It was a true Silicon Valley success story.

The San Francisco-based tech startup had just turned two, and celebrated its anniversary in style by raising the second-largest SaaS financing round ever: $500 million.

By every metric, the company seemed destined for great things. It leapt from $1 million in Annual Recurring Revenue at the end of its first year, to $20 million by the end of its second, and nearly $100 million by the end of its third.

When it needed to raise a third round of capital in March, the company could hardly beat the VCs back. At one point, Andreessen Horowitz, big dog in Silicon Valley’s VC scene, had more money invested in the company than in any other.

Best of all, this rapid growth showed no signs of slowing.

When Business Insider reported on the $500 million round, it praised the company’s “astounding” and “meteoric” rise.

“While massive rounds and valuations for young startups seem almost blase these days,” the news source practically gushed, “the sheer size of this one, and for a company so young, is still eye-popping.”

The article went on to quote the company’s CEO and his breathless description of his company’s rapid ascent: “We’re the fastest-growing SaaS business ever,” he said. “We closed as much business in March 2015 as we did entire the previous 15 months of the company’s history.”

Combine that explosive growth with the new mind-boggling infusion of capital, and the company’s prospects were the stuff of SaaS dreams.

Even better, the path forward was simple.

“We think, and our investors believe, we should keep the pedal to the floor,” the company’s CEO trumpeted. “Go really fast, and keep getting as much of the market as we can.”

Go really fast, and keep getting as much of the market as we can.”

If you’re hoping for a SaaS fairy tale ending, prepare to be disappointed.

That meteor-like company was Zenefits, and ‒ less than a year later ‒ it appears to be crashing back down to earth.

What Goes Up

Things started going south for Zenefits more quickly than anyone could have imagined.

Less than a year after that gushing story from Business Insider, Inc. released a new story with a much more sober tone: Zenefits was laying off more than 250 employees, 17% of its workforce. This was after the growth-hungry CEO, Parker Conrad, had resigned amidst allegations that brokers at his company had been falsifying qualifications and concealing other misdeeds.

To save the company, the board brought in another CEO, former Yammer chief David Sacks, and dedicated itself to correcting course.

Which it has done by calling out the main source of its problems: unbridled and hollow growth.

Indeed, in his open letter to the company, Sacks minces no words about what went wrong for Zenefits.

“It is no secret that Zenefits grew too fast,” he wrote, “stretching both our culture and our controls. This reduction enables us to refocus our strategy, rebuild in line with our new company values, and grow in a controlled way that will be strategic for our business and beneficial to our customers.”

Later, Sacks put it even more bluntly: “It’s not just about growing the top line.”

Sacks’ open letter echoes what journalists and other outsiders have been saying about the SaaS industry for several months. Valuations are too high, and startups are unlikely to produce the profits that VCs have been expecting of them. And, all told, it could torpedo many more companies than just Zenefits.

The Benefit of the Zenefits Mess

There is no doubt that Zenefits’ implosion ‒ and the current state of SaaS in general ‒ is a true crisis. And as such, it’s important to remember the old maxim to “never let a crisis go to waste.”

The story of Zenefits is a cautionary tale, and it has lessons even for SaaS companies that feel insulated from the popping bubble / market correction (depending on your level of optimism).

In many ways, Zenefits is the perfect embodiment of the dark side of the “growth at any cost” mentality that has dominated the SaaS world for many years. The philosophy that the best startups are the ones that grow their top line the fastest has been essentially unquestioned for several years, but now, high-profile examples like Zenefits are casting serious doubt on this assumption.

In this post, we look at what SaaS companies should take away from the Zenefits fiasco, and how the Zenefits story argues that now is the time for SaaS startups to double down on efficiency.

Section 1

Section 2

Section 3

The New Growth

The Pendulum Theory

To understand what’s happening to the value of SaaS companies, it’s helpful to take a step back and think about how investors evaluate SaaS companies in the first place.

And it isn’t as straightforward as it sounds. Because SaaS companies are built on a recurring revenue model, it is more complicated to determine how much they’re “worth” than it is for companies with more traditional (read: one-time-sale) business models.

This is where the idea of the “forward revenue multiple” comes in. Essentially, when investors try to determine how much a SaaS company is worth, they take its annual revenue and multiply that figure by an amount designed to account for how profitable the company will be over its lifetime.

But where does this multiple come from? How do investors decide what multiple to apply to a SaaS company’s revenue?

The answer, for simplicity’s sake, is sentiment. If sentiment is high that SaaS companies (and the SaaS industry) will continue to grow and provide high returns, then they will value SaaS companies at higher multiples.

What are Forward Revenue Multiples?

The multiple ascribed to a SaaS company’s annual revenue to predict the overall value of the company and adjust for the SaaS industry’s recurring revenue model.

Which is exactly what started happening in 2011.

As the industry grew, investors started valuing SaaS companies at insanely high multiples. By 2013, these multiples were significantly higher than they had ever been, and magnitudes higher than traditional software multiples.

Here’s a chart tracking SaaS forward revenue multiples vs. traditional enterprise software.


Source: TechCrunch

As you can see, the last few years have seen a steady decline in SaaS multiples, and they now sit at one of their lowest points ever, essentially identical to multiples for traditional software vendors.

What happened?

The Shift to Efficiency

In short: Sentiment about how profitable many SaaS companies will become has plummeted. A few years ago, growth (in terms of top-line revenue and customer base) was essentially all that mattered for SaaS businesses, and it was reflected in the valuations of SaaS startups. VCs believed that companies that were growing fast, like Zenefits, would soon become incredibly profitable, and therefore slapped them with sky-high multiples (and, consequently, high valuations).

These companies were handed massive checks and given the mandate to use the new capital to accelerate that growth. (Think of the Zenefits’ CEO saying “our investors believe we should keep the pedal to the floor.”) These startups opted to spend capital on things (like rapidly increasing sales headcount or buying gobs of ads) to artificially inflate growth instead of creating value.

As the chart above shows, the growth-based valuations peaked in 2013. Since then the pendulum has started swinging the other way.

The End of “Growth at Any Cost”

It has started swinging toward efficiency.

Efficiency is the New Growth

A recent article from Benhamou Global Ventures succinctly describes the arc of this pendulum swing, and how the market shift (from bull to bear) has changed how we expect the best SaaS companies to behave.

“While we do not believe that private valuations should match public valuations (hyper-growth companies in new and exciting markets should deserve a premium) we do believe that as companies mature and scale, profitable growth has to enter the valuation equation,” the firm writes.

That last phrase is extremely important ‒ “profitable growth.” While profit has always been a key ingredient in the success of traditional companies, it has never received as much attention in the SaaS world. Profits will come, the thinking went, as long as companies are continuing to expand.

But that’s changing.

“Market sentiment has shifted from valuing companies for growth to valuing companies for profitability,” the article continues. “The pendulum has now swung to the other extreme.”

Bridging the Funding Gap

The Walk 4-1

Now that the pendulum is shifting from growth to efficiency (and VCs are no longer as willing to pour money into pre-profitable companies) startups are left with a very natural question: What happens to companies that have been following the “growth at any cost” strategy but are now forced to change their plans to accommodate the sudden reduction of capital?

These companies, often by no fault of their own, are stuck between worlds. The old world, where they based their decisions on raising capital early and burning through it quickly to fuel growth. And, the new world, where they are trying to rely less on expensive capital and instead focusing on efficient use of their cash on hand and revenue.

Here are two rules to help these companies bridge this dangerous gulf.

The Watney Rule

In the Martian, an astronaut named Mark Watney (played by Matt Damon) is unintentionally left for dead on Mars. With no assurance that NASA even knows he’s still alive, Watney is forced to find ways to survive without any outside assistance.

His main strategy is to grow potatoes and strictly ration them to last until (if ever) NASA can rescue and return him to Earth.


In the current inhospitable SaaS climate, many startups feel like Mark Watney. With no guaranteed round of funding on the horizon, these companies are rushing to make themselves self-sufficient during an especially precarious period.

As investor Mitch Kapor recently put it on Twitter: “The Watney Rule for startups: Survival depends on achieving self-sufficiency.” With VC capital no longer an easy option, it’s up to startups to start fending for themselves, perhaps earlier than they expected.

The Watney Rule is a perfect way to distill “the new growth.” The assumptions that undergirded the “growth at all costs” mentality ‒ that growth is more important than profits and that expansion can be continuously funded with cheap capital ‒ are losing credibility.

More and more, SaaS startups are shifting to the mindset of growing their own potatoes and carefully rationing them for the foreseeable future.

The Customer Capital Rule

But rationing potatoes is only half of the equation for surviving in the new SaaS landscape. The other half is making more potatoes.

So how can you ramp up your production of potatoes without relying on NASA to come drop them off?

The answer is so obvious it’s easy to miss: your customers! If you have a fair amount of customers, but you’re still not profitable, your best option may be to lean on your customer base (rather than the increasingly fickle funding world) to finance your expansion.

A recent article in VentureBeat from AdEspresso founder Armando Biondi puts an even finer point on it: “In today’s playground, it’s easier and faster to get capital from customers rather than investors.”

Biondi does a good job of breaking down the equation. If cash is tight, you basically have three paths to pursue: increase cash on hand, drive up revenue, or cut expenses.

“You want to increase cash on hand? Sure, you fundraise. You want to decrease expenses? Fire people or cut marketing,” Biondi writes. “But what about the revenue part? It’s going to be easier and faster to get to profitability through increased revenue than through fundraise.”

And that’s where your customers come in. If your product-market fit is strong and if you’re doing a good job of satisfying your customers, then you will be able to navigate the lean VC times simply by getting more revenue from your customers.

Biondi proposes a few different strategies.

Determine the Length of Your Runway

If you’ve spent a single day in the startup world you’ve probably heard the term “runway” several thousand times. This is how founders think about how much time they have before they need another infusion of cash.

But most founders are thinking about runway wrong. They typically think of their runway as the cash in the bank divided by burn rate.

But something’s missing, right? Revenue. Most founders don’t include the monthly revenue they’re bringing in from their customers, which (sometimes drastically) overstates the urgency of their need for new capital.

Back to Biondi: “It turns out that by factoring that revenue in plus some reasonable growth, they only need ⅓ of the cash they did (if not none at all).”

So before you tour the country visiting every VC with hat in hand, calculate your runway including current revenue and growth expectations.

Give Your Customers What They Want

If you want your customers to help defray your cash burn while funding is scarce, you need to provide real value for them. Luckily, this is what your whole business is (or should be) built around.

Biondi suggest speaking with your top, most satisfied customers and ask them a few simple questions.

The End of “Growth at Any Cost”

“1) What can I do for you that I’m not already doing? 2) How valuable would that be to you? 3) How much would you be willing to pay for that?” he writes.

Taking this approach will help you in two ways: It will allow you to extract more money from your most engaged customers and it will help you understand what you need to change about your product to attract more great customers.

Use Benchmarks to Improve Your Performance

If you want to generate more revenue from your customers, you also need to acquire customers more efficiently. And this means turning to industry benchmarks to see where you have the most opportunity for improvement.

Which, unfortunately, is something that most founders struggle with.



SaaS Benchmarks

See how your company stacks up against others in your industry by exploring our filterable SaaS metrics.

“Founders on average are sooo bad with benchmarks,” Biondi writes. “But benchmarks are your compass.”

Find areas where you can incrementally improve your performance (in terms of winning deals and retaining customers) and you will see huge benefits to your revenue stream.

“Every percentage point of improvement means more dollars to you,” Biondi adds.

This quote brings up an important question: In this new world, where efficiency trumps growth, how can companies measure whether they’re becoming more efficient over time?

