2024: Growth Dynamics Outlook in the Startup and VC Ecosystem
A deepdive into 2024 B2B SaaS growth dynamics, in collaboration with Maxio Institute
Part 1: Understanding the New Normal
From the soaring heights of growth between 2020 and 2022 to the stabilised landscapes of 2023, what does 2024 hold for B2B SaaS startups? Our team at Mountside Ventures has recently looked at some of Maxio Institute’s latest Growth Index Report, and summarised our key takeaways for founders ahead of the new year. Despite a dip in fundraising deal volumes in Q4 2023, PitchBook’s graph shows that 2023’s activity aligns with 2018 levels, hinting at a potential “new normal” for the startup and VC ecosystem in 2024.
So, what are the implications of this anticipated normalised growth on the current fundraising climate?
In late 2021, the influence of growth contributed 11x more than profitability to valuations. By the end of 2022, this disparity began to narrow, with the contributions of growth and profitability to enterprise value multiples nearly equalising. For VC-backed companies, revenue growth is critical to staying alive. If companies raise a decent amount of money at a good valuation, then the only way for the math to make sense for VCs is through revenue growth.
While a margin increase has a linear impact on value, a growth rate increase can have a compounding impact on value. — Byron Deeter
VC math requires significant value compounding for it to work. While being efficient gives companies more time, if the revenue growth compounding doesn’t happen then no one will have a good outcome. This is why Bessemer Ventures partners recently observed that the “Rule of 40” concept wasn’t reflecting actual market conditions, and introduced the “Rule of X”, a nuanced approach to evaluating SaaS startups that recalibrates the rule of 40. Alternatively, “Rule of X” suggests that the growth rate and profit margin sums should not equal a fixed percentage benchmark, but instead should be tailored to the specific stage and sector of that company. It is ultimately an individual assessment allowing for a more accurate measure of a company’s performance and potential
Rule of X = (Growth Rate * Multiplier) + FCF Margin
The “multiplier” in the equation represents how important growth is relative to FCF margins, and Bessemer recommends that public companies should conservatively use a 2x multiplier. Looking ahead to 2024, this new benchmark anticipates growth to be 2.3 times more crucial than a single point of profitability, marking a significant pivot towards prioritising growth over traditional profitability metrics in B2B SaaS startup valuation.
Growth optimism and expectations
The Maxio Institute’s partnered with Benchmarkit to survey startups’ expected level of growth optimism for 2024, taking into account various company sizes and types of fundraising. Key findings reveal that:
- Optimism is most prevalent in smaller companies; 50% of the companies that anticipate their growth rates to exceed 10% compared to 2023 have an ARR of less than $2m. Only 10% of companies with an ARR >$50m anticipate their growth rates to exceed 10%, compared to 2023
- Among the companies predicting a 1–10% ARR growth compared to 2023, the majority are backed by private equity, accounting for 45%. For the companies forecasting a >10% ARR increase relative to 2023, the majority are self-funded or bootstrapped, making up 42%.
In 2023, the landscape of startup growth efficiency experienced significant shifts. Sales and marketing efficiency saw a notable decline of 55%, together with reduced CAC and a median CAC payback period extending from 28 to 29 months. Despite efforts to mitigate burn rate and operational expenses, such measures didn’t necessarily translate into more efficient growth which was likely tied to macroeconomic uncertainties.
For 2024, venture capitalists have again set high expectations for rapid expansion from smaller enterprises. T2D3 growth, which denotes tripling revenue for two consecutive years followed by doubling it for three, is a key VC metric at the Series A stage — deemed essential for securing Series B funding within a subsequent 12-month period.
Amid these dynamics, growth-oriented companies have strategically conserved cash in an effort to optimise their run rate in 2023. For many, this strategy has strengthened their financial position, enabling them to increase spending and seek additional funding rounds as macroeconomic conditions are expected to improve in 2024.
Part 2: B2B Growth Drivers in 2024
Revenue Growth
In 2023, saw an increase in the median customer expansion rate to 42%, up from 34% the previous year. Companies with robust customer bases are now shifting to reevaluate their pricing and packaging strategies and focus on upselling, cross-selling, and promotional tactics, ensuring these approaches are as efficiently executed as customer acquisition efforts. This may involve a pivot towards consumption-based models as opposed to traditional subscription services, indicating a burgeoning trend towards hybrid pricing strategies. The challenge lies in mastering the operationalisation of these models while maintaining cost-effective customer acquisition practices.
“The period of abnormal growth observed in the early 2020s continues to weigh heavily throughout the private technology and subscription sectors. Having comprehensive insights into every aspect of your financial operations is crucial to creating optimal pricing strategies that not only serve your clients’ needs but also allow your business to remain resilient through periods of slowing growth.”
Jon Cochrane, Director of the Maxio Institute.
