Software Value Creation With DealEdge

How can SaaS companies drive operational excellence, maximize exit success, and create lasting value in today’s market? 

In a new episode of SaaS Conversations, we’re joined by Lauren Kelley, CEO of OPEXEngine, and Dania Shaheen Gutterson, General Manager at DealEdge and Senior Director of Private Equity at Bain & Company.

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The experts discuss the Rule of 40, key efficiency metrics, and specific operational levers investors can use to drive value creation, addressing how successful SaaS companies optimize for both growth and profitability. As market conditions shift and the demand for efficiency intensifies, SaaS leaders are finding new ways to scale while remaining resilient.

Listen in to learn how top SaaS players are enhancing their operational playbooks and maintaining a competitive advantage in today’s challenging market.

Click here to listen to the episode on Spotify.

‍You can download the accompanying white paper here: Driving Exit Success: Operational Excellence and Value Creation in SaaS Investments

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Transcript: Software Value Creation With DealEdge

Andy (Host): Welcome to SaaS Conversations, a podcast from OPEXEngine by Bain & Company. We're thrilled to be joined by the authors of a brand new white paper titled, Driving Exit Success: Operational Excellence and Value Creation in SaaS Investments.

This paper breaks down the evolving landscape of software investments and highlights how operational efficiency is key not just to growth, but to long term profitability and maximizing exit value.

In today's conversation, we'll explore critical concepts like the Rule of 40, key efficiency metrics, and how investors can leverage operational levers to drive value creation. Whether you're an operator, investor, or simply interested in how SaaS businesses scale, this episode is packed with actionable insights you won't want to miss.

Please join me in welcoming Lauren Kelley, CEO of OPEXEngine, and Dania Shaheen Gutterson, General Manager at DealEdge and Senior Director of Private Equity at Bain & Company. Welcome to you both. 

Lauren Kelley: Thank you. Great to be here.

Dania Shaheen Gutterson: Thank you – great to be here. 

Andy (Host): So let's jump right in. Lauren, would you mind starting by summarizing what you're hearing in this paper and particularly how operational excellence in SaaS investments can really ladder up to exit success?

Lauren Kelley: Yeah, absolutely. So overall, profitability has increased in importance, and what that translates into in terms of valuations is that overall average valuations have come down from a peak in 2021 and are now at an average of about the same as they were in 2018.

The big difference here is that top quartile valuations are actually higher than they've ever been before, and the gap between top quartile and average is huge – also bigger than it's ever been before. And one of the things that we've seen from both the data and also our experience in the market is that investor scrutiny has increased dramatically.

Deals are taking longer to close. The kind of diligence that's being done is deeper and more – I've heard various descriptions… medical descriptions of it – but it's pretty intense. SaaS companies have to be able to show sustainable, efficient growth rather than growth at all costs. Underlying those high level performance metrics like growth and EBITDA are key operational efficiency metrics like Customer Lifetime Value to CAC, Magic Number, and R&D ROI, which are [all] associated with better performance, better Rule of 40, and higher EBITDA margins, which are then associated with stronger value and exit valuations. We call this kind of the value ladder of those performance metrics.

Dania, I know that you see so much of this data in so many different sectors. What do you see that's different about software and SaaS in the recent numbers? 

Dania Shaheen Gutterson: Oh, gosh – I think it's been an eye-opening last few years, right?

And so for us on our end, as we've looked at the market – especially the tech and SaaS space – we are seeing that the improvements you talked about and key SaaS efficiency metrics do correlate with higher EBITDA margins/better exit valuations. In this paper, it was so important for us to really underscore the importance of leveraging those operational metrics to drive margin expansion [and] drive value creation in those SaaS investments – especially in this current market environment because, as you mentioned, investors are much more discerning right now.

It's hard to get some of the numbers that maybe that you might feel your business is worth at this point. And so there are ways to do it, but they're different than the ways you may have employed a couple of years ago.

