Date created: Oct 12, 2022 • Last updated: Feb 16, 2023
What is Hype Factor?
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.
Hype Factor Formula
How to calculate Hype Factor
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.
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What is a good Hype Factor benchmark?
A hype factor of 1-2 is target. A hype factor of 2-3 is good, particularly well before an IPO. A hype factor of 3-5 is not good, too much hype and too little ARR. A hype factor of 5+ suggests there is very little “there there” at all.
How to visualize Hype Factor?
A summary chart is the best way to visualize Hype Factor. Summary Charts display the current value in comparison with the past. Take a look at the example:
Hype Factor visualization example
ChartMeasuring Hype Factor
More about Hype Factor
Hype takes two forms: good hype that drives ARR and wasted hype that simply makes the company famous for being famous. Since private companies raise capital and burn it down until an IPO, you should expect that the above values represent minima from a lifecycle perspective. In theory, you’d arrive on IPO day broke, having raised no more cash than you needed to get there.
Limitations to this approach include how much VC is left over on the eve of the IPO or how much debt the company had raised, capital consumption per category that may vary as a function of the category, and that the ARR run-rate calculations should only apply to subscription.