14th annual report suggests that the macroeconomic climate is likely to continue to impact ARR growth and profitability in 2024

SAN FRANCISCO and MENLO PARK – December 20, 2023 – KeyBanc Capital Markets (KBCM), the corporate and investment banking unit of KeyCorp in partnership with Sapphire Ventures, a global software venture capital firm backing companies of consequence, released results from KBCM’s Technology Group’s 14^th annual Private SaaS Company Survey, the benchmarking report by which the SaaS industry measures financial and operating performance.

This year’s survey revealed trends of decelerated growth and a transition towards profitability in 2023, a resounding theme throughout the report’s findings. In addition, the report uncovered that sales and marketing could potentially see some lagging effects although, in the near term, there is an overall feeling of optimism in more productive go-to-market (GTM) teams after industry wide-adjustments.

Key trends identified in this year’s report include:

• Continued budget cuts and conservative buying patterns are driving customer churn, longer deal cycles and reduced contract values, leading to lower growth rates.
  • Annual Recurring Revenue (ARR) growth decelerated from 35% in 2022 to 26% in 2023
  • Net Revenue Retention declined from 108% in 2022 to 104% in 2023
• While conversion rates are expected to drop across the marketing funnel, GTM teams are striving to drive revenue efficiency.
  • Gross and Net Magic Numbers of 0.7 and 0.5, respectively, along with a median ~23-month customer acquisition cost (CAC) payback period in 2022
  • The tight spending environment is forcing teams to be more accurate with their efforts given limited resources
• Public market software valuations are returning to more normalized levels in 2023 at ~6x Next Twelve months (NTM) revenue compared to the all-time highs of 2021.
  • The Rule of 40 is more important to valuation than it was in the free money era, but growth still matters as investors underwrite future cash flows at scale
• Private market financing activity and multiples continue to show strength despite macroeconomic headwinds.
  • Lower growers (<50%) have seen private market multiples compress toward normalized public market multiples, but higher growers (>100%) have been more resilient, still commanding super premium multiples (29.9x NTM median)

Primarily driven by the availability of capital and a positive economic outlook, companies invested to pursue aggressive growth targets in 2022. However, as the market became more challenging and growth did not play out as expected, many companies were forced to scale back operations and shift their focus from growth to profitability,” says Scott Peterson, managing director, Software Investment Banking at KeyBanc Capital Markets. “Despite this, we continue to see strong long-term prospects for the sector, due to factors such as a continued move to the cloud and increased adoption of artificial intelligence.”

Scott Peterson, managing director, Software Investment Banking at KeyBanc Capital Markets

Sapphire Ventures is pleased to partner with KeyBanc Capital Markets on this invaluable report and reference point for the start-up SaaS industry. As 2023 comes to a close, the findings are no surprise as we saw B2B software companies adjust to a new normal amidst difficult economic times,” said Steve Abbott, partner, Sapphire Ventures. “Over the past year, we saw the cost of capital rise significantly, which resulted in the top companies focusing more than ever on achieving efficient growth metrics. We see this trend continuing into 2024.”

Steve Abbott, partner, Sapphire Ventures

Among private SaaS companies, only 15 percent of this year’s respondents operated at or above The Rule of 40, a key benchmark of “best-in-class” SaaS company performance, which is calculated by adding a company’s growth rate and profitability margin. Last year, more than one third of respondents noted that they operated at or above The Rule of 40 in 2021, an indication that companies were less efficient with their spending and/or did not achieve their growth targets in 2022.

The KBCM and Sapphire Ventures Private SaaS Company Survey provides credible operational and financial benchmarking data for executives and investors in SaaS companies of all sizes. This includes everything from GTM selling strategies, historical and projected growth, and retention rates, to operational management and margin structures, as well as proprietary data on valuation and exit expectations. This year’s survey polled senior executives at more than 100 privately held global SaaS companies with a median 2022 ARR of $25.5 million in several sectors including infrastructure management, fintech, cybersecurity, communications, data infrastructure, vertical market application and horizontal application. To view the full survey results, methodology and to see a deeper analysis of the findings, visit us at http://www.key.com/saassurvey.