Net dollar retention, growth rate, sales efficiency and the Rule of 40, plus the churn myths buyers ignore
Thomas Smale · FE International
Published September 6, 2024Explore the lesson. Sign in to access the slide download.
The speaker uses acquisition experience to distinguish sustainable valuation drivers from metrics that may matter operationally but not to buyers. The talk covers sustainable growth, common valuation misconceptions, deal evidence, and the reinvestment cycle after exits.
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“think about that is buyers will often perceive 40% to be a sustainable growth rate when compared with all the other metrics if you grow 200% in the year there might have been a particular oneoff so for example like during covid a lot of businesses significantly grew that's not necessarily sustainable and buyers will not necessarily value it when it comes to your multiple whereas 40% consistently definitely does very clear correlation with”
“misconceived with does not matter in your business there are lots of metrics that can matter in your business important to track important to improve important to think about just does not necessarily mean they affect valuation so I'm going to go into some common myths confirmation bias and I think things like confirmation bias are particularly important at events like SAS open where people like Nathan will only put the best people in the industry”
“on the revenue you're generating not the absolute number of people leaving and it's a very important differentiation I'm going to talk a little bit about from a a real deal just to give you an idea of what buyers actually talk about what they actually want and I I was looking through of the 1500 deals I looked at a very recent letter of intent from a deal and I think it will quite clearly show you how some of the metrics we spoke about in the”
“successful and the way I look at it my kind of philosophy is as that capital is deployed if each of you sold your business tomorrow for a billion dollars what are you going to do with your money you don't contrary to put public of Lea you don't go spend it and live on a beach what you'll probably do it is reinvest back and 990 million is going to come back into investing in businesses so you then end up with even more dry powder more money successful people investing their money creates”
“Metric 1: Net Dollar Retention”
“Metric 4: Rule of 40”
“Myth: Customer Churn”
“* Year to date through July 10, 2024. Source: S&P Global Market Intelligence. Private Equity Dry Powder ($T)”
Video
4 SaaS Metrics That Have Driven Over $50bn in Acquisitions - Slide Deck
Thomas is the founder and CEO of FE International - a tech focused M&A advisory firm. His team has closed over 1500 deals with a combined value over $50bn throughout their careers working with investors and founders all over the globe. He's also an investor and advisor to multiple businesses in the tech sector, spending his time helping them grow. Regularly featured speaking at conferences, industry publications, radio, TV, podcasts and other forms of interviews - he is always open to new opportunities to talk about the world of M&A.
Thomas Smale · FE International
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16 passages
SaaSOpen, September 2024 4 SaaS Metrics That Have Driven Over $50bn in Acquisitions Thomas Smale CEO, FE International
The talk separates metrics that matter from common myths, then uses real deals to explain how buyers assess companies and the market.
Over the Next 20 Minutes I’m going to show you Metrics That Matter From Over $50Bn in Deals Data First Real Closed Deals Metrics That DON’T Matter Common Myths Confirmation Bias A Real Deal Learn How Buyers Think Current State of the Market Reality > Theory
The chart rises each year, from 1,302 completed deals in 2019 to 1,512 in 2023, with steady growth across the period.
Aggregate Deals Completed
The scatter plot places net dollar retention against enterprise value to revenue multiples, with many companies clustered around 100%-130% retention and a broad spread of valuations.
Metric 1: Net Dollar Retention
The box plots show higher revenue growth bands paired with higher valuation ranges: the > 40% group sits above the < 20% group.
Metric 2: Annual Growth Rate
The three distributions shift toward higher enterprise value to revenue multiples as sales efficiency rises from below 20% to above 40%.
Metric 3: Sales Efficiency
The scatter plot and upward dotted line connect a higher combined revenue growth rate and EBITDA margin with higher revenue multiples; the shaded region begins at 40%.
Metric 4: Rule of 40
This section examines buyer myths, confirmation bias, and which small valuation details deserve attention.
Let’s Jump Into Section 2 I’m going to show you… Common Myths Confirmation Bias Small Nuances Buyers don’t care Incorrect things you will hear What your friend sold for What a buyer told you It doesn’t all matter Track but don’t lose sleep
A worker asleep at a desk accompanies the phrase “Output > Input,” contrasting visible results with effort alone.
Shipping our first app 2017, Hotel Lobby Full bleed image template Output > Input
The scatter plot compares churn with transaction value to revenue multiples; the points are widely dispersed, with no clear upward pattern.
Myth: Customer Churn
This section moves from a letter of intent to private equity market conditions and the gap between buyer statements and deal realities.
Let’s Jump Into Section 3 I’m going to show you How Buyers Think Current State of the Market Reality > Theory From a Letter of Intent Dry powder at historic highs (still) Disinformation is everywhere
The screenshot presents a proposed acquisition with cash at closing, holdbacks, and a later payment tied to conditions; the small scanned amounts are not clear enough to repeat.
Screenshot of Letter of Intent
The bars climb from $2.04T in 2019 to $2.62T in 2024 year to date, with only modest increases between 2022 and 2023.
* Year to date through July 10, 2024. Source: S&P Global Market Intelligence. Private Equity Dry Powder ($T)
An email describes a founder being told to move the team to remote work to improve valuation, framing it as a claim to verify rather than accept at face value.
Be Careful Who You Listen to
The recap emphasizes four valuation measures, optimizing for an exit, and real deal examples, while cautioning against work effort and revenue breakdown as standalone indicators.
Metrics That Matter 4 to Focus on Optimize for an Exit KPIs Metrics That Don’t How Much You Worked Average Revenue Per User Revenue Breakdown Real Examples LOI tied to metrics The Current State of the M&A Market An email Over the Last 20 Minutes I Showed You
The speaker closes with a thank-you and a QR code for the audience to scan.
SaaSOpen, September 2024 Thank you! Thomas Smale CEO, FE International