Lauren Kelley: I'm going to jump in here before you ask the next question, Andy, and mention as background that Dania was actually on the committee that evaluated OPEXEngine when OPEXEngine was acquired by Bain. And before that she had tremendous experience with Vista Equity, being a part of both a portfolio company and didn’t you also work directly with Vista?

Dania Shaheen Gutterson: Yes, supporting value creation. So, yeah, I've had a chance to wear a lot of hats as an operator and an investor. So I love seeing papers and working on things like this because you get to bring that expertise and provide context too. It's great to chat about it live as well.

Lauren Kelley: Exactly, and you've seen that difference in the focus [being] all on go-to-market and how to drive more growth at all costs to a more balanced view of that.

Dania Shaheen Gutterson: Yes.

Andy (Host): I want to actually post a question for you, Dania. Thinking about the market shifts and software valuations right now, in terms of what you've seen evolve over the past few years – because you've been so steeped in this data – what should SaaS companies and investors be aware of in terms of growth versus profitability?

We've spoken about that generally, but is there anything specific they should be looking at?

Dania Shaheen Gutterson: One of the things – and for those that have read the paper, this stat won't shock you,  but for those who have not, make sure to download and dig in – software evaluations have compressed by about 24% since 2021.

This is across various categories… growth and profitability – there's just been a general decrease in median valuation multiples from about 17 to 13. Yet as Lauren mentioned, there's a higher peak in valuation multiples, so we're seeing 25x in 2023. So that top quartile – it's gotten bigger.

And so what we're looking at today is just a bigger gap between your top quartile deals and your median. And Lauren touched on this a little bit. And this change in this trend is most likely the result of just those changing market conditions, greater deal scrutiny, and again, more focus on efficient growth compared to that growth at all costs energy that was happening a couple of years back.

It was all about your top line and how fast you could grow it – probably at the expense of some long term scalable growth opportunities. And so what we're seeing now is just that bigger gap. The big deals are getting bigger, but not everyone can be in that top quartile. And so we're seeing some of that compression as well.

Andy (Host): Yeah, and one of the things we're looking at for the first time here to some are EBITDA multiples, and we've traditionally looked at revenue multiples for many years back in the growth at all cost days.

I'm curious – tell me more about that metric and why that's important. I know it's something that you look at at DealEdge as one of your core metrics. So if you're able to speak a little bit more to that it would be interesting.

Dania Shaheen Gutterson: Yeah, it's about that sustainable growth that we're touching on. And I know Lauren will jump in here as well – I see her smiling, she’s like, “Oh I love EBITDA multiples.”

In sacrificing the growth at all costs and looking more now on more longer term, better scaled decisions, EBITDA multiples can provide – especially when you're looking at Rule of 40 for example – it's a good balance there, and so it's not just about your growth rate. It's not just about that typical revenue growth, but also considering what that profit margin is.

So I personally like EBITDA as a factor in that equation. Some people use free cash flow if they'd like, but I think it's a balance between that revenue expansion and EBITDA because it's not all about just growing that top line, but also making sure that you're growing in a way that is smart and you're taking into account operational efficiencies and making sure that when you're spending that dollar and it's generating that top line for you, that you're spending that dollar in a way that is smart for the business and provides long term growth and success.

Andy (Host): Yeah, and so you're talking about growing in a smart way. So Lauren, I know this is your bread and butter – thinking about how to grow in a smart way. And we highlight metrics like CLV to CAC, Magic number, and R&D RO. These are essential indicators for SaaS performance. Could you explain how these operational metrics can ladder up and lead to a higher EBITDA margin?

Lauren Kelley: CLV to CAC, Magic Number, and R&D ROI – if you think about it, Magic Number is looking at your go-to-market efficiency.

Effectively, really simply looked at, it's every dollar that you spend in sales and marketing – how much new growth are you getting from that?

And the same thing with R&D ROI – for every dollar you spent last year on R&D, how many cents or dollars are you getting in new growth? Because SaaS companies have to keep growing unless they have perfect retention and perfect customer relationships, which no company does because there's always – even in a perfect situation – you're going to have companies that are going to go under or disappear or do something.

And so you have to constantly be building that snowball. If you accept that, which is what the whole SaaS recurring revenue model is about, and you look at your go-to-market and your product, that's 80% or 90% of the investment that you're making in your company. That determines your growth, your competitiveness, etc.

And if when you're looking at that, you're not producing much growth from that big investment you're making there, as an investor, you can understand that might be concerning. And if you don't have a very high growth rate, you are not going to be able to show very good numbers for Magic Number or R&D ROI because it's just a calculation against your growth, and if you don't have growth, you're not going to have that.

So then it turns to the other side of the calculation, which is what you're spending. So it all relates to your growth rate, and your spending has to be in relationship to your growth rate. If you can show that for every dollar you spend – regardless of whether you're profitable or not – you're producing growth, then that's great. You're going to have a high valuation and you don't have to be as profitable. But if you're showing that for every dollar you spend, you're not really getting any growth, then that's a problem, and that's really what it comes down to. So you have to look at those underlying metrics, and then if you want to affect them, you need to look at the next level down of operating metrics.

Andy (Host): So I think that's an interesting segue into the Rule of 40. So we're talking about, and we talked about, why your EBITDA is so important. And we talked about why your growth is so important because all of these underlying factors kind of correlate up to it. This has become a very important benchmark. 

And I'll call on you, Dania, to help speak to that and why it's so important and why it's something that maybe is more important these days than ever to investors.

Dania Shaheen Gutterson: The Rule of 40 has been around a while. I'm dating myself, but I was at Deloitte early in my career and I remember hearing about the Rule of 40 maybe like in 2010? Lauren, correct me – I feel like 2010-ish was when you started to hear more about the Rule of 40.

So what's funny to me is – it's been around for a while, but the Rule of 40, as we mentioned, is basically looking at your growth rate (typically revenue growth) plus your profit margin (usually EBITDA or free cash flow) and ideally that should be 40% or more.

It's a formula that investors can use to assess if a company is striking that right balance between high growth and sustainable profitability. It's useful for comparing tech companies with varying levels of growth and profitability. The formula has a strength in that it recognizes the trade off between growth and profitability, especially with early stage versus mature companies – it can help to equalize that a little bit. And so a company can be profitable but growing slower or unprofitable but growing fast and either could still pass the Rule of 40. 

It's a rough guideline, as Lauren was hinting at and talking about earlier. It's not comprehensive. It does not account for factors like customer acquisition or long term sustainability. And so that's where, when Lauren's kind of talking about some of those other efficiency metrics, there's a balance here. It's not all about the Rule of 40. It's a great guideline, and it should be used alongside other financial metrics for a good picture or a full picture of a company's health.

Lauren Kelley: Yeah, and I also have been around for a little bit of time in the industry and the Rule of 40 was, originally, I think it got the most publicity from a blog that Brad Feld, a great VC who's super smart, published in 2015. So it was 2015. 

And then it was really, for VCs, a way to just quickly look at a company in a consistent way and see – if you had 60% growth, it was okay if you were 20% negative EBITDA. Obviously, as you get bigger, it's harder to have that kind of fast growth so it's going to evolve more towards EBITDA.

It was just a nice, simple rubric to look at companies and then dig into the details. It doesn't mean Rule of 40 is the end all be all. It just means that it's a quick way to evaluate companies with all the investor proposals, etc. When you talk about the Rule of X and Bessemer's comments there, the Rule of X in a way is more about, “what's your future?”

It's better to have 30% growth and 10% EBITDA – depending on the size of the company – than it is to have 5% growth and 35% EBITDA, again, depending on the size of the company.

