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The first is a good way to figure out if you will be profitable in the long run, and the second is about measuring the time to profitability (which also greatly impacts capital efficiency).

The best SaaS businesses have a LTV to CAC ratio that is higher than 3, sometimes as high as 7 or 8. And many of the best SaaS businesses are able to recover their CAC in 5-7 months. However many healthy SaaS businesses don’t meet the guidelines in the early days, but can see how they can improve the business over time to get there.

The second guideline (Months to Recover CAC) is all about time to profitability and cash flow. Larger businesses, such as wireless carriers and credit card companies, can afford to have a longer time to recover CAC, as they have access to tons of cheap capital. Startups, on the other hand, typically find that capital is expensive in the early days. However even if capital is cheap, it turns out that Months to recover CAC is a very good predictor of how well a SaaS business will perform. Take a look at the graph below, which comes from the same model used earlier. It shows how the profitability is anemic if the time to recover CAC extends beyond 12 months.

For Entrepreneurs.com

More SaaS + Software Stats

High-growth companies are 8X more likely to reach $1 billion in revenues than those growing less than 20%.

If a software company grows at 20% annually, it has a 92% chance of ceasing to exist within a few years

80% of venture capital investments take place in the enterprise

Account Churn Rate (ACR) = customers at beginning of month – customers at the end of month / customers at beginning of month

More than two thirds of SAAS companies experienced annual churn rates of 5% or higher

SaaS businesses face significant losses in the early years (and often an associated cash flow problem)

Analysed by contract value, field sales are primarily evident for companies with median deals over $25K. Inside sales strategies are most popular for companies with $1K-$25K median deal sizes

SaaS IPOs have more than doubled over the last 12 years

Less than 20% of new revenue came from existing customers in the form of up-sell and expansion sales

Internet Sales strategies have a significantly lower CAC of just $0.42

More Growth Strategy Stats

Best-in-class SaaS companies achieve 5-7% annual revenue churn – equivalent to a loss of $1 out of every $200 each month

Companies that spend more on sales and marketing (as a % of revenue) generally grew at a faster rate than those that spent less

At Facebook, 15 percent of tech roles are staffed by women

SaaS IPOs have more than doubled over the last 12 years

Between the SMB and Enterprise customer types, the top-quartile performers not only have net-revenue churn that is 14% to 23% percentage less than the average performers but also have net-revenue churn that is negative in an absolute sense

Revenue per employee has been steadily increasing in SAAS companies. It serves as a great longitudinal measuring stick to understand the increasing or decreasing efficiency of the business

The best SAAS businesses have a LTV to CAC ratio that is higher than 3, sometimes as high as 7 or 8

Companies with longer contracts (2+ years) reported the lowest annual unit churn

The boom in the industry is creating more jobs for techies. Data reveals there were 627,000 unfilled positions in tech in April 2017

Because of the losses in the early days, which get bigger the more successful the company is at acquiring customers, it is much harder for management and investors to figure out whether a SaaS business is financially viable.