If you don’t prepare ahead of time, you could get stuck not producing the key SaaS metrics that investors want to see when they’re considering whether to invest in your next round. Not preparing the right SaaS metrics by venture stage for your VCs can ultimately reduce valuation, or even kill your fund raise.
In this post, we’re going to share some powerful insights into the SaaS metrics investors want to see from SaaS start-ups depending on their stage. These recommendations are shared by fellow SaaS finance leaders and their investors, who participated in several conversations at the inaugural Modern SaaS Finance Summit during SaaStr in February 2019. We’ve created this simple guide for finance leaders by introducing the key objective with each stage of the company, what it means, how to measure it, how the finance team plays a role, and the processes that must be built to make this objective successful.
Our former board member, Jeff Epstein, operating partner at Bessemer Venture Partners, discussed the use of funds and key measures you need to focus on to get to the next stage. Similarly, several finance leaders who have successfully guided their companies through growth, discussed how they scaled the people, process, and technology, including using Sage Intacct, to prepare for each stage on the journey to $100 million and beyond.
We will be having another Modern SaaS Finance Summit in NYC on May 16 and encourage you to join us to learn how you can apply these principles to your SaaS start-up.
1.Seed: Prove SaaS Product/SaaS Market fit
What it means: Secure and serve those first 10 ecstatic customers. You want 10 evangelists more than you want 100 customers that use your product, but wouldn’t advocate for it.
Key Metric: Cash management is the lifeblood for early stage companies. Don’t run out of cash before you figure out your market.
Finance’s responsibility: In this case, it isn’t even done by finance. It’s done by the outsourced bookkeeper, who pays bills out of the shoe-box.
Processes: Keep it simple in just paying bills and collecting cash in a simple bookkeeping program.
2.Series A: Prove the SaaS Revenue Model
What it means: Seventy-five percent of the sales team is meeting quota, and you’re driving yearly revenue at triple growth year over year.
Key Metric: Hone your product’s unit economics. In general, you’re looking for a CAC payback of less than two years, unless CLTV is high.
Finance’s responsibility: Hire a determined and hungry finance expert–generally at the director level—who can build processes but who’s also willing to get their hands dirty and do work.
- A good quote to cash process can increase cash-flow +20%:
- Start building this process when you begin scaling sales.
- Work with sales ops to build your first quotes.
- For high-volume billing, start with a credit card processor that can speed your cash-flow.
- For high ACV, start building a repeatable quoting process. If you build them in the Salesforce opportunity record, you can start to build consistency in your performance obligations.
- Many companies decide to graduate from QuickBooks at this stage and move to cloud financials. A native synchronization between Salesforce and financials allows the item master to be synchronized, so the billing rules and revenue recognition schedules are already known and automated.
- Operationalize financial planning and analysis:
- Shift FP&A out of the CEO’s hands and into finance’s purview.
3.Series B: Prove the SaaS Net Renewal Model
What it means: Keep the growth above 50 percent and show that your customers are coming back a second and third time.
Finance’s responsibility: Now it is time for a CFO. You need a crisp process watching over the entire customer lifecycle from the original sale to upsells, down-sells, and renewals. With this information, you’ll also need to be able to forecast.
Key Metric: Net Change in CMRR. This is a good measure because it factors in new sales, renewals, add-ons, churn, etc. Simplifying to this single measure allows you to get everyone (product, sales, customer success, and others) going after the same North Star.
- This is when you begin pressure testing a quote-to-cash process that can scale, which can reduce churn by up to -5%:
- Most businesses with land-and-expand or high-annual-contract-value (ACV) models put in a configure-price-quote (CPQ) solution at this time to start bundling products and services, to handle multi-element arrangements, and to document the performance obligations, both explicit and implicit, that ASC 606 requires you to know.
- When a finance team builds the quote, and volumes are high enough, there’s now a need to automate it. Out-of-the-box integration with Salesforce takes the pressure off having to manage a complex integration and links the item master records out of the Salesforce contract into the financial system.
- When the quoting process is automated, finance can also automate billing with all the myriad options it wants to offer customers to create the most value and maximize monetization.
- A finance team can then automate the revenue recognition against all of these. Revenue recognition takes its own chapter, or its own book, or its own 796-page novel. If you want to know more about ASC 606, click here.
- Now there is a crucial distinction: The SaaS 1.0 and 2.0 business models ran on orders, but ASC 606 and subscription businesses now center around contracts to govern customer financial relationships and lifecycle. You need to know the contract term, the performance obligations, and how that impacts all of the upsells and renewals. The old suite-based systems based on orders have to cobble together a complicated set of revenue arrangements and make reporting a nightmare, defeating the whole purpose of automating to be able to report.
4.Series C-F: Grow to $100M in SaaS Gross Profit—not SaaS Revenue!
What it means: A company’s objective at this stage is to grow more than 40 percent with a repeatable process for getting product made, sold, and supported. That way, a company builds an efficient, profitable machine. Teams should track profit and not revenues because some business models are low margin, such as some examples we see in the sharing economy.
Key Metric: Gross Margin
- The systems teams are refined overtime and there’s more operational rigor at this stage. This can increase EBITDA +10%:
- Tightening the close to get data to the FP&A team much faster.
- Deepening cohort analysis in FP&A.
- Measuring complex metrics get more nuanced when analyzing cohorts, such as gross revenue churn vs. net revenue churn vs. logo churn
- At this stage, we see treasury management becoming a priority, which includes building the rigor, controls, and compliance for public company reporting becomes very important.
5.Sale or IPO: Expand the SaaS Product Line or Go Global
What it means: Move what has worked to adjacent product markets and geographies, both organically and inorganically.
Key Metric: Capital Efficiency. How well are you doing on EBITDA and FCF margin?
- Measure and build a system to increase the average revenue per customer
- Increase the number of product lines used per customer
- Foreign exchange – track the exposure to gross profit
- SOX – you need the controls in place to show adequate governance for your financial systems
In summary, the Modern SaaS Finance Summit gave many SaaS leaders the opportunity to collaborate amongst peers and to learn from each other’s experiences when growing a SaaS company to $100 million. We hope these insights guide you in the choices you make to grow your SaaS business and prepare for what you need to do at the next round of VC funding. Click here to learn more stories about your peers.
If you’re a SaaS company and would like to discuss SaaS metrics for VC funding, please contact us. We’re glad to help.