Scaling SaaS teams while maintaining efficiency

"We need 68 employees to achieve X by 2025".

I read this in a pitch deck the other day. It made me wonder how many human resources are really needed to reach a certain stage in SaaS.

In the realm of SaaS companies, success hinges on striking a delicate balance between scaling teams and maximizing ARR. This dual challenge presents a unique conundrum: how to expand the workforce while ensuring that each employee contributes efficiently to revenue generation?

The equation seems straightforward: More hands on deck = increased revenue. Yet, the reality is different. Without careful consideration, scaling your team can give rise to the so-called Ringelmann Effect (or “Social Loafing”), a phenomenon where individual productivity decreases as group size increases. The result: bloated teams that fail to meet expectations and, in the worst case, lead to layoffs.

Ringelmann Effect | Source: House of Van Schneider

Certainly, the Ringelmann effect is one of the reasons why growth rates of VC-funded SaaS companies (which tend to have much larger teams) are not significantly higher than those of bootstrappers.

Growth by ARR and Funding | Source: SaaS Capital

A great and simple metric to track if you are able to keep that effect in check is ARR per FTE (Full-Time Equivalent). If you only have full-time employees, this is the same as ARR per employee.

Kyle Poyar of OpenView - one of the thought leaders in SaaS - recently published some benchmarks, broken down by ARR range:

ARR / FTE Benchmarks | Source: Kyle Poyar (OpenView)

This appears to be in line with median values for the broader SaaS market from a recent SaaS Capital report:

Revenue per Employee | Source: SaaS Capital

Not surprisingly, however, the report also confirms that VC-backed SaaS companies are less efficient in this regard.

Of course, you should always look at the bigger picture and not at ARR per FTE as an isolated metric. However, it can provide a good guideline to manage team growth wisely and avoid inflating the team without achieving the desired outcome.

A few outliers that take it to the extreme: