Announcing Benchmarks for Operators

3/17/24 Benchmarks for Operators

Bold claim (screw it, wish me luck!) - I’m pioneering a new category - Operator Equity Research.

My goal is to create the best performance benchmarking and valuation resources specifically for tech operators. If you are in Finance, Strategy, or Operations, this will help you translate what the outside world values to your target operating model.

Will the charts change? Probably. But updates will always be in the spirit of explaining benchmarks for Operators to use when running companies. Metrics are great - but they don’t do you much good if you can’t identify the levers to move within your business to achieve a desired outcome.

I’ve long looked up to the likes of Jamin Ball, Alex Clayton, and Tomasz Tonguz. Their musings on SaaS metrics were my inspiration to put myself out there and start writing this newsletter in the first place.

In the process of studying their works, and applying their insights to my own practice as an Operator, I eventually noticed a gap - I was not an investor.

We were speaking the same language, but using a different accent. And sometimes this slight difference made it hard for me to apply in my role as the train conductor, trying to make sure things stay on time, rather than making a binary go / no go investment decision.

In addition to the benchmarking cuts below, which we’ll update on a weekly basis, I will also provide a take on:

• How a metric can help you think about strategy, and what you can tactically do with it

• How a public benchmark should translate to the private world

• Rules of thumb for private company operators to rely on as they scale

• What investors value, and why

My hope is that there is a CFO, FP&A Director, or Investor Relations pro out there who reads this and finally says:

“Gone are the days of grasping for straws when it comes to finding valuation comps for my particular business model!”

Or,

“I can understand how the public market’s efficiency metrics translate to my private company operating model!”

And even,

“OK, I actually get why investors ask me about that metric now!”

This new weekly report is an admittedly selfish pursuit. I’m scratching my own itch and producing the dataset I want - as someone who’s worked for companies across Infra & Security, Marketplaces, and Vertical Software, and wondered what “good” looked like in each scenario.

Thanks for rocking with me. Let’s do some damn benchmarking. You can expect this each Sunday from here on out so we catch changes in market caps. If this isn’t for you, you can unsubscribe to just this send (it’s a “section” on Substack which I’ve titled “Multiples”) so you continue getting all the other gold on Tuesdays and Thursdays. Buttttt then you won’t know how much your company is hypothetically worth, or have something wicked smaht to forward to your boss.

PS - the data contained herein is powered by my homies at Virtua Research. If I am Barry Bonds, they are my BALCO. And they can put your benchmarking on steroids too.

You can find the list of companies within each index here.

• Figures for each index above are measured at the median.

• Average, Median, and Top 10 Median are measured across the entire data set, where n = 139.

• All margins are non-gaap.

• SMB to Midmarket is defined as average deal size below $100K in ARR

• Midmarket to Enterprise is defined as average deal size above $100K in ARR

Revenue Multiples

Revenue multiples are a shortcut to compare valuations across the technology landscape, where companies may not yet be profitable. The most standard timeframe for revenue multiple comparison is on a “Next Twelve Months” (NTM Revenue) basis.

NTM is a generous cut, as it gives a company “credit” for a full “rolling” future year. It also puts all companies on equal footing, regardless of their fiscal year end and quarterly seasonality.

However, not all technology verticals or monetization strategies receive the same “credit” on their forward revenue. That is why I break them out as separate “indexes”.

Reasons may include:

• Recurring mix of revenue

• Stickiness of revenue

• Average contract size

• Cost of revenue delivery

• Criticality of solution

• Total Addressable Market potential

From a macro perspective, multiples trend higher in low interest environments, and vice versa.

Multiples shown are calculated by taking the Enterprise Value / NTM revenue.

Enterprise Value is calculated as: Market Capitalization + Total Debt - Cash

Market Cap fluctuates with share price day to day, while Total Debt and Cash are taken from the most recent quarterly statements available. We share this report each week to keep up with changes in the stock market, and to update for quarterly earnings releases.

