$136,000 Median SaaS Revenue Per Employee

Once the startup begins scaling, leaders from each team start asking for more resources (e.g. we just signed 10 more customers, let’s hire another person to do ‘X’). Only, outside the budget, it’s difficult to assess the overall efficiency. One of the best metrics to track efficiency is revenue per employee.

According to the 2016 Pacific Crest SaaS Company Survey Benchmarks, the median SaaS revenue per employee is $136,000:

Over time, the revenue per employee changes as the startup scales from pre-revenue through to seed stage and beyond. Each milestone often has a higher revenue per employee with ones at the expansion stage typically having $200,000 or more in revenue per employee.

Entrepreneurs would do well to track their own revenue per employee and benchmark it against other startups of similar size and scale.

What else? What are some more thoughts on using revenue per employee to evaluate the efficiency of the startup?

Accountability in a Startup

As the startup grows from a small group of co-founders to the first early employees and beyond, organizational accountability needs to scale as well. Co-founders, talking so frequently and being self-starters, often mind-meld on a daily basis and don’t need as much structure. Only, that doesn’t scale.

Here are a few ideas for accountability in a startup:

Accountability in a startup takes work. Make it a system with the right rhythm, data, and priorities.

What else? What are some more thoughts on accountability in a startup?

4 Criteria for a 5-8x Adjusted EBITDA Software Exit

Upland Software is a publicly-traded SaaS company based in Austin, TX that specializes in acquiring sub-scale SaaS companies and rolling them into the portfolio. To date, they’ve acquired 14 companies and are actively looking to buy more. With a market cap of $480 million and an annualized run-rate of $80 million (source UPLD), they’ve executed this strategy for 7+ years.

Here are the four criteria for Upland Software acquisitions:

  • Financial Profile – Revenues in the $5-$25 million range
  • Recurring Revenue Base – Renewal Rates > 90%
  • Enterprise Applications – Built-for-purpose Enterprise Work Management
  • Geography – U.S., Canada and E.U.

According to their press release from a few months ago they pay 5-8x pro forma Adjusted EBITDA:

The acquisition is within Upland’s target range of 5-8x pro forma Adjusted EBITDA and will be immediately accretive to Upland’s Adjusted EBITDA per share.

Long term, their target is an Adjusted EBITDA margin of 40%.

Here’s how an acquisition might work:

  • $10 million/year SaaS business makes $3 million/year Adjusted EBITDA
  • Upland acquires the SaaS company for $21 million (e.g. 7x Adjusted EBITDA)
  • Upland cuts expenses and raises the Adjusted EBITDA from $3 million to $4 million (e.g. 40% target)
  • Upland’s stock trades at ~18x Adjusted EBITDA (e.g. $26 million Adjusted EBITDA expectation for 2017 with a valuation of $480 million ignoring current assets and debt – source)
  • $4 million of new Adjusted EBITDA increases the value of the business by $72 million, making the $21 million acquisition very profitable

Entrepreneurs thinking through potential exit value for their startup should understand these values and how a financial buyer might value the business.

What else? What are some more thoughts on this example with four criteria for a 5-8x Adjusted EBITDA software exit?

Run the Annual Expenses Audit and Cut the Waste

Recently I was talking to an entrepreneur that had just finished an exercise to get more efficient with his business and reduce the burn rate. After making a concerted effort over 30 days to cut waste they now save $200,000/year. Here are a few areas to analyze:

  • Credit Cards – Start with the biggie. Credit cards are so easy — almost too easy — to buy stuff that many entrepreneurs don’t scrutinize the purchases. Take last month’s statement and make the card holders justify each expense in a Google Sheet.
  • Amazon Web Services – Cloud platforms make it incredibly simple to scale services, and scale the bill. Walk through every line item of the last AWS bill and the corresponding usage of that item (e.g. do you need all those full-time EC2 instances when spot instances might work instead? what about reserved instances?)
  • Unused SaaS Apps – With so many interesting SaaS apps out there it’s easy to sign up and pay only to not truly integrate into the business process such that there’s little-to-no value. Go ahead and cancel it.
  • Unused SaaS App Users – Many SaaS apps are mission critical must-have products but that doesn’t mean paying for more than you need. How many users of Salesforce.com do you have? Do you really need them all? What other apps can be adjusted?

Entrepreneurs would do well to audit expenses at least annually, if not more frequently, and cut the waste. Just because you need to move fast doesn’t mean you need to waste money.

What else? What are some other areas to look for savings?

Quarterly Wrap Up

With the start of Q3 upon us, it’s a great time to review the end of the quarter process. In the pre product/market fit days, there isn’t much process to follow but as the startup grows and scales, it’s important to scale the processes as well. Here are a few ideas to consider:

  • Simplified One Page Strategic Plan – The one pager is the overall business alignment doc. Priorities change every quarter, along with the basic metrics, but much of the document stays the same. 
  • Quarterly Check-ins – Whether it’s monthly or quarterly check-ins, it’s critical to spend time with team members and constantly calibrate. With small startups, it’s more ad hoc and formalizes as the business grows.
  • Monthly SaaS Metrics – While the one pager has great high-level info, the monthly SaaS metrics sheet breaks it down into dozens of data points and provides a fine-grained view into the performance of the business.
  • Start, Stop, Continue – What’s working well, not working, and needs to change in the business? Just like a scrum meeting, it’s important to evaluate the overall business functions as well.

Figure out what’s right for the startup and continuously evolve the rhythm, data, and priorities.

What else? What are some more ideas to wrap up each quarter?

The Three Critical Monthly Cash Questions

Whenever I meet with an entrepreneur that’s raising money I ask about current funding, burn rate, and the number of months of runway. Managing cash, and understanding the corresponding business unit economics, are two critical functions of an entrepreneur, yet many don’t do it. In fact, ensuring that there’s always enough cash in the bank is one of the three most important things a CEO does.

Every month, entrepreneurs should be able to answer these three questions immediately:

  • How much cash do we have?
  • How much cash are we burning each month?
  • How many months do we have until we run out of money?

Pretty simple, right? Only, many entrepreneurs I talk to can’t answer these three questions with confidence. Entrepreneurs need to understand the importance of cash and manage it accordingly.

What else? What are some more thoughts on the three simple monthly cash questions?

Quarterly Simplified One Page Strategic Plan

Once a startup has product/market fit, one of the best things they can do is a Simplified One Page Strategic Plan and update it on a quarterly basis. The concept is easy: put the most important high-level things about the business on one side of one sheet of paper and ensure everyone in the organization understands all aspects of it. Nothing more, nothing less — make it a simple doc.

Here are the contents of the Simplified One Page Strategic Plan (Google Doc template and example plan):

Purpose

  • One line purpose

Core Values

  • General – fit on one line
  • People – fit on one line

Market

  • One line description of your market

Brand Promise

  • One line brand promise

Elevator Pitch

  • No more than three sentences for the elevator pitch

3 Year Target

  • One line with the goal

Annual Goals

  • 3-5 annual goals in table format with the start value, current value, and target value

Quarterly Goals

  • 3-5 quarterly goals in table format with the start value, current value, and target value

Quarterly Priority Projects

  • Three one-line priority projects with the percent complete for each

 

Entrepreneurs would do well to implement the Simplified One Page Strategic Plan (Google Doc template, example plan) and update it on a quarterly basis.

What else? What are some more thoughts on the Quarterly Simplified One Page Strategic Plan?