Andy (Host): And it all depends, so that's why it's so important to dive into those operational metrics and really make sure that when you are looking at benchmarks, it's so important to look apples to apples and operating model to operating model.

Lauren Kelley: Yeah.

Andy (Host): So speaking of the forward momentum and looking forward, let's look at the next 6 to 18 months. I know none of us here have a crystal ball, but I'm curious, how do you see the SaaS performance benchmarks that we discuss in this paper (like EBITDA and growth rates and Rule of 40) – how do you see these things shifting and moving into the next year?

Lauren Kelley: I'll jump in quickly. I think the next 12 to 18 months from everything that we've seen, both from the data internally at Bain that I've seen and also what I see in the market talking to investors, we're going to continue to see this funny market where you're going to have a segment of the market that have tremendous growth opportunity. And at the other end of the spectrum, a segment of the market and there are so many companies and there's so many solutions chasing the same problems.

And customers – what's super interesting is that, at least for me (having been through these kinds of market slowdowns before, in the past), what used to happen is when there was a market slowdown or uncertainty in the market, customers usually were pretty happy to buy early stage products from companies. And they were open to small companies. The prices were usually cheaper. The companies were willing to go an extra mile. And the bigger companies often didn't adjust very quickly to changes in the market. They were slow. The technologies were slower. They were stuck in their ways.

This market's really different. In this market, customers don't want to buy from small companies. They want reassurance with what they're buying, they want to reduce the number of cloud products that they have. They want to control it centrally within the company. They want to make sure that every department doesn't have 30 different SaaS products that they're using – some of which overlap; many of which aren't being used.

And so they're more willing to buy from very large companies. And so that makes it even harder for the smaller companies, who were just getting started in 2021 and 2022. So , over the next 12 to 18 months, I think there's going to be a lot of cross currents in the data that will, if you just look at an average, it's going to bring the average sort of to the middle of different extremes.

And we're going to see more of what we saw in the paper that we just produced, where there's a bigger split between average and top quartile.

Andy (Host): Yeah, and we're seeing also on the valuation side that valuations are compressing – what we spoke about earlier – and investor expectations are shifting. For Dania, what advice would you have for a software operator or investor looking to build long term value in the current market?

Dania Shaheen Gutterson: Oh, gosh. As I mentioned earlier, we are seeing those valuations compress but yet the top quartile is getting higher, right?

We're seeing more impressive multiples here and that difference there. I think the question here is how do I become part of that top quartile? What do I do here? How do I get an investment? How do I make an investment that puts me in that quartile? How do I become a business leader that has a deal that exits in that top quartile?

This is where I think you want to be very thoughtful about the Rule of 40 or the Rule of X or many of the metrics that are mentioned in this podcast and in the paper, recognizing that it is about balanced growth right now.

And so making sure you're looking at operational efficiencies, cost management, and being thoughtful about sustainable growth and what your long term success looks like. It is no longer – I know we've said this a couple of times in this podcast – it is no longer a growth at all costs kind of market. When I was an operating leader, I will say, I remember picking up businesses, acquiring things, and/or stepping into leadership roles and just being faced with pages of strategic initiatives and you're just like, “what do I do here?” There is so much on this page.

And I was part of a time where it was the growth at all costs kind of energy that was out there. And I will share my mistakes freely with those who dial into this. It is really easy to pick up some of the initiatives where it's really big, top line revenue growth and maybe the cost implications are much more significant than you were expecting or you didn't really vet out what the initiative or what the strategy was.

And so you pick or you invest in things where it's like, oh my gosh, it's massive top line growth, but it's really not sustainable. It's really not tenable. And it's not the best investment of that dollar, right. It doesn't yield the best ratio for me. 

And so one of the things I've learned as an operating leader that I would encourage anyone to do – if you're an investor sitting on a board or you're that operating leader – looking at those strategic initiatives and looking at all those priorities and really making sure that portfolio company understands what that return on investment is. Are they just chasing the biggest revenue growth opportunity or are they really balancing out the cost vs. top line ratio in a smart way?

