Why you Should Consider Building a SaaS Company

Are you already in the SaaS space or just planning to launch your cloud service? Then you most probably want to know the latest metrics on how your peers are raising capital and where they are pouring their cash. If that’s the case, sit back and keep reading to find out:

• The number of SaaS companies & SaaS market size by region
• How SaaS companies are raising capital & SaaS funding amounts
• How much do SaaS companies spend on marketing & other channels

How Many SaaS Companies Are There in the World: Core SaaS Statistics & Geographics

• Statista reports that the number of SaaS companies in the world in 2021 stands at 25,000, with a whopping 7,000 SaaS firms in the marketing space alone. The global SaaS market size is worth $272.49 billion with a projection to hit $307.3 billion by 2026 at an estimated 11.7% of industry growth rate.
• The top SaaS markets are the US (15,000 companies) and the UK (2,000 companies), followed by Canada (1,000 companies), Germany (1,000 companies), France (939 companies), India (813 companies), and China (663 companies), as Statista states.
• The US SaaS market size was valued at about $145.5 billion in 2021. The most renowned SaaS moguls in the US are Microsoft, Adobe, Google, and others.
• The ultimate Asian SaaS leaders are India and China, with $3.5 billion and $8,5 billion market size respectively.

SaaS Funding Amounts

As the world shifts to the cloud, more and more entry points for startups are opening, placing SaaS funding amounts at a staggering $48.5 billion of total investment across 2,600+ firms in 2020 against the previous all-time high of $43.6 billion raised in 2019, says Pitchbook.

To get a clear picture of how these record-breaking sums are distributed over the fresh industry players, we've looked into the key metrics from the core thought leaders and analysts, like saasindustry.com, Statista, 500 Global, and others.

Here are our findings on the most recent capital raising activities among SaaS companies (Q1 of 2021).

SaaS Pre-Seed Funding Amounts

Q1 of the year 2021 was a fruitful time for SaaS startups to raise their Pre-Seed capital. On the whole, there were 40 SaaS companies accumulating pre-seed investments worth $8.8 million in total.

The biggest Saas funding amounts at the pre-seed stage were distributed between the Germany-based Levity and Denmark-headquartered Oveo, attaining $1,7 and $1,2 million accordingly.

SaaS Seed Funding Amounts

There were 115 SaaS companies that raised capital at this investment stage. Each company attained no less than $1 million placing the total SaaS funding amount at a whopping $174 million.

The ultimate leader on the list is the US-based Trace, whose $8,3 million investments were led by Greylock and Uncork Capital.

SaaS Series A, B, C Funding Amounts

This, by all means, was the most fruitful capital raising phase, with a total of $3,3 billion raised by 124 SaaS companies across the A, B, C funding rounds. Almost $1.5 billion came from round C alone, while $752 million was raised in Series A, and just over $1 billion in Series B.

Speaking geographically, the ultimate leader in raising capital for SaaS is the Northern America area, touching $7.8 billion (or 79% of the total investment!), only to be followed by Europe and Latin America, but funds raised in these regions were no more than 10$ each.

Saas Budget on Marketing & Sales and Research & Development

To find out where SaaS companies pour their money and how much they spend on Marketing & Sales, Research & development, and other channels, we analyzed hundreds of SaaS companies (B2B) and a range of key benchmarks from SaaS Capital, SaaS Live, KBCM Technology Group, Gartner.

In our research, we paid special attention to the following data:

• Company funding type (bootstrapped / equity-backed)
• Company growth
• Annual Recurring Revenue (ARR).

How Much Do SaaS Companies Spend on Marketing & Sales

On the whole, the lion’s part of SaaS companies’ budgets is poured into Marketing & Sales efforts (27% of ARR) rather than Research & Development. Moreover, whereas the global Marketing expenditure has shrunk to 6.4% in 2020 from 11% in 2019, the marketing spending in the SaaS space stays solid as never before – 10%.

The major reason behind the trend is that companies need to acquire recurring revenue and pay off the money spent on customer acquisition. Here are some illustrations of how much SaaS companies spend on marketing and sales:

• Zoom: spends close to 19% of its ARR on S&M efforts
• Twilio: spends close to 27% of its ARR on S&M efforts
• Wix: spends close to 40% of its ARR on S&M efforts
• Dropbox: spends close to 19% of its ARR on S&M efforts
• Smartsheet: spends close to 50% of its ARR on S&M efforts.

As a rule, marketing & sales spending continuously grows over time and peaks when the company's ARR touches €1-€10 million (these numbers are true for the European market but may be approximate for The Northern American region).

That said, marketing & sales channels budgets vary from company to company, but a safe estimate for SaaS business owners to keep in mind is somewhere between 10% and 40% of the company’s ARR.

SaaS Research and Development Spend

Historically, the smaller and younger your SaaS business is, the more you should spend on Research and Development – from 30% all the way to 60%. The reason is straightforward: you should first invest in the quality of your product to guarantee its value and competitiveness in the market, according to the 2021 European SaaS Benchmark.

However, once your company hits €10 million in revenue R&D expenditures inevitably drop (European SaaS market). While this is true for the vast majority of SaaS players, your budget planning is subject to the strategy you align your company with.

For example, Slack, whose revenue in 2016 hit 105M USD, spent 59% of revenue on Research & Development. Here is what they say:

To remain competitive, we must continue to develop new features, integrations, capabilities, and enhancements to Slack…

So, there is no one-fit-all strategy for all B2B SaaS marketing budgets. To allocate your funds wisely, you need to figure out the nature of your organization - product-driven and sales-driven. With this in mind, decide on your goals, resources, and product/service specifics to adjust your spending accordingly.

Final Thoughts

Running a successful SaaS company or any other type of business is not an easy task, as it is a matter of thoughtful budget planning, capital raising, and allocating your resources accordingly.

So, keep an eye on the core software as a service statistics - like how your SaaS peers are raising capital, what are their funding amounts, and how they spend their money - and align this info with your own business strategy.

First published here