6 SaaS Metric Frameworks & Benchmarks To Know Before Fundraising
The majority of SaaS Investors uses the same metric frameworks and benchmarks to quickly assess the fundamentals of a SaaS company. This is why it can be interesting to know and understand them before you start fundraising.
1- These benchmarks and frameworks mostly apply to “VC compatible” SaaS. It doesn’t mean that you can’t build a fantastic SaaS business if you don’t hit these milestones nor that you need to fundraise to reach these numbers.
2- At early stage your metrics can fluctuate from one month to the other and some metrics (like LTV, churn or CAC) can take months / years before they stabilize (once you found your first product market fit). As a consequence be also cautious when you calculate the various ratios covered in the rest of the post when you’re really early stage.
3- If you want to understand better what it takes to raise depending your company stage I suggest you to read Christoph’s SaaS Napkin.
Here are 6 metric frameworks and benchmarks commonly used in the VC world.
1- Revenue growth: the T2D3 framework
When it comes to revenue growth the T2D3 framework is probably the most popular among SaaS VCs. T2D3 stands for ‘triple, triple, double, double, double” applied to your ‘end of the year’ ARR.
The rationale behind this framework is to show what it takes to grow your revenue from $1M — $2M to around $100M ARR in 6–7 years (which is what fast growing SaaS companies achieve).
Obviously the vast majority of SaaS startups will never reach this level of growth and that’s completely fine. But know that if you talk to “traditional” SaaS VCs, they’ll probably ask themselves: “Does this company have the potential to T2D3?”.
Bessemer also shared a revenue growth benchmark along those lines:
- The SaaS Adventure (where the term T2D3 was first coined)
- How fast is fast enough? By Christoph Janz.
2- Revenue Growth efficiency: SaaS Quick Ratio
Growing your revenue fast is great but the majority of people in the SaaS industry knows that high churn and lack of account expansion can kill even the fastest growing companies. If you grow fast but don’t manage to keep your customers it’ll be extremely complicated to scale.
This is where the SaaS Quick Ratio comes in handy.
SaaS Quick Ratio = (New MRR + Expansion MRR) / (Churned MRR + Contraction MRR)
A SaaS Quick Ratio superior to 4 will excite VCs, between 2 and 4 a bit less but still ok and below 2 it won’t interest them.
- SaaS Quick Ratio: How efficient is your growth? — awesome explanatory post by Chartmogul.
- The SaaS Quick Ratio by Mamoon Hamid (who invented it)
3- The LTV / CAC ratio
Another very commonly used ratio is the LTV / CAC one. LTV stands for Life Time Value and CAC for Customer Acquisition Cost.
VCs expect that a customer generates at least 3 times what it cost you to acquire him (it’s a minimum).
As you can see on the diagram below, this ratio mixes many aspects from sales and marketing efficiency to your ability to keep users (linked to product quality and customer support). As a consequence there are many ways to optimize this ratio and just looking at the “raw result” won’t give you much insights.
Also worth mentioning in this section is the CAC Payback time by customer segment shared by Bessemer:
4- Churn Benchmark
Churn is one of the most covered and analyzed SaaS metric on the internet so I won’t go into details here but just share this table by Tomasz Tunguz:
You can probably be even more demanding for the Enterprise segment and expect a 0–0.5% monthly customer churn (and you generally measure Enterprise churn on a yearly basis rather than monthy).
- SaaS Metrics: Benchmarking Your Churn Rates by myself :-)
- The Maximum Viable Churn Rate For A Startup by Tomasz Tunguz
5- The 40% Rule
It’s a framework that I personally don’t use but it might be useful for later stage companies:
Quoting Brad Feld:
“The 40% rule is that your growth rate + your profit should add up to 40%. So, if you are growing at 20%, you should be generating a profit of 20%. If you are growing at 40%, you should be generating a 0% profit. If you are growing at 50%, you can lose 10%. If you are doing better than the 40% rule, that’s awesome.”
6- What about product related metrics?
There’s no, to my knowledge at least, widely accepted product related metric frameworks or benchmarks simply because there’s a wide variety of SaaS products. Communication tools like Slack require a high percentage of daily active users while a security monitoring tool like Sqreen doesn’t (it keeps your back safe and will show up when it’s really important).
As Mamoon explains in his SaaSTr presentation, the most important is to find YOUR “North Star”:
To finish this section on product metrics, when you go in fundraising mode you probably won’t escape sharing user retention cohorts as well as daily / weekly / monthly active users.
As usual don’t hesitate to leave a comment and to share with me the frameworks / benchmarks I missed.