Using public companies to benchmark your startup’s operating performance

Sorting through the apples and oranges. A self-serve software example

A frequently-asked question by CEOs and CFOs at companies of all stages is “how are we doing relative to our peers?”, or the close variant “what is best-in-class for this metric?”.

Luckily we don’t have to be totally in the dark about how we are doing – public companies offer freely available financial information to help us see how we stack up.

While I was a Corporate Development & Strategy lead at McAfee we used peer analysis both to understand how McAfee was spending relative to peers, and for acquisitions of early-stage startups. In the latter case, peer analysis helped us to contextualize the acquisition target’s performance (for valuation purposes), and acted as a sanity check on our post-acquisition growth rates and spend projections.

Below is an example of how to use publicly available information to compile relevant metrics from your peer companies and then use that information to get insights about your business. I use an example of ‘self serve software’ companies — companies selling software directly to customers with limited sales interaction — to illustrate the methodology.

5 steps to perform operational benchmarking

1. Choose your universe of companies. Select companies that are in a similar industry, have a similar business model, and/or are a similar size (the last criteria will be harder if you are an earlier-stage startup). Start with a set of ~7-10 names if you can. You can always narrow it down later.
2. Determine the metrics to use as a basis of comparison. Frequently-used metrics for software companies include size (revenue), revenue per logo, revenue per user (price), net dollar retention, revenue growth rate, gross margin %, S&M efficiency (magic number), R&D, G&A as % of revenue, and operating margin. Other industries may have different operating metrics. Use the ones most relevant for you.
3. Pull the publicly available information. Use Bamsec.com or SEC.gov to access peer company filings, or use a 3rd party like Yahoo or Google if you’d prefer a “quick and dirty” analysis.
4. Normalize or denote any anomolous or ‘one-time’ activity that might skew the numbers. One-time or non-recurring items can include stock-based compensation, which can inflate operating expenses esp. at an IPO, and/or acquisitions, which can distort revenue growth.
5. Analyze the information, and make an assessment of how (if at all) you should use it to inform your business. This is where your judgement comes in. As an operator, decide which metrics are important to compare against peers and which are not. As one example, very early stage startups will almost always have higher R&D as % of revenue than scaled public companies.

Note: If you have access to private company information, either through your VCs or a 3rd party service like Pitchbook, by all means add it to your analysis.

Example: Self-serve software metrics

(you can access the excel version here)

High level observations from this example

It bears repeating that the above are best in class, scaled/scaling tech companies with top tier financial metrics. It’s almost by definition — they wouldn’t have gone public if they weren’t.

Revenue. The group had an average of 48% revenue growth in 2019.

• Zoom growing at 88% and Shopify at 47% are particularly impressive. Of note Twilio’s 75% growth was aided by acquisition.
• Revenue per logo of $7–10k implies wide range in customer contract size, which is a factor of the ‘self-serve’ model where customers uptake can be in pockets of a single enterprise.
• >124% average net dollar retention for this group is truly fantastic. Smartsheet, Shopify, Zoom, Twilio and Slack stand out with net retention >130%.

Gross margin. The group has an average 74% gross margin.

• Slack, Smartsheet, Hubspot, Zoom have 80%+ gross margin profiles, which is considered strong in SAAS business models. Shopify and Twilio are much lower at 55% and 54% margins respectively (Shopify metric is due to its Merchant solutions business that is sub-40% gross margin)
• Also of note, Hubspot, Docusign, MongoDB, Smartsheet have professional services business that are operating at +/- breakeven.

R&D. The peer group has 22% R&D margin (32% including SBC)

• Dropbox, Smartsheet and Slack spend notably more on R&D as a % of revenue (>30%). Docusign and Zoom spend the lowest (<10%).

Sales efficiency. Box has the lowest sales efficiency ratio — defined as dollar revenue growth divided by prior year S&M spend — along with Dropbox, Docusign, and MongoDB (all 0.6x and below). Zoom, Twilio, and Shopify metrics are all at 1.0x and above.

Operating income. Smartsheet, Slack, and MongoDB are running negative operating income margins (all below 15%).

Final thoughts

We can use analyses like these to contextualize our business metrics and determine if they are (a) in-line, (b) trending in the right direction, or (c) totally off-base vs. your peer set. For early stage companies, investors will understand if not all your metrics are “best-in-class”. However, as you grow you should see metrics start to trend in the right direction towards the peer set (or have a good reason why they are not!).

Thanks for reading, and good luck! Comment below or shoot me an email at harry.macinnis@gmail.com if you’d like to discuss how best to implement for your company.