Lastly, if you\u2019re not religiously tracking these metrics already, start now. There\u2019s a reason VCs ask for them; these metrics are the heartbeat of your business. Having a solid grasp on them will make you a better manager.<\/p>\n
23 Vital Saas Metrics for Fundraising + Optimization<\/h2>\n
The following 20 SaaS metrics represent the performance and opportunity of your company as you raise money (or simply look to improve your business):<\/p>\n
- \n
- MRR Build<\/li>\n
- Gross Churn<\/li>\n
- Net Churn<\/li>\n
- Cohort Retention<\/li>\n
- CAC<\/li>\n
- LTV<\/li>\n
- Contributing Margin<\/li>\n
- Payback period<\/li>\n
- Quota attainment<\/li>\n
- Sales funnel<\/li>\n
- Sales customer economics<\/li>\n
- Available pipeline<\/li>\n
- Sales Payback Period<\/li>\n
- Magic Number<\/li>\n
- Active users<\/li>\n
- Time Spent in product<\/li>\n
- Activity in product<\/li>\n
- Gross Profit Margin<\/li>\n
- Department Spent<\/li>\n
- Operating Income or Loss<\/li>\n
- Market Opportunity<\/li>\n
- Projections<\/li>\n
- Customer References<\/li>\n<\/ol>\n
Now let’s break them down:<\/p>\n
Monthly Recurring Revenue (MRR) Build<\/h2>\n
![\"Saas](\"https:\/\/www.intercom.com\/blog\/wp-content\/uploads\/2015\/03\/SaaS-Metrics-Net-New-MRR.png\")
<\/div>\nThis is the trail that shows how you\u2019ve become the company that you are today. Ultimately, your valuation and the amount that you\u2019re able to raise will be calculated from a combination of:<\/p>\n
- \n
- Your current MRR<\/li>\n
- How quickly you\u2019ve gotten there<\/li>\n
- The rate at which you\u2019re adding to it<\/li>\n
- The rate at which you\u2019re losing it<\/li>\n<\/ul>\n
Simple as that :)<\/p>\n
Here\u2019s a summary of how you should present this:<\/p>\n
![\"Key](\"https:\/\/www.intercom.com\/blog\/wp-content\/uploads\/2015\/03\/SaaS-Metrics-MRR-Build.png\")
<\/div>\n* You want your SaaS Quick Ratio to be over 4<\/a><\/em><\/p>\n
We\u2019ll explore a few of these in more detail (visits\/leads, churn, and annual\/lifetime customer value) below.<\/p>\n
Retention<\/h2>\n
![\"\"](\"https:\/\/www.intercom.com\/blog\/wp-content\/uploads\/2015\/02\/leaky_bucket.jpg\")
<\/div>\nMRR retention will make or break the growth of your SaaS business – there\u2019s no point filling the bucket if it\u2019s full of holes. This topic has been covered over<\/a>, and over<\/a>, and over<\/a>\u00a0again. Read these articles and digest them. Investors will be heavily focused on this aspect of your business.<\/p>\n
You\u2019ll need to show retention in a few ways.<\/p>\n
Gross Churn:<\/h4>\n
Of all the committed revenue you had last period, how much walked out the door this period? Do the same on a customer count basis.
\nGross MRR Churn = Churned MRR \/ BOP MRR<\/code>
\nGross Customer Churn = Churned Customers \/ BOP Customers<\/code><\/p>\nNet churn:<\/h4>\n
Of all the committed revenue you had last period, how much walked out the door this period net of upsells?
\nNet MRR Churn: (Churned MRR - Expansion MRR) \/ BOP MRR<\/code><\/p>\nCohort Retention:<\/h4>\n
Churn metrics as described above are a great snapshot into the business at a point in time. However, it\u2019s a blended average of all customers at different points in their lifecycle. Retention by cohort gives you a longitudinal view of how good you are at keeping, up-selling and cross-selling any given customer and how that has evolved over time. In other words, for every dollar that starts today, how many dollars do you have 6 months later, one year later, and so on?<\/p>\n
Below is an example of how this is typically displayed. This fictional business is getting better at retaining customers and up-selling them over time; a promising sign. Cohorts greater than 100% is what investors want to see. Consistent cohorts of greater than 100% will lead to negative net MRR churn.<\/p>\n
![\"SaaS](\"https:\/\/www.intercom.com\/blog\/wp-content\/uploads\/2015\/03\/SaaS-Metrics-cohort-retention.png\")
<\/div>\n<\/div>\nCustomer Acquisition<\/a><\/h2>\n
This boils down to how you find and acquire new customers. Ask yourself:
\nHow have traffic \/ lead sources changed over time and what\u2019s driving that? Is it repeatable?
