What is the difference?

# Hype Factor vs Magic Number

Hype Factor

SaaS Magic Number

#### What is it?

Hype Factor is an efficiency metric that shows how efficiently a company converts capital raised into ARR. SaaS companies convert venture capital into two things: annual recurring revenue (ARR) and hype. ARR has direct value as every year it turns into GAAP revenue. Hype has value to the extent it creates halo effects that drive interest in the company that ultimately increase ARR.

The SaaS Magic Number is a ratio showing yearly recurring revenue growth gained for every sales and marketing dollar spent. It indicates the level of operational efficiency of a company, as well as the sustainability of sales and marketing expenditure.

#### Formula

ƒ Sum(Capital Raised) / Sum(Annual Recurring Revenue)
ƒ ((current quarter’s recurring revenue – previous quarter’s recurring revenue) x 4) / (previous quarter’s sales and marketing spend)

#### Example

Looking at some recent JMP research, the average SaaS company goes public at around \$25M/quarter in revenue, a \$100M annual run-rate, and which also suggests an ARR base of around \$100M. The average SaaS company has raised about \$100M if you include everyone or \$68M if you exclude companies not considered enterprise software. This suggests that 1.5 (=100/68) is a typical capital-to-ARR ratio or Hype Factor, on the eve of an IPO.

A company’s recurring revenue in Q2 is 700K, and their recurring revenue in Q1 was 500K. Their Sales & Marketing investment in Q1 was 600K. When calculating the SaaS Magic Number in Q2, the company will subtract 500K, the previous period recurring revenue, from 700K, to get Q2’s recurring revenue growth of 200K. This quarterly figure is annualized by multiplying by 4 to get 800K. Finally, this number is divided by Q1 Sales & Marketing investment of 600K to get a SaaS Magic Number of 1.3. ((700K - 500K) x 4)/600K = 1.3

#### Published and updated dates

Date created: Oct 12, 2022

Latest update: Feb 16, 2023

Date created: Oct 12, 2022

Latest update: Mar 28, 2024