As I've discussed in previous posts, investors are laser focused on two factors when it comes to valuing companies: growth and profitability. In this post, I'm going to step back from valuation and consider which public SaaS companies are growing the most efficiently- that is, generating the most growth with the smallest amount of cash burn and dilution from issuing stock to employees.
The plot below is similar to others I've used in the past, with one exception: the X-axis measure of profitability is adjusted for stock based compensation (SBC). It is worth a whole other post, but in the traditional calculation of free cash flow shares issued to employees are not captured as an expense- after all no cash changes hands per se. This has led to investors largely ignoring the cost, which expresses itself as long term dilution as the share count increases. I'm less forgiving than the market seems to be (Warren Buffet, at least, is on my side), so when I value companies myself I typically treat SBC as a cash expense, which penalizes companies that use it heavily.
This isn't about bashing companies that tend to use lots of SBC (which my data shows are disproportionately based in Silicon Valley), but rather highlighting some companies that are absolutely crushing it and growing way faster than their all-in expenses would otherwise suggest. Here's how the chart looks:
The winners (highlighted) are a diverse group. Shopify and Wix serve small and medium sized businesses with high velocity models based on inbound marketing, branding and self-service. Veeva is a vertical SaaS company whose top ten customers (the world's largest pharmaceutical companies) represent 45% of revenue. ServiceNow is as enterprise as enterprise gets, dominating the IT Services Management market while also successfully expanding into a broader workflow software platform. MuleSoft, the only recent IPO on the list, is a software integration platform powering the rise of APIs.
What do they all have in common? Not a ton, but here is the trait that is clear to me:
They are all clear, dominant market leaders in their categories without an obvious peer company or close competitor, such that they've become the default vendors in a way that makes their go-to-markets more efficient. Wix and Shopify have built dominant brands with their target audiences through inbound marketing and creative advertising. Veeva, ServiceNow and Mule are so dominant in their respective categories that they're at the top of every shortlist by default. It is good to be king, and it shows up in financial metrics.
Some of these traits are shared by other companies on the chart that don't perform as well on the plot for various reasons- this is just one lens to use, and it is important to note that all of the companies on the chart are exceptional: they're public, scaled SaaS companies.
Here's the list, ranked by the sum of the two factors plotted above: