SaaS ‘Burn Productivity’… Better Than Magic Number and Rule of 40?

In an increasingly product-led world, traditional SaaS ratios/metrics are becoming outdated. Why? Hyper-growth, burgeoning network effects and varying gross margin profiles — concepts that didn’t exist as significantly when Magic Number and Rule of 40 became prevalent, and so were not captured. The solution? Burn Productivity adapts to the modern SaaS paradigm R&D and product-led growth.

This series of blog posts explores:

1. The symbiotic relationship between ratios/metrics, and valuation
2. The limitations of the traditional metrics such as Magic Number and the Rule of 40
3. Why Burn Productivity is a stronger, and more important, indicator for entrepreneurs to follow

Feel free to drop me a note if you have any questions or thoughts.

The SaaS Universe

Since the inception of the SaaS category heralded by the IPO of Salesforce in 2004 (at a market cap of $1.1Bn, vs. ~$160Bn today), there has been a proliferation of publicly-listed companies (90+ by June 2020, of which 61 are still listed per below) addressing a plethora of end customers and use cases, across infrastructure and application layers.

This series of blog posts uses these 90+ companies to form the base of this broader analysis.

Topics of Discussion

Below is a summary of topics in this series:

Background:

1. SaaS Financial Benchmarking… One Size Doesn’t Fit All, and Focusing on Gross Profit — benchmarking growth, margins and opex items
2. What Financial Ratios Should You Go Public With?… And What Should They Look Like Longer Term? P&L ratios at various stages of their growth curve, from pre-IPO through to large scale, and why there is no ‘one size fits all’
3. Magic Number and Rule of 40… Helpful, For Now — Showing that these metrics haven’t always been correlated to higher valuations

Burn Productivity:

4. ‘Burn Productivity’… A Consistently Better Signaler of SaaS Valuation — Defining Burn Productivity and its stronger correlation with valuation owing to its capturing of product-led growth

5. How Does Burn Productivity Drive Profitability and SaaS Valuation?… A Practical Example — Valuation and its stronger relationship to Burn Productivity via a first-principles look at the drivers of valuation