S&M and OPEX Growth
Regarding OPEX, Benchmarkit looked at patterns of revenue percentage and found that smaller companies with less than $2 million in Annual Recurring Revenue (ARR) allocate a smaller portion of their revenue to Sales and Marketing (S&M) expenses. Conversely, larger companies, those with over $50 million ARR, invest a higher percentage of their revenue in S&M efforts to sustain growth. Interestingly G&A efficiency is reached when companies exceed $50 million ARR — larger companies spend a smaller fraction of their revenue on G&A compared to their smaller counterparts.
As we look towards 2024, the predominant valuation metric remains the growth rate, making it essential for companies to OPEX and marketing budgets for better CAC ratios. With a 5% reduction in sales and marketing expenses and a 1% decrease in R&D expenses noted in 2023, the approach to spending is evidently shifting. Particularly for B2B SaaS companies approaching an IPO, there’s an anticipated need to significantly boost S&M expenditures by 5–15% to fuel continued growth.
Founder must have a crystal clear understanding of their unit economics, especially in terms of CAC payback periods and the Lifetime Value to CAC (LTV:CAC) ratio. For companies whose metrics fall within the top quartile, the current climate presents an opportunity to ramp up spending. Maxio Institute’s webinar with Benchmarkit highlighted the participants' poll which showed 63% expect a higher growth rate for 2024, with over 50% planning to increase their S&M spending compared to last year. Accelerating S&M spending can facilitate faster growth, outpace competitors and help in capturing a larger market share, underscoring the strategic importance of expense management in tandem with aggressive growth tactics.
Growth by Industry
The most consistent average growth over the last eight quarters was seen in CyberTech, while e-commerce experienced the least consistent growth in the same period. YoY growth rate improvements were most notable in restaurants/leisure tech (post-COVID peak), while supply chain tech showed the least improvement. Maxio Institute also presents a “best finish” category - the highest growth rate in Q4 2023, observed in PropertyTech, coinciding with an all-time high in construction job openings over the past two decades. On the other hand, MediaTech saw the “worst finish” in Q4 2023. And finally, FinTech — financial operation, automation, and efficiency tech emerged as one of the fastest-growing cohorts in 2023.
The demand for financial and operational efficiency, including expense management and financial software, became a top strategic priority for SaaS companies in 2023.
Part3: The Ultimate Metrics for Value Creation
Ray Rike, Founder & CEO of Benchmarkit, shares the key capital, operational and CAC efficiency value creation metrics for founders to focus on this year.
- Net Dollar Retention Rate: Measures ARR generated by a 2023 customer cohort by December 2024, including churn, down-sell, upsell, and cross-sell. The median for private B2B SaaS companies is 105%.
- Gross Dollar Retention Rate: The remaining ARR from 2023’s 10M dollar ARR at the end of 2024 (excluding expansion MRR).
- Rule of 40: evaluate SaaS company’s balance between growth and profitability. YoY Growth rate + profit margin should be equal to or above 40%
- CAC Payback Period: measures the time it takes for an investment to generate an amount of income equivalent to the cost of that investment
- CAC Ratio: Sales and marketing expenses divided by total growth in ARR.
- CLTV:CAC Ratio: Efficiency in acquiring, retaining, and growing customers. The lifetime value of each customer acquired should ideally be 4x the customer acquisition cost.
- Logo retention rate: measures how many distinct customer accounts (logos) a company retains over time — and focuses on the number of customers, irrespective of how much they are spending. Crucial to understand customer satisfaction and market acceptance of the product. Particularly insightful for companies whose revenue is not heavily skewed by a few large clients.
- Linear Regression Model: assessing the impact of a single independent variable on dependent variables.
Key Takeaways for Founders
So what questions should founders ask themselves in 2024? We conclude with Ray Rike’s insights on four essential focus areas:
- Enhancing Net Revenue Retention and Customer Expansion: Concentrating on these pivotal go-to-market metrics can drive sustainable growth.
- Adopting Sales-led Strategies: In 2023, vertical sales-led SaaS companies experienced a median growth rate of 24%, significantly higher than the 10% growth seen by product-led companies. This disparity underscores the effectiveness of sales-driven approaches in B2B software sales.
When comparing vertical versus horizontal SaaS, a vertical focus — specialising in specific niches, particularly with AI applications — consistently outperforms a broader horizontal approach. Ray Rike, 2024
3. Leveraging Analytical Insights: Employing analyses like the EV:NTM Rev Multiple, which examines the influence of independent metrics on dependent variables through the R-squared factor, can provide deeper strategic insights
4. Prioritising Strong Unit Economics: Recognising the importance of solid unit economics will be crucial for steering a company’s strategy and boosting its market performance, more so than ever before.
More about this can be found on Maxio Institute and Benchmarkit.ai
Contributions from Ray Rike, 2024
