The SaaS Metrics That Matter At An Early Stage
At Conviction we spend a lot of time talking with founders about SaaS metrics, both before investing while we seek to understand their business better and once we’ve invested as we help founders navigate the growth journey. The problem for founders is that there’s an endless choice of metrics to choose from and they all take precious time to produce.
Before diving into the detail let’s examine why we care about SaaS metrics:
- We use SaaS metrics to provide an ‘apples to apples’ comparison with other start-ups, helping us understand what best in class really means.
- Classic accounting measures, such as revenue, are backwards looking metrics that tell you what has already happened, but some SaaS metrics try to lift the veil on the future and tell you how a company will perform.
- Finally & most importantly we genuinely believe that tracking SaaS metrics can help founders scale better as their business grows and they’re less directly involved in day to day operations.
Our Favourite SaaS Metrics
We wanted to share our favourite 7 SaaS metrics that we look at to help founders better understand how VC’s will view their business.
New Leads Growth - the top of the sales funnel gives the most forward looking view into the future performance of a business, we like to see the rate of new marketing qualified leads being added to the funnel each month grow at least as fast as revenue is forecast to grow. If new leads are stalling out it means businesses are likely to under-perform vs. budget in the coming months.
Annual ARR Growth - one of the first metrics we check when looking at any business is how fast its growing, typically around the $1m ARR mark we like to see 4x+ annual growth.
Growth Endurance - The rate at which you’d expect a business to grow naturally declines as it scales, but one of the core features we’re looking for in SaaS companies is enduring high quality growth. A good benchmark here is that the ARR growth each year should be at least 75% of the growth in the prior year. This metric is essentially a more scalable version of the old rule of thumb that Series A companies should T2D3 (triple twice, double thrice).
Net Revenue Retention - capturing how your existing customers perform in single metric Net Revenue Retention looks at how the revenue from a cohort of customers has changed over a period, we’re looking for 100%+ on this metric meaning upsells & expansions have more than outweighed any customer churn. There’s a lot of nuance behind this metric and factors like contract duration, account management approach & sales strategy all have a massive impact on upselling & churn. Net Revenue Retention works well as a high level metric, but we often find ourselves digging into a spreadsheet of monthly revenue by customer & talking to account managers to get the true picture.
Magic Number - our favourite sales efficiency focused SaaS metric the Magic Number gives a quick insight into how efficiently the sales function is performing, any score above 0.75x suggests its time to invest more into building out the sales team.
Burn Ratio - moving beyond a pure SaaS metric Burn Ratio looks at how efficiently the business is growing as a whole, typically we’ll measure this on an annual basis so its a snapshot of how efficient the business is currently running and ignores any money burnt in prior years to build the product etc. Particularly in the current market environment where belts are tightening this is a key metric to stay on top of.
Team Churn - our final favourite metric is not SaaS specific at all, but team churn within a company can often be an early warning sign that things aren’t working out, from culture to product if employees aren’t enjoying their work or feeling productive they’ll move on.
How To Deploy SaaS Metrics
Once you’ve picked what metrics to measure, both to frame how you understand your business and how you want to present it to investors, its worth bearing a few points in mind.
For the most part any SaaS metric isn’t worth an awful lot in isolation, its only by looking at how the metric evolves overtime or comparing the relative performance of different companies that they give insight. Pick what metrics you want to track & stick with them, try to understand how operational changes effect those metrics and set a target for what you want those metrics to look like.
There are some great publicly available datasets of SaaS metrics (ChartMogul, KeyBanc SaaS Survey, SaaS Capital, Capchase) and you can always ask you current investors for benchmarks.
At Conviction we’re always up for a discussion of SaaS metrics and if you’re a B2B SaaS company looking to raise a Late Seed or Series A round and think your metrics will get us exited then get in touch!