\nHow many unique visitors do you get on a monthly basis, and how many of them are from organic traffic sources vs paid?<\/p>\nYou\u2019ll need to prove out the economics of your acquisition strategy<\/a>. It\u2019s important to calculate the following for your overall business.<\/p>\n
CAC:<\/strong> Cost of acquiring a customer.<\/a>
\nCalculation:(total $ spent on S&M) \/ (total new customers)<\/code>
\nLTV:<\/strong> Customer Lifetime Value.
\nCalculation:ARPA \/ Gross MRR Churn<\/code>
\nContribution Margin: <\/strong>
\nCalculation:(LTV x GP Margin) - CAC<\/code>
\nPayback period:<\/strong> this is the time it takes you to recover your CAC.
\nCalculation:CAC \/ (ARPA * GP Margin)<\/code><\/p>\nIt\u2019s also a very common request and important to calculate the above metrics specifically for paid tactics. To do this, recalculate the metrics above using S&M spend, new customers, and gross MRR churn only employed\/observed via paid marketing.<\/p>\n
If you\u2019ve made it as far as hiring a sales team, you\u2019ll need to showcase the traction and productivity of that team. The metrics here include:<\/p>\n
Quota attainment<\/strong>
\nYou’ll want to show this on a per rep basis and at the overall team level. The earlier you are in building your sales team, the higher you want this to be (assuming a relatively standard sales quota<\/a>). If your reps are doubling their quotas, that shows you can add to the sales team and reasonably expect those new reps to be productive.
\nSales funnel<\/strong>
\nWhat % of your pipeline are you closing and how long is the average sales cycle? This will be a good indicator of how quickly you\u2019ll be able to scale the sales team and have them contribute to the business.
\nSales customer economics<\/strong>
\nDo you see any variance in the size of the deals and\/or in churn? The answer to both of these should be yes.
\nAvailable pipeline<\/strong>
\nThis is a leading indicator of future performance and your\u00a0ability to scale the sales team.
\nSales Payback Period<\/strong>
\nThis will illustrate how quickly you recuperate your spend on your sales team. The calculation is as follows:
\nPayback period [in months] = \u00a01 \/ ( (New ARR in period) \/ (Total sales spend [base + variable\u00a0+ overhead] in period) ) * 12<\/code><\/code><\/p>\nThe above are all detailed metrics that investors will use to understand\u00a0each component of your sales and marketing engine. The magic number is a quick and easy way to effectively summarize your overall spend on acquisition.<\/p>\n
Investors will use the magic number\u00a0to benchmark your sales and marketing spend<\/a> against various other SaaS companies. As Will Price puts it<\/a>, \u201cThe [magic number] provides insight into the effectiveness of previous quarter Sales and Marketing spend on MRR growth. Your MN will be penalized if the spend is wasted (bad marketing, bad sales execution), if your churn is high or if the market has issues (saturation, competitive forces). It also has a very high correlation with Q\/Q growth rates so in general, high Magic Numbers are good.\u201d<\/p>\n
Magic number is calculated as:
\n(change in ARR during period) \/ (S&M spend in prior period)<\/code>
\nand
\nYour payback period on acquisition spend (in months) = (1 \/ magic number ) x 12<\/code><\/p>\nIt\u2019s important to customize the period that best reflects your business. A magic number below 1 is worrisome if you\u2019re early stage. That means for every $1 spent on sales and marketing, you bring in <$1 in new ARR and your payback period is greater than one year. A magic number in the range of 1-1.5 typically means your spend is reasonable (although not all ARR is created equal – mind the churn!). Here you bring in over $1 of ARR for every dollar you spend on S&M, and your payback period is between 8-12 months. Greater than 1.5 and you\u2019ll grab investors attention. It means you probably have more room to spend on S&M and grow even faster.<\/p>\n
Engagement<\/h2>\n
![\"SaaS](\"https:\/\/www.intercom.com\/blog\/wp-content\/uploads\/2015\/03\/SaaS-Metrics-Daily-Active-Users.png\")
