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Benchmarking Inc. 500 Software Companies: Which Delivery Method is Best?

Matthew Buckley
Mar 18, 2015 8:00:00 AM  |  Matthew Buckley

It is a fascinating time to be a student of SaaS. As a delivery method, it continues to gain adoption across industries at an astounding rate. The worldwide software market has an estimated value of more than $400 billion. However, the cloud software market (SaaS/PaaS/IaaS) makes up only $48–$56 billion, meaning that "cloud-based software accounts for no more than 15% of the value of the total software market," according to Altos Ventures

I was reviewing last year's Inc. 500 list with my colleague, Brian. We began to think about the software companies that had made the list and decided to conduct some research to see if we could better understand what was helping these 41 companies join the ranks of the fastest-growing private companies in the U.S. 

A couple of late nights full of data mining from Inc.CrunchBase, and the company websites and here’s what we’ve learned. (Note: we've decided to break this out into a series of posts. This is Part I, you can read Part II here.) 

Starting at the highest level, we can see that all of these companies have achieved remarkable growth over the past three years:

 

  3-Yr Growth Revenue '13 Revenue '10 Employees Revenue/head Jobs Added Prev. 3 Years
Mean 2,762% $11,056,341 $619,624 87 $155,956 70
Median 1,708% $6,600,000 $230,539 62 $131,250 43


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It is clear that these companies have been able to move from establishing initial product/market fit (<$1.5 million in annual revenue) into the high-growth phase, increasing revenue by 2,762 percent on average. In fact, only 3 of the 42 companies analyzed recorded revenues greater than $1.5 million in 2010 (Swiftpage $4.3 million, Lab Tech Software $2.4 million, and Coupa Software $2.1 million) and could be considered as having already reached product/market fit prior to 2010 using $1.5 million. 

First, let's take a page from Tom Tunguz's playbook and compare the three-year revenue growth of these companies looking at years-since-founding, which I've plotted below: 

3-Year_Growth_Rate_of_Inc._500_Companies__By_Years_Since_Founding

I've applied a linear trend line, marked in red. We can see that younger companies, especially those younger than 6 years are growing faster than those founded more than 6 years ago. I have excluded one outlier from this set (Superfish which recorded a three-year revenue growth of 26,043 percent and 7 years-since-founded) as its growth rate fell outside three times the interquartile range (IQR). 

Second, let's compare which delivery method these companies are using:

2014_Inc._500_Software_Companies_By_Delivery_MethodSaaS companies make up the majority of the list and represent a disproportionately higher percentage of this sample than the percentage of SaaS companies in the software market as a whole, which we looked at earlier. A much smaller percentage of these companies offer a choice between on-premise software-development services or a SaaS solution paired with hardware. This is indicative of the software industry as a whole moving from on-premise to the cloud. 

When looking at this distribution over time, we can see that from 2006 onwards, the rise of SaaS as a distribution method within this dataset becomes remarkably clear. SaaS companies shot up in number between 2006 and 2008, and accounted for 100 percent of companies founded from 2009 onwards, as charted below: 

2014_Inc._500_Software_Companies_Broken_down_by_Year_Founded_and_Delivery_MethodAs we look at this further, we can see from the 2013 gross annual revenue that SaaS companies are generating the highest gross revenue on average, followed by development vendors, then hardware/SaaS, and finally on-premise. Superfish has again been excluded from these metrics as an outlier. 

As SaaS companies represent the majority of this sample, the distribution of revenue across delivery methods is impossible to extrapolate from the software space as a whole. However, it is indicative of the broader trends we've seen in the rise of SaaS as the favored delivery method. 

2014_Inc._500_Software_Companies_Revenue_Growth_by_Delivery_Method

Finally, in alignment with the broader trends we've seen toward SaaS, when looking at revenue/head SaaS again comes out as the leader with 33 percent higher revenue/head than runner-up development vendors and 49 percent more than hardware/SaaS delivery, as seen here: 

2014_Inc._500_Software_Company_Revenue_Head_By_Delivery_Method

Ultimately, many of these metrics supported our hypothesis at the outset of this research that, as Marc Andreessen so aptly put it, "software is eating the world." With that in mind, SaaS most certainly dined its way to the top of the Inc. 500 in 2014. 

This is the first in a series of posts covering our research of this topic. You can read Part II here, where we compare the success of the companies that were able to bootstrap their way to success versus those that received funding. 

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Matthew Buckley

This post was written by Matthew Buckley

Matthew Buckley is New Breed's Lead Marketing Strategist. He specializes in developing successful inbound marketing programs and is a HubSpot expert. Matt’s expertise has led to the launch of many successful inbound marketing campaigns.

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