data from over 100 B2B SaaS companies. The report highlights the importance of focusing on fundamental metrics and achieving a balance between growth and efficiency, particularly during turbulent macroeconomic conditions. Key insights include the impact of recent market dynamics on top-line growth, bottom-line efficiency, and organizational productivity. The report also provides benchmarks for key performance indicators as companies scale from $10M to post-IPO, along with goalposts for best-in-class performance at each stage.

Insights

Current market conditions

• SaaS companies have faced significant challenges in achieving top-line growth due to the turbulent macroeconomic environment, with growth-stage and late-stage companies experiencing the lowest growth rates in the past eight quarters.
• Net dollar retention for growth-stage and late-stage companies has declined to ~110% in 1H 2024, down from peak levels of 120-130% in 2017-2019.
• Companies have prioritized bottom-line preservation, leading to consistent improvements in free cash flow (FCF) margins, but Rule of 40 has remained stagnant, indicating a need for more significant cost adjustments.
• Go-to-market efficiency and productivity have deteriorated, with net magic number falling below 1.0x for the first time, marking the lowest point in sales efficiency in years.

Best in class performance

• Top-performing SaaS companies typically grow 1.5-2x each year until reaching $100M ARR, then maintain 30%+ growth through IPO. New logos are the primary driver of ARR growth until companies reach ~$200M ARR, after which customer expansion becomes more significant, contributing more than 50% of gross new ARR.
• Top-quartile SaaS companies typically achieve positive FCF margins around $150M in ARR about five years after reaching $10M ARR, maintain a burn multiple under 1.0x after reaching $25M in ARR, and achieve LTV/CAC ratios above 6x with CAC payback periods below 20 months across all scales.
• Product-led growth (PLG) companies often see higher gross margins and GTM efficiency compared to sales-led companies at scale.
• The Rule of 40 (growth rate + FCF margin) tends to decline as companies scale, but top performers maintain it across all ARR ranges.