<\/div>\nAs enterprise software get consumerized<\/a>, investors are increasingly paying attention to consumer engagement metrics as a leading indicator for the health of the product. You\u2019ll want to identify a couple of consumer-like engagement metrics that illustrate that people rely on your tool\/app\/service heavily. This can be anything from:<\/p>\n
- \n
- Daily, weekly, monthly active users<\/li>\n
- Time spent in product (daily, weekly, monthly)<\/li>\n
- Activity in product (e.g. for Intercom this may be number of messages sent per customer per day)<\/li>\n<\/ul>\n
The key is to show that your product is sticky, that your customers use it heavily, and do so for a significant amount of time.<\/p>\n
Market opportunity<\/h2>\n
Can you return at least 10x on the investment you are looking for? Although this depends on the stage of the company, a simple place to start with investors is to prove to them that a 10x return on their investment is in the cards. The earlier the investment, the larger the multiple, which makes sense if you think that 20x on $5M is much different than 10x on $100M. 10x isn\u2019t a steadfast rule, but is a good benchmark. In later stages (series D, E, etc) this multiple will come down.<\/p>\n
For most young companies, you\u2019ll be in a good position if you\u2019re able to convince a VC their upside is at least 10x. This is 10x off your post-money valuation. For example, if you\u2019re looking to raise $10M dollars, at a $50M post money valuation, you need to be able to convince investors that you can become a $500M company.<\/p>\n
You\u2019ll need to get creative to do this. One potential way to do this is to lay out the customer and ARPA growth needed to get to your 10x valuation. Are they reasonable? Do you realistically have some line of sight to them? Are these assumptions validated by comparable public companies?<\/p>\n
Financial Statements<\/h2>\n
Have all three financial statements – income statement, balance sheet, and cash flow – up to date, as well as a copy of your cap table prepared.<\/p>\n
Your income statement will be the most scrutinized. Keys to the income statement include:<\/p>\n
Gross Profit Margin<\/strong>
\nGross profit (GP) is calculated asRevenue - Cost of Goods Sold (COGS)<\/code> where COGS are the direct costs you incur in servicing your customers. You can think of COGS as the costs you would pay in hosting, support<\/a>, and infrastructure if you were to stop acquiring any new customers and stop doing any product development today. Great SaaS companies have healthy GP margins at 70% or above.<\/p>\nDepartment spend<\/strong>
\nLay out all non COGS related spend into three buckets;<\/p>\n- \n
- Research and Development (R&D)<\/li>\n
- Sales and Marketing (S&M)<\/li>\n
- General and Administrative (G&A)<\/li>\n<\/ol>\n
The proportions of each will tell the story of where you\u2019ve invested to build your business.<\/p>\n
Operating Income or Loss<\/strong>
\nThe calculation here is:
\nRevenue - COGS - R&D - S&M - G&A <\/code>
\nInvestors are looking to see how much you\u2019re burning on a monthly basis and how many months remain with the cash you have in the bank.<\/p>\nProjections<\/h2>\n
![\"SaaS](\"https:\/\/www.intercom.com\/blog\/wp-content\/uploads\/2015\/03\/SaaS-Metrics-MRR-Projection.png\")
<\/div>\nWhile most investors will take your rosy projections with a grain of salt, they still want to understand how you\u2019re planning for the future. A detailed projection for the next 12 months with high level assumptions applied to the next 2-3 years is a good place to start. You\u2019ll want to project both your MRR build and your income statement.<\/p>\n
Be prepared to talk through the assumptions used to build out these projections. These assumptions should be things that you\u2019re able to point to with confidence, particularly the closer they are on the horizon. Also, important to note, the projections you share in this situation will most likely be what you\u2019re measured against should the deal close.<\/p>\n
Customer references<\/h2>\n
![\"\"](\"https:\/\/www.intercom.com\/blog\/wp-content\/uploads\/2015\/02\/SaaS-Metrics-References.png\")
<\/div>\n