September 19, 2017

Excessive SaaS spend: a drag on your bottom line – and cap table

Notable venture capital investor Brad Feld talks about the Rule of 40%. He believes that healthy software companies should have growth plus profit rates equal to 40%. Brad’s point is that there really is a minimum point of profitability-happiness for those writing big checks.

Chart courtesy of Pacific Crest as presented at the recent Zuora CFO Forum.

CFOs are regularly reaching out to us concerned about the likely impact SaaS spend is having on their bottom lines. As these leaders move their companies from scrappy to process driven, they realize: software spend controls and subscription disciplines need reinforcement.

Companies, and especially VC backed startups, are spending outrageous amounts on software. But when armed with visibility and usage insight, CFOs help companies make better software investment decisions.

They curb undisciplined behavior.

They redirect spend to beneficial software.

They unlock new levels of productivity and collaboration.

But this tightening around financial operations is too often under-appreciated.

Controlling SaaS spend is not just about saving money. Or getting more productive.

What employees – even CFOs themselves – underestimate is the degree to which software vendor and license management can impact a startup’s future. 

For CFOs charged with big-picture leadership on growth, funding and acquisition decisions, SaaS spend has material sway within the context of these conversations.

Yes. What you spend on software can come back to haunt you in a major fundraising or M&A conversation.

Consider this: 

Our team has found that the average 200 person startup may spend in excess of $2 million annually on software. Almost $500,000 will be lost on excess cloud software licenses and wasteful SaaS contracts. Measures that bring spend into alignment can mean millions in valuation difference depending on industry multiples and revenues.

During M&A negotiations buyers look closely at a company’s enterprise value. As finance leaders well know, calculating enterprise value is subject to two levers: a multiple and EBITDA (or, earnings before interest, tax, depreciation and amortization).

As company leaders have funding or M&A conversations, they find there are standard, discussed multiples attached to specific industries or product and service types. If these multiples are effectively fixed, the other lever in determining enterprise value, EBITDA, looms particularly large.

Unchecked SaaS spend can materially impact pre-tax operating cash and the expense line item within this calculation.

This is particularly true when a the common multi-year, forward EBITDA calculation is used.

What if your SaaS has ballooned out of control for the previous three years? If your financial model assumes the same growth in future years, you just amplified an already problematic issue – easily to the tune of millions of dollars in lost valuation.

Even prior to full-on acquisition negotiations, SaaS spend is practically important to profitability. Few companies want to acquire a cost center. Reducing operating expenses accelerates the path toward profitability. The productivity that shedding ineffective software brings may even grow revenues by keeps teams engaged with only the most collaborative apps.

And when your profit and loss statement delivers a rosy response to the classic question, “how long will it take until I earn my money back?”, then your attractiveness as a fundable company or acquisition target leaps.

For CFOs, managing SaaS spend is not just an exercise in improving productivity or establishing corporate, financial discretion.

It’s not even just about saving a few dollars come contract renegotiations.

There are real, big-picture financial implications at stake.

Contact us today to unlock this value in your business.

About Cleanshelf

Cleanshelf is the leading SaaS spend optimization solution focused exclusively on tracking, controlling, and benchmarking subscription SaaS applications. Cleanshelf’s cloud technologies help companies save up to 30% on their SaaS spending by automatically identifying unused, underused, or unmanaged licenses and subscriptions.

Headquartered in San Mateo, CA, Cleanshelf serves dozens of clients, including Drawbridge, Revinate, Dynamic Signal, Qumulo, and Service Rocket.

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