Metrics for the New Growth

The short (and insufficient) answer is value creation. Like all businesses, SaaS companies should be evaluated based on how efficiently they convert capital into revenue. But value creation is a vague term, and SaaS executives would be excused for yelling at the screen “Of course I’m trying to create more value! But I want to know which metrics best reflect this value creation.”

First let’s quickly get out of the way which metrics don’t reflect value creation: top-line revenue growth, customer-base growth and employee headcount growth (to name the three most common examples).

As Zenefits learned, these metrics reflect what can be considered hollow growth ‒ growth that can be bought and artificially inflated. Any company infused with capital can pay to acquire more customers and hire more employees. But this does not mean they’re adding value.

On the other hand, metrics that reflect unit economic optimization and per-employee revenue growth are what today’s (or, at least, tomorrow’s) investors want to see.

Here’s a quick primer to the metrics for the new growth:

Revenue Per Employee

One way that “growth at any cost” masks inefficient scaling is the fact that most recently funded startups quickly ramp headcount. Adding bodies (especially in sales and marketing) effectively increases revenue, but rarely efficiently. For the New Growth, companies will need to measure revenue growth per employee. This way you can tell if companies are becoming more profitable or simply bigger.

Further reading: Benchmarking SaaS Startup Efficiency With Revenue Per Employee Metrics


Gross Margin

The emphasis on top-line growth has caused many startups to ignore how profitable that revenue actually is. Gross margins corrects that by looking, not at how much revenue you’re bringing in, but how much you’re paying to get that revenue.”

Further reading: Why Revenue Isn’t The Most Important Financial Metric For Startups

Revenue as % of burn

Every company’s goal is to bring in more money than they spend, but startups are a little different. They are expected to have a few years before they ever turn a profit. However, they are still expected to be working toward profitability. The best startups track this by measuring the trend of how much they’re bringing in vs. how much they’re spending.

Further Reading: Buffer Breaks Down How It Spends Its Revenue


Payback Period

It’s easy to acquire customers if you don’t worry about how much you spend to get them. But this does not make a company profitable. Instead, growing startups need to pay close attention to the cost of acquiring their customers (CAC) and how long it takes them to recoup this outlay through the customer’s payments (payback period).

Further Reading: David Skok on SaaS Metrics

Lifetime Value

Knowing that it takes time to recoup your investment to acquire a new customer makes another thing clear: the average lifetime value (LTV) you get from a customer is much more important than the amount you get when you close a deal. Measuring LTV is an important way to make sure you’re not optimizing for bookings, but for long-term revenue as well.

Further Reading: David Skok on SaaS Metrics


SaaS Quick Ratio

Historically, the best way to identify a startup with high potential is to look at its MRR growth. But this can be deceiving, as many companies bring on new customers at a fast clip but fail to retain these customers at the same rate. That’s where the SaaS Quick Ratio comes in. It measures MRR growth against churn, giving you a single number that shows how quickly startups are adding real, lasting revenue.

Further Reading: Benchmarking the SaaS Quick Ratio

Conclusion: Welcome to the New Growth


As we’ve seen, the SaaS landscape is changing, and startups are being forced to change with it. No one knows if it will continue to worsen or if we’re about to see a rebound, but one thing is clear: the period of “growth at all costs” is coming to an end.

And, in this way, the SaaS industry isn’t so much cratering as it is being held to the standards that most industries have been held to forever. Companies in most industries have not been able to rely on regular infusions of capital to finance rapid (and profitable) growth. Most companies have to focus on efficiency and profitability from the jump.

Although this market correction is painful for some, it may actually end up helping startups create more enduring and value-oriented business models. It may, indeed, lead to better companies offering better products.

But not without cracking a few eggs first. The best SaaS companies are likely to make it through these lean times ‒ if they focus on the fundamentals of their businesses, not the hollow growth that has inflated so many SaaS companies since 2013.

By understanding why and how the pendulum is swinging, focusing on the metrics that are most in line with the new form of SaaS growth, and finding creative and efficient ways to stay afloat without cheap capital, the best SaaS companies are likely to emerge on the other end stronger, leaner and more value-oriented than ever before.

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