So I bring that every time I put on an operating hat – I try and list all those initiatives and we go through the pain of saying, what do we commit to from a top line perspective? What do we know this will cost the business? And we actually will develop a power score and rank all the initiatives, and sometimes the one with the biggest revenue growth isn't necessarily the one that's the smartest for the business. It's not the most tenable. It's not the most sustainable.

So that would be my combined advice for both investors and operators.

Lauren Kelley: And I think that when we step back and think about all the cross currents in the market that we've just talked about – to have those executive conversations of getting everyone on the same page of what the right targets are, it's unbelievably important to be able to have good third party validation or not validation of the targets.

That's something that benchmarking gives you, and the other element of it, which is incredibly important to our process, is being sure that you're comparing apples to apples – both in terms of, is my data that I'm comparing against the benchmarks and are the benchmarks applicable to my business?

All of us have sat through too many meetings where people try to use benchmarks and it devolves into a conversation more about where did this data come from? Whose data is that? And, even arguments about the company's own metrics as to whether those are the right metrics or they were calculated properly.

And that gets away from the point of the benchmarking because you can't really get any value out of that if you don't feel that the benchmarks are apples to apples. So I think it becomes even more critical in these really complicated markets than it was before. And on top of the complicated markets, there's a million benchmarks that are floating around and that makes it even more complicated.

Dania Shaheen Gutterson: Yeah, absolutely. Benchmarking is incredibly important both on the investment side and the operator side. Yes, I've worn both hats, and I will say, regardless of what hat I wear, when I walk into a room and I've got data that is relevant and I can speak to the performance of not only the business or the investment, but also the market – my outcome in those meetings is so much better than if I walk in with mediocre information or no benchmark at all.

Today I will say the data you've got – many of the folks who are listening – the data that's available today to both investment investors and operators is so much better than it used to be. I jokingly told Lauren this when we were looking at OPEXEngine to bring OPEXEngine into Bain, I thought, wow, I would have loved this data. I would have loved the data that OPEXEngine has when I was going through scaling a portfolio company. 

On the same side as I stepped into the GM role at DealEdge – and that's more investor level data – when you're looking at sector strategy, etc. again, I didn't have granular level data on this scale. 

So for example with DealEdge, if you're a tech investor, oftentimes, as Lauren mentioned, you want good data, right? So sometimes you'll just tend to use like the tech sector returns, and you'll just say, oh this is how the tech space is doing. 

That's not good enough. Today, with tools like DealEdge (and I think DealEdge is actually the only tool that has this), you can drill down. So it's not just about the tech space, but you can drill into the software space. And then from software, you can say, what kind of software am I? Am I infrastructure software? Great. I can drill down again and say, hey, data antivirus – what are the returns there? 

So you're bringing much more relevant benchmarks into the equation. That's huge. If I could summarize this whole paper and this podcast here and offer words of wisdom, it would be: get smart, get data, benchmark.

If we could put that on t-shirts and sell those, that would be wonderful. Lauren and I would have a great side hustle. But don't walk into conversations without benchmarks – especially relevant ones. Make sure you're out there looking at tools like OPEXEngine, looking at tools like DealEdge, and bringing the right data into the conversation.

Lauren Kelley: Love it. Love it.

Andy (Host): I'd certainly get one of those t-shirts. And that's a wrap. Thank you both so much. 

Thank you to Lauren and Dania for sharing these insights on operational excellence and value creation and how it all ties together with benchmarks. If you found this discussion valuable, be sure to check out the full white paper for more in-depth analysis and actionable benchmarks that will help you drive success in your own SaaS business or investment strategy. Thank you again for tuning in.

Lauren Kelley: Thank you, Andy. 

Dania Shaheen Gutterson: Thank you. 

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