Operating losses in SaaS are huge

Profitability is not a requirement in SaaS. Of the 71 SaaS IPO’s below, 59 of them were not profitable at the time they went public (83%). Clearly a certain level of burn is ok so long as you’re growing, but what is that level?



On median, the operating margin was -24%, meaning for every $1 of revenue, there was $0.24 of operating loss. This level of operating loss is extraordinary, but clearly the market has shown a willingness to look past the burn. Even more alarming is the trend of the last 10 SaaS IPO’s: their median operating margin was -36%. Snowflake has an operating margin of -135% (not a typo), Asana has an operating margin of -84%, and Palantir comes in at -78%. The market has never been more forgiving of extremely ugly operating margins.

Why is the market so forgiving? It’s not clear, although these companies do have a few things in common: they’re large and growing fast, the customer base is generally attractive enterprises, they’re retaining and growing existing customers (100%+ net dollar retention), nearly all of them have been backed by tier 1 VC, and investors believe there is a path to profitability.

While it’s not a trajectory we would recommend for any startup, the market has shown a willingness to accept extreme operating losses for attractive SaaS businesses.

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