Reliable data about private growth-stage software companies is extremely hard to find. In our experience, what’s available is typically self-reported (therefore noisy), and often lags by 2 quarters or more. Data on public software companies is more easily accessible, but is generally of limited utility for growth-stage companies and also lags by several months.
We believe that quality data is essential to helping software companies scale, which is why we make our own internal consolidated metrics available to founders each month. These numbers are aggregated from hundreds of private software companies that RAC reviews across our funds, using only primary sources, validated by our investment team. We exclude companies that are below $2.5 million of ARR.
The April metrics by growth cohort:
The April metrics by Rule of 40 cohort:
To learn more about the Private Software Growth Index and how it was constructed, please see the disclosure at the bottom of this post.
Our observations on the April data:
Unlike in the past, companies in the faster-growing cohort (30%+ ARR growth) today are not spending meaningfully more as a group on sales and marketing compared to slower-growing companies.
However, faster growing companies are spending more on product and R&D compared to the slower-growing cohort, resulting in higher burn.
Higher product/R&D spending is strongly correlated with (materially) higher retention and better sales efficiency metrics, leading to a better overall Rule of 40 in the high-growth cohort.
Achieving “Rule of 40” is still extremely difficult for growth-stage software businesses. Only 22% of our dataset exceeds that hurdle--and there is upward bias in our universe of companies.
It’s notable that today’s Rule of 40 companies as a group are showing incredibly low payback periods—below 15 months, which is very hard to achieve in enterprise software and is a signal of strong demand pull.
The data is also a useful reminder that if your goal is to exceed Rule of 40, having a strong ‘growth’ side of the equation makes the job much, much easier. In growth stage software, the reality is that it’s hard to ‘cut’ your way to Rule of 40.
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