Vital Metrics to measure while fundraising for SaaS Companies

If you are at an early stage of planning to fundraise, this might help you get your house in order before a VC comes knocking with questions.

These metrics are the heartbeat of your business. You do not want to be considering these metrics for the first time when you get a query about them from a potential investor.

* MMR Build

How quickly you’ve gotten there

The rate at which you’re adding to it

The rate at which you’re losing it

This is the trail that shows how you’ve become the company that you are today. Ultimately, your valuation and the amount that you’re able to raise will be calculated from a combination of:

* Gross Churn

Of all the committed revenue you had last period, how much walked out the door this period? Do the same on a customer count basis.

Gross MRR Churn = Churned MRR / BOP MRR

Gross Customer Churn = Churned Customers / BOP Customers

* Net Churn

Of all the committed revenue you had last period, how much walked out the door this period net of upsells?

Net MRR Churn: (Churned MRR - Expansion MRR) / BOP MRR

* Cohort Retention it’s a blended average of all customers at different points in their lifecycle.

For every rupee that starts today, how many rupees do you have 6 months later, one year later, and so on?

* Cost of Acquiring a customer (CAC)

Calculation: (total $ spent on S&M) / (total new customers)

* Customer Lifetime Value (LTV)

Calculation: ARPA / Gross MRR Churn

* Contribution Margin:

Calculation: (LTV x GP Margin) - CAC

* Payback Period (Time is taken for you to recover your CAC)

Calculation: CAC / (ARPA * GP Margin)

* Sales Funnel

What % of your pipeline are you closing and how long is the average sales cycle? This will be a good indicator of how quickly you’ll be able to scale the sales team and have them contribute to the business.

* Sales customer economics

Do you see any variance in the size of the deals and/or in churn? The answer to both of these should be yes.

* Available Pipeline

This is a leading indicator of future performance and your ability to scale the sales team.

* Payback Period

This will illustrate how quickly you recuperate your spend on your sales team. The calculation is as follows:

Payback period [in months] = 1 / ( (New ARR in period) / (Total sales spend [base + variable + overhead] in period) ) * 12

* Magic Number

The magic number is a quick and easy way to effectively summarize your overall spend on acquisition.

The [magic number] provides insight into the effectiveness of previous quarter Sales and Marketing spend on MRR growth. Your MN will be penalised if the spend is wasted (bad marketing, bad sales execution), if your churn is high or if the market has issues (saturation, competitive forces). It also has a very high correlation with Q/Q growth rates so in general, high Magic Numbers are good.”

(change in ARR during period) / (S&M spend in prior period)

and

Your payback period on acquisition spend (in months) = (1 / magic number ) x 12

A magic number below 1 is worrisome if you’re early stage. That means for every $1 spent on sales and marketing, you bring in <$1 in new ARR and your payback period is greater than one year. A magic number in the range of 1-1.5 typically means your spend is reasonable (although not all ARR is created equal – mind the churn!). Here you bring in over $1 of ARR for every dollar you spend on S&M, and your payback period is between 8-12 months. Greater than 1.5 and you’ll grab investors attention. It means you probably have more room to spend on S&M and grow even faster.

* Active Users

Daily, weekly, monthly active users

* Time Spend in product

Time spent in product (daily, weekly, monthly)

* Activity in product

Activity in product (this may be number of messages sent per customer per day. or transactions )

* Gross Profit Margin (GP)

Gross profit (GP) is calculated as Revenue - Cost of Goods Sold (COGS)

where COGS are the direct costs you incur in servicing your customers. You can think of COGS as the costs you would pay in hosting, support, and infrastructure if you were to stop acquiring any new customers and stop doing any product development today. Great SaaS companies have healthy GP margins at 70% or above.

* Department Spend (R&D, Sales, and Marketing, General administration)

Lay out all non COGS related spend into three buckets;

Research and Development (R&D)Sales and Marketing (S&M)General and Administrative (G&A).

The proportions of each will tell the story of where you’ve invested to build your business.

* Operational Income = Revenue - COGS - R&D - S&M - G&A

Investors are looking to see how much you’re burning on a monthly basis and how many months remain with the cash you have in the bank.

* Market Opportunity (ROI)

Can you return at least 10x on the investment you are looking for? Although this depends on the stage of the company, a simple place to start with investors is to prove to them that a 10x return on their investment is in the cards. The earlier the investment, the larger the multiple, which makes sense if you think that 20x on $5M is much different than 10x on $100M. 10x isn’t a steadfast rule, but is a good benchmark. In later stages (series D, E, etc) this multiple will come down.

For most young companies, you’ll be in a good position if you’re able to convince a VC their upside is at least 10x. This is 10x off your post-money valuation. For example, if you’re looking to raise $10M dollars, at a $50M post money valuation, you need to be able to convince investors that you can become a $500M company.

You’ll need to get creative to do this. One potential way to do this is to lay out the customer and ARPA growth needed to get to your 10x valuation. Are they reasonable? Do you realistically have some line of sight to them? Are these assumptions validated by comparable public companies?

* Projections

A detailed projection for the next 12 months with high-level assumptions applied to the next 2-3 years is a good place to start. You’ll want to project both your MRR build and your income statement.

Be prepared to talk through the assumptions used to build out these projections. These assumptions should be things that you’re able to point to with confidence, particularly the closer they are on the horizon. Also, important to note, the projections you share in this situation will most likely be what you’re measured against should the deal close.

* Customers

This is pretty straightforward, but if you know that you’re going out to fundraise, it’s best to have these prepared in advance. Investors will typically want to talk to a set of your largest paying customers – largest defined both by the amount they pay and by the reputation of the company. They’ll also ask to talk to a subset of your largest churned customers. Reaching out to these customers to get their consent is best practice.

Curated by Rinkesh Ghorasia