One of the most crucial points in a SaaS companies history is when they are raising funds. If you can successfully throw together a pitch deck and close your first round of funding, then you’re off to a great start. Until you do that, it’s hard to imagine what kind of SaaS metrics they will be looking at when they are making their decisions. This article will take you through the top 5 things VCs look at when considering investing in a SaaS company.
There are many different stages at which a startup can be funded. The first round is known as the seed round, whereas the second stage is called the Series A round and so on…
The type of funding you seek out at each stage depends on what stage your business is in and how much money you require (and can fundraise) at that point in time.
A popular way to fund a startup before it has built any kind of product or prototype is to attract Venture Capitalists who will provide a financial investment in return for an equity stake in your company.
Venture capitalists are evaluating businesses using a standard set of metrics. This article will explain the SaaS Metrics VCs look at when making a decision whether to invest or not, along with some practical insights.
The following should be noted:
The post favors B2B SaaS Startup
SaaS metrics are the result of the collaboration of a team, a product, and a market. Companies are more than just a series of statistics on a spreadsheet. We can’t emphasize this enough: numbers aren’t everything; it’s the team, product, and market that matter.
There will always be variations to what software investors look for at varying moments.
Having said that, investors are primarily interested in learning whether a business has created a product that people like and can get that product into the hands of customers quickly, effectively, and financially. Valuable metrics are techniques for investors to quantify if these things are happening at a certain company.
Top 5 SaaS Metrics for Venture Capitalists
Product/Market Fit (Most Common SaaS Metric)
- ARR (Annual Recurring Revenue & Capital Efficiency)
“Annual recurring revenue” is a popular acronym, in the technology industry and has become increasingly important recently as investors look to big tech companies as places where successful companies and investment opportunities lie. A business that is growing and scaling in ARR is generally an indication of product/market fit: the product is providing value to the customer.
|ARR||· Series A: $1-$3M ARR |
· Series B: $5M ARR
|Cash Efficiency||There is no hard and fast rule, but we consider organizations to be cash efficient if they did not burn much more than $xM to achieve $xM of ARR.|
Is the Business Growing Fast? – SaaS Metrics
- ARR Growth Benchmarked against T2D3 or other successful SaaS companies
- New Customers every quarter and new ARR
Triple, Triple, Double, Double, Double (T2D3) is a term that describes what it takes for a SaaS business to expand from $1 million to $100 million or more in 5–7 years. Venture capitalists want to demonstrate how an investment in a SaaS startup can yield a significant multiple of their money, and there is no better way to do it than to develop quickly and move closer to being a $100 million+ ARR business. Granted, most companies do not strictly adhere to T2D3, but at the Series A/B level, growth investors will expect at least 2.5–3X YoY growth.
Also, investors like to see that new customer (logos) and ARR are increasing quarter over quarter to demonstrate that the company has the ability to develop tremendously.
|Series A||3X+ YoY Growth|
|Series B||2.5–3X+ YoY Growth|
Is the Business Growing Efficiently?
- Quick Ratio & Growth Accounting
Investors seek to understand what is driving a company’s rapid growth. Is your company’s growth coming from new customers or from upselling to existing customers?
To understand the health of a company’s growth, Growth Accounting divides ARR by month or quarter into new, upsell, downsell, and churn.
On the other hand, The Quick Ratio is primarily significant to businesses that have been in operation for at least a year, when a fraction of the first year’s customers begin to churn.
|ARR Growth Accounting|| New & Upsell to Grow QoQ (Quarter over Quarter). |
Downsell & Churn decreasing QoQ.
|Quick Ratio||> 4|
Is the Company Retaining Clients?
- Gross Customer Retention & Net Dollar Retention (Cohort Analysis)
Understanding if the company you’re analyzing is retaining customers is an important part of your investment thesis. Customer retention (CR) is an indicator of competitive positioning and sustainable market leadership, which helps reduce risks in the investment decision-making process. CR should be one of the key components to an investor’s discipline when vetting their investment universe.
|OVERALL SAAS METRICS BENCHMARK|
|ARR||Gross Margins||Gross Logo |
|Net Dollar Retention |
|Payback Period |
|Magic # |
(1/ Payback period)
Is the Company Selling the Product Efficiently?
- CAC Payback Period
The Payback period is a basic calculation used to determine how soon a business recoups the cost of its customers acquisition for a new service or product.
Companies that don’t take steps to understand their CAC will always run the risk of an unsustainable business model, and their ability to attract investors will suffer. It’s important to understand how critical this metric is to a startup or traditional business in the B2B space.
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