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Laura Lenz, Partner at OMERS Ventures, sat down with SAAS NORTH marketing partner, Riaz Sidi of Sidi.io to discuss SaaS metrics that will help grow your business. Laura will be speaking at SAAS NORTH NOW, on September 9-10, to further discuss these important metrics.
“Revenue per employee is a very important metric because the employee in the SaaS company represents the majority of the company’s performance,” said Lenz during the interview. “Understanding how much revenue you can drive from each employee in your business is a really important metric to look at.”
Lenz explained that it’s recommend that you look at:
“KeyBank put out a report in 2019 that said that the median revenue per employee for companies generating more than 500 million in ARR (Annual Recurring Revenue) is about 135,000,” Lenz said. “So I look to companies that are generating revenue per employee greater than that number to show that they’re in the top percentile.”
“Often LTV (Customer Lifetime Value) and CAC (Customer Acquisition Cost) can be a general number,” Lenz advised. “So you really need to understand what the calculations are that go into LTV and CAC to ensure that it is a fully burdened CAC number.”
A good LTV to CAC ratio should be 3:1. The value of a customer should be three times more than the cost of acquiring them. If your ratio is close to 1:1, you’re spending too much. If it’s 5:1, you’re spending too little. This is a key factor when it comes to maintaining your SaaS company’s growth rate.
However, Lenz advised that if you’re putting in customer support and implementation as part of your CAC cost, it’s not a true LTV to CAC ratio because you can over inflate the number.
“In terms of other metrics SaaS companies should be looking at, we talk about the rule of 40,” Lenz said. “So with revenue growth, oftentimes you can’t grow quickly and be profitable. So we are willing to sacrifice a little bit of profitability if you’re growing very quickly.”
Net dollar retention is an important metric because it tells you what percent of revenue from current customers you retained from the prior year; after accounting for upgrades, downgrades, and churn.
“So you want to have net dollar retention greater than 125 per cent,” she explained. “This is how much more revenue you can get from your existing customer base – which of course decreases your CAC overtime.”
“How much capital are you spending?” Lenz asked. “How much cash are you spending in a year to bring in additional new ARR? That ratio should be less than 1X.”
To figure out how much you’re spending there’s two simple ways to measure capital efficiency:
The last metric Lenz said they are looking at is churn. Because SaaS churn is the percentage rate at which SaaS customers cancel their recurring revenue subscriptions, it can be stated as the number of customers cancelling (ΔC) per time interval (Δt) divided by the number of customers at the beginning of the interval (C). Lenz recommends that your annual churn should be less than 5 per cent.
“The longer we’re in a bull-market, the further and further away we move from true financial metrics – I might even say we move towards unrealistic and inappropriate metrics,” she said. “You’ve seen companies that have looked at the number of eyeballs, number of users on a platform, you’ve seen communities adjusted to the dot as a metric. These aren’t true metics we should be looking at long term. I think what is important is velocity, profitability and capital efficiency – and those should be measured in many different ways.”
Lenz explained that due to COVID-19, she thinks companies need to focus on three areas: velocity, profitability and capital efficiency, to determine whether or not they are well positioned for fundraising in this current environment.
“In this environment, VCs are looking for a longer cash runway,” she said. “So they’re looking for 18-24 months of cash runway, and are relying more and more heavily on investors who are already on the CAC table. If you do have best in class metrics then you will be able to raise capital and in this portfolio itself.”
Lenz explained that some companies have been able to raise their capital 12-15X, but unfortunately that’s not happening for everybody right now. Those who don’t have the best in class metrics – or who don’t have the proper revenue – have to make sacrifices so they can still maintain their business during COVID-19.
“Some companies that didn’t have those best in class metrics had started to see structures in their legal documents that hadn’t been seen in 10 years: pay to play provisions, full ratchets on price protections – kinds of structure that hadn’t been in place for quite a while”.
Since the outbreak of COVID-19, a lot of businesses have had to pivot their model into digitization.
Lenz said, during the interview, that due to the need of maintaining physical distance, she believes that a lot of companies will look for ways to make this work for their businesses. For example: the food delivery industry has accelerated very quickly because people want food in their homes, but they don’t want to go to the grocery store. Because of this, there’s been an adoption curve for online delivery, food and meal kits.
“I think there’s a massive pressure for automation wherever there is a close proximity business – so that could be retail, restaurants, manufacturing or food processing plants.” she said. “I think that we’re also seeing a massive acceleration in adoption of ecommerce, and so any solutions that are able to facilitate payments online and build trust online will see good success coming out of COVID.”
It’s important to figure out how to measure your revenue properly, which strategies you can implement and of course how you approach the new opportunities for growth for your business. So you want to make sure that if you’re a SaaS founder that you have support from your existing investors because they will provide great reference calls. Founders should also expect softing in valuations as VCs price additional risk and uncertainty.
Overall, VCs are looking at three main metrics when it comes to investing in SaaS companies: velocity, profitability and capital efficiency – as well as SaaS companies who have opportunities for growth and can prove it during the pandemic. If you follow those main metrics and implement the strategies mentioned, investors will be knocking at your door in no time.