The 7 Metrics that Best Communicate SaaS Startup Success to Investors
I had an opportunity to talk with Paul Singh when he and his partner Dana Duncan came through Knoxville, TN as part of their company Results Junkies’ North American Tech Tour.
I asked Paul questions about reasonable valuations for seed rounds, and what makes a startup compelling to early investors. The result of that conversation was:
- the 7 most important metrics SaaS startup CEOs should be leading with in their discussions with Angel investors;
- the best resources I found for calculating each of those critical metrics;
- closing with a blueprint summary at the end of this post that puts all those stats together into your (tallish building) elevator pitch.
Now let’s get to the metrics.
1. Lead with Your Traction
There were several discrete lessons that I gleaned from our conversation, but the biggest was: lead with your traction.
Regardless of what service you’re offering, what industry you’re attempting to disrupt, or how hot your market niche is, there’s nothing quite so rare or sexy as proving your product market fit with decent traction.
Intellectually, I knew that was true before our conversation. But I didn’t fully comprehend how true it is. If you have 4 or 5 figure MRR (monthly recurring revenue) as a SaaS startup in a reasonably exciting niche, that’s something to shout from the rooftops!
Moreover, you can even spice up your traction by talking about it in terms of what ARR (annual recurring revenue) you can assume from your MRR. Hey, that’s a bigger number, and you have permission to use it! Sweet!
Don’t wait to shout it until you’ve gotten most of the way through your pitch. Recurring revenue traction instantly differentiates you and grabs your prospective investor’s attention.
And, if you already have brought in some investments for your current round, include that in your up-front pitch, too.
So, the first words out of your mouth when meeting an investor who you want to impress should be something like this:
“Hi Paul, Smart RIA is a fintech SaaS startup with $100k in ARR in our first year of revenue, and we have in the first $225k of our $500k seed round.”
Solid Metrics Make Recurring Revenue Even Sexier
In addition to that little tidbit of information, Paul shared a set of metrics with me that are truly compelling to investors. You’ve seen them all before, but they’re important, and it’s useful to you to be able to know them up front.
I knew these stats, but in a squishy sort of way. I certainly couldn’t confidently spout them out on demand. But with my mistake comes this post, so now you can be prepared!
After talking with Paul, I sorted through a metric shit ton of blog posts and other references to find what I thought were the best resources for calculating the metrics he recommended. I’ll list those resources under each metric below.
2. LTV (Customer Lifetime Value)
After leading with your recurring revenue, be prepared to follow that with your CLTV.
My favorite CLTV resource was from this article by David Skok. I recommend reading it, but if you’re an immediate gratification sort, click here to download the CLTV calculator spreadsheet. It offers 3 different models for making the calculation. I found the 2nd tab, “Real World Calculation”, to be the most clearly explained and its calculation the best for our startup.
3. CAC (Customer Acquisition Cost)
CAC is the simplest of the metrics to calculate, but it’s incredibly important to track and get right. Here’s a great blog post about CAC, including a spreadsheet that you can customize a bit to make its cost structure match your own.
4. CAC to LTV
No brainer here: to have a prayer of survival, your startup must spend considerably less to acquire your customers than you’ll earn from the lifetime value of your customers.
Investors like to see a CAC to CLTV ratio of 1-to-8 or better, and ideally, it’s continuously getting better.
5. Churn Rate
Churn rate is the percentage of your customers who leave over a month, year, or whatever time period. Right? Turns out it’s a lot more complicated than that. I had a hard time finding a resource that I liked, but this article on acceptable SaaS churn rates does a great job of explaining why it’s important, while this article offers a simple approach to calculating churn rate (after telling you there are at least 43 publicly used models to calculate churn — ack!).
6. Negative Churn, or Account Expansion
Account Expansion (the smiling, dimpled twin of the more angst-ridden term Negative Churn) is the percent of your revenue in a given period that comes from increasing revenue from existing customers. Here’s a great article on Account Expansion.
Account expansion is your friend! It helps to negate your churn rate, and solid AE is a great indicator of a healthy SaaS company.
7. Month Over Month MRR Growth Rate
You don’t need a spreadsheet for this statistic — your phone or laptop calculator should be able to produce it very easily. Here is my favorite resource for calculating MoM MRR Growth. Use the “Compound Annual Growth Rate” method, about mid-way down the page. But instead of years, you’ll use months.
A Comment on Early Stage Metrics
Be aware that many SaaS metrics are fairly meaningless when you’ve only been in existence for a year or less. For example, MoM MMR growth is always seriously kickin’ when your year started at $0.00!
I actively combat this issue with an additional metric shit ton of research effort, looking for typical values for the SaaS metrics we’ve discussed here, then use them as assumptions for my company.
Hopefully, this can help you let an investor know you’re aware your current 0% churn rate, for example, is not expected to last forever, but it’s a great indicator of your ability to deliver a great product with solid product/market fit.
That’s it for the most important metrics. Now let’s conclude by putting them together into a SaaS metrics elevator pitch.
Your SaaS Metrics Elevator Pitch Blueprint
Spending some time to understand and calculate these SaaS metrics, and then keeping them always in mind as you make decisions for your startup, is a powerful exercise that I have benefitted from personally, and I’m certain you will too, if you aren’t already doing this.
Plus, you’ll be able to spout off some really exciting stats that just might stop an investor long enough to have a real conversation.
Here’s the blueprint:
[Startup] is a [5-word description] with $[X]k in ARR since first revenue in [date], and [short details of your round, if you have anything good to report]. Our CAC is [X] and LTV is [X], at a [X] to [X] ratio. Our churn is [X]%, we’re expanding existing accounts [X]%, and we’re growing MRR at [X]% month over month, on average, since [date].”
Ultimately, these are my thoughts on the words of someone who has been there, done that. If you like the things I shared here, be sure to follow Paul Singh at @paulsingh and sign up for his and Dana Duncan’s blog updates at https://www.resultsjunkies.com/posts/.