Historically, 10x NTM Revenue has been viewed as a “premium” valuation reserved for the best of the best companies.

Efficiency Benchmarks

Companies who can do more with less tend to earn higher valuations.

Three of the most common, and consistently publicly available, metrics to measure efficiency include:

• CAC Payback Period: How many months does it take to recoup the cost of acquiring a customer?

CAC Payback Period is calculated as: (TTM S&M Costs) / (Change in TTM Revenue x Gross Margin) x 12

Note: Some may measure CAC Payback as the change in last quarter’s revenue x 4, but I believe this overstates a company’s progress if they are growing fast, and the output can be volatile due to quarterly sales seasonality.

---

• Rule of 40: How does a company balance topline growth with bottom line efficiency? It’s the sum of the company’s revenue growth rate and free cash flow margin. Netting the two should get you above 40.

Rule of 40 is calculated as: Revenue growth plus FCF margin on a “Last Twelve Months” (LTM) basis.

Non Gaap Free Cash Flow is calculated as: net cash provided by operating activities, minus capital expenditures and minus capitalized software development costs.

---

• Revenue per Employee: On a per head basis, how much in sales does the company generate each year? The rule of thumb is public companies should be doing north of $450k per employee at scale. This is simple division.

Revenue per Employee is calculated as: (TTM Revenue / Total Current Employees)

A few other notes of efficiency metrics:

• Net Dollar Retention is another great measure of efficiency, but many companies have stopped quoting it as an exact number, choosing instead to disclose if it’s above or below a threshold once a year. It’s also uncommon for marketplaces and fintechs to report it at all.

• Most public companies don’t report net new ARR, and not all revenue is “recurring”, so I’m using annual change in TTM revenue timeframes as a proxy in my calculations.

Operating Expenditures

Decreasing your OPEX relative to revenue demonstrates Operating Leverage, and leaves more dollars to drop to the bottom line, as companies strive to achieve +25% profitability at scale.

The three most common buckets companies put their operating costs into are:

• Sales & Marketing: Sales and Marketing employees, contractors, marketing programs to drive pipeline, conferences, tools

• Research & Development: Product and Engineering employees, development contractors, tools

• General & Administrative: Finance, HR, and IT employees… and everything else. Or as I like to call myself “Strategic Backoffice Overhead”

All of these are taken on a non Gaap basis and therefore exclude stock based comp, a non cash expense, but is an important figure to track for total comp and dilution purposes.

This week’s “Operator’s Corner”

The other GOAT

In my opinion, Revenue per Head is the the GOAT of SaaS efficiency metrics. It cuts through all the noise.

The “gold standard” for Revenue per Head at time of IPO used to be in the $250K ballpark. It’s now normalized in the $350K / person range when companies ring the bell, and expected to grow as a company becomes more mature to $450k or more. The thinking is it should get easier to produce more per head as you achieve product market fit and add more products to sell into your existing customer base. Plus, if you have 1 CFO at $20M in revenue, you don’t need 2 CFOs at $40M. You get the point.

If I’m a private company operator, I want to see this go up non linearly as I progress through the revenue bands. And I’m also thinking that “$50M is the new $100M” when it comes to efficiency. But that’s OK, because the expectations for growth (and the associated costs you have to fuel it) have fallen as well.

In short:

• You should start tracking this metric in earnest after ~$2M in Revenue.

• You should be achieving greater than $75K per person between $2M and $10M in revenue

• You should be approaching $150K in revenue per employee at around $20M in revenue

• And you should be closing in on $300K per person at scale (+$100M in revenue)

You should also consider how revenue per head looks based on your business model - fintech and marketplaces, which make money by acting as a middle man or pass through, should theoretically should have more revenue per employee compared to a traditional field sales motion.

All benchmarking data provided by Virtua Research.

For assistance with your own benchmarking and equity research needs, contact cventi@virtuaresearch.com.

Tell him CJ sent you; he'll hook you up!"