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:
- 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.
- 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.
- 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.
- 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:
- SaaS pricing functionA couple of models here could are:
- Product configurator platform: number of products the client is using on your platform.
- 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.
- 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:
- 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.
- 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).
- 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.