SaaS metrics 101

All the metrics that matter to SaaS investors today

In the current climate, the thing that matters for all the SaaS companies is growth. Very simply put, there are 4 key metrics SaaS growth investors are looking at:

1. OVERWEIGHT GROWTH. Investors like to use this 3-3-3-2-2 framework for growth in annual recurring revenue. Can you triple your revenue three times in a row: so if you start with $1 you get to 3, $3 becomes $9, $9 becomes $27. Now double that you get $54 and double $54 you get $108.
   
   3X growth in revenue is considered the top quartile. 2.5X growth gets you to the median. Anything less than 2.5X growth means people are usually not interested in investing.

2. GROSS MARGINS. You can go higher, but anything above 70% is completely acceptable as a gross margin number. This is the minimum you need to be regarded as a SaaS company.

3. RETAINED REVENUE. Revenue from existing customers year-on-year should be in the range of 125-130%. So even after churn (let’s say you lose some business), your existing (sticky) customers are able to give you incremental revenue.

4. MAGIC NUMBER. Incremental recurring revenue divided by sales & marketing cost. For example, if you spend $1 on sales & marketing in Q1 and generate $2 of ARR in Q2, your magic number ratio is 2.
   
   So as long as you’re adding incremental revenue every year and if your incremental revenue > sales costs, it doesn’t matter if you’re losing money (if you’re breaking even on accounts in less than 1-1.5 years).

If you’re going to raise money, the 2 other biggest variables investors look at are:

1. SaaS pricing functionA couple of models here could are:

   1. Product configurator platform: number of products the client is using on your platform.

   2. Vertical use-case platform: dependent on the number of functional tasks completed (JTBD). For example, in the case of lending APIs, this number could be the number of loans approved.

   One-time implementation fee is considered lumpy, one-time revenue and doesn’t give the SaaS company at hand a lot of credit.

2. Addressable market: let’s say you have a customer, Mr. X, that gives you $1MN over its lifetime. VC investors want to figure how many of such Mr. X are there and ensure they can at least build a $50MN to $100MN revenue line.

Points to note for early-stage SaaS companies:

1. Can we raise money or should we raise money? I feel the company needs to have a clear path where they know to sell in their current markets and have a plan on how to scale. To this whole debate about: can you sell in India, can you sell in the US, or can you sell in Europe, I think you have to win markets that are adjacent first or you have to pivot entirely to the US from the get-go.

2. Indian companies are usually great at the product but fall behind in selling. Most Indian SaaS companies are going after SMBs — don’t get me wrong — that market is good but churn is very high so it’s very hard to grow beyond a point because you keep losing a lot of revenue. Enterprise is really where the markets at. Most Indian companies struggle with a disciplined enterprise sales process (10 different decision-makers, complex sales cycles, pilots or PoCs, etc).

3. Focus on recurring revenue. For companies with little recurring revenue, investors feel it’s still like a one-time sales business. And they may fund that, but they won’t give it the same multiple.