SaaS Startup Health — The Four Vital Signs
This spring, Vertex US hosted a SaaS roundtable with our friends at Scale Venture Partners (Scale), including Dale Chang, Operating Partner at Scale, and Jeremy Kaufmann, Principal at Scale. Over breakfast, founders and top executives gathered virtually for a lively discussion as Dale presented “The Four Vital Signs For SaaS,” simple, key metrics for measuring the health of a SaaS startup. In addition to formulas for calculating each metric, Dale also shared key tips for how to best present these numbers to VCs when the time comes.
Of the many metrics available to share, here are the top four categories that investors value most:
Growth
To determine growth, start by calculating the instantaneous compound annual growth rate (iCAGR), which is a signature Scale metric. iCAGR reflects how fast your company is growing right now. It’s the annualized measure of growth of your net new ARR vs. your ending ARR and is a leading indicator of future growth. Where standard compound annual growth rate formulas can mask recent slowdowns for early-stage companies, iCAGR reflects changes in recent growth. (For a deeper dive, check out Jeremy Kaufman’s article, “The Growth Rate Mirage.”)
If your company doesn’t have a full year of data, iCAGR is crucial because the correlation between it and forward ARR is strong. Note that iCAGR does drop pretty dramatically from 5M to 10M to 15M.
Sales Efficiency
Sales efficiency is a metric that isn’t dependent on the size of your company; it’s fairly consistent over 1–3M and over time. Net sales efficiency is the measurement of the efficiency of your entire GTM engine, including customer churn. Measuring this metric at a company level is great (anything more specific than that is going above and beyond). Early on, net sales efficiency will be your focus, however, later, somewhere around 5M, you can bring the “magic number” into play. Net sales efficiency will give a picture of how efficient your company is right now, while the magic number will look backward.
Churn
In determining churn, start with defining your annualized net retention, which is an annualized measure of your customer churn, including upsell or expansion. Bear in mind that there’s a difference between renewal rate and retention. Your renewal rate tells you how many customers re-signed at their contract’s end, while retention displays how well your company’s holding on to customers that signed up during that same timeframe. It’s also worth noting that companies whose subscription terms are less than a year (insurance companies, for example, which often run on 6-month terms) don’t fit well into this framework.
Burn Rate
Get a picture of your burn rate by finding your operating margin, a generally accepted accounting principle (GAAP) measure that’s used to determine net cash burn. Managing your company’s burn rate is how you ensure you have enough runway available to reach your goals.
Time to Present
When presenting these numbers, you’ll want to include financial statements (income statement, balance sheet, and cashflow). Beyond centering the right metrics, don’t underestimate the importance of building a strong financial metrics pack for your quarterly reporting deck. Dale emphasized that a solid pack can help ensure both the board and your organization are on the same page. Be sure to — at least — include the following slides:
- Key KPIs — Tell the story from the first slide
- ARR Budget vs. Actual, last quarter and year to date
- GAAP P&L and Cash — budget vs. actual, quarter and year to date
- ARR forecast next quarter with detail
- “Behind the ARR” — Give details on what happened, include key revenue issues
Thanks to all who attended and to Dale and Jeremy for their expertise! Read more on Scale and the metrics that defined the Four Vital Signs here. Have additional questions? Reach out to the Vertex US team here.
