Key Metrics for Early Stage SaaS Success

Question: How much time does a VC spend on one Pitch Deck? 1 week, 1 day, 1 hour, or even shorter?

The answer will be revealed at the end of this blog, so keep reading :)

According to TechCrunch, VCs spend most of the reading time on the financials, team, and competition part of the deck. It is thus crucial for SaaS startups to be clear and concise on their key metrics. Unfortunately, less than 60% of slide decks include a meaningful slide for financials, according to Slidebean. These metrics not only highlight growth, sustainability, and competitive advantage, but can also make or break your opportunity for a crucial first call. 

Any business in its absolute fundamentals boils down to three things: getting customers, keeping customers, and making customers pay. In this logic, we’d like to compile some of the most crucial and most used metrics for early-stage startups, so there is no cold sweat when VCs drill down on those numbers before handing you those muti-figure checks. 

Customer Acquisition:

A robust customer acquisition strategy is vital for a promising SaaS venture. Essential metrics include:

• CAC (customer acquisition cost) measures the cost of acquiring new customers and is an important metric to track customer profitability and sales efficiency.

• Fully loaded CAC total acquisition cost should include ALL expenses associated with acquiring new customers, including marketing spending, salary of S&M personnel, overhead associated with S&M, tools and platforms…

• Compared to fully loaded CAC, Blended CAC only look at direct cost/variable cost such as S&M spending, or payment to an agency who is running your market campaign 

Overtime, you should be able to see CAC reducing then stabilising thanks to improved efficiency in your S&M, and building of the brand that leads to more organic customer acquisition.  

• CAC payback period tells you how long it takes to earn back the money spend on acquiring a new customer

CAC is often used in conjunction with other KPIs, one frequently used combination is CLTV / CAC (see below)

• CLTV (customer lifetime value)

• CLTV is the average revenue you can generate from a customer over the entire lifetime of their account, or before they churn.

• CLTV / CAC tells how profitable a customer will be over their lifetime. Although the benchmark for a “good” CLTV / CAC varies depending on the business and industry, as a rule of thumb, between 3 and 5 can be considered good. While a higher value is generally considered better, a ratio too high (>5) indicates that the company is not aggressive enough in customer acquisition, and as a result, is not growing to its full potential. It is also worth pointing out, just as any other metric, CLTV / CAC should not be used on its own as a signal for changing strategy, a low ratio does not necessarily mean an inefficient customer acquisition effort, factors inherent to the nature of your business such as COGS and customer lifetime could also lead to a low ratio.

• Magic Number measures the result for every S&M dollar spent and helps to understand how much your business is growing relative to its marketing spend.

• Magic Number measures the result for every S&M dollar spent and helps to understand how much the business is growing relative to its marketing spend.

• A magic number of 0.75 is often used as a green light threshold to invest further on S&M efforts, while anything below 0.75 should serve as a flag to re-evaluate your marketing spending and fundamentals such as product-market fit and business model (source). However, to land on your final decision on a future marketing plan, you will also need to consider other aspects such as gross margin, cash runway and retention.

• Conversion Rate

• Conversion rate measures the company’s ability to convert qualified leads to actual sales. It shows how successful the sale funnels are in identifying and targeting the right audience.

Customer Retention:

SaaS startups need to focus on customer retention. Key retention metrics include:

• Churn rate is crucial to understand the health and stickiness of a business, you can refer to the article by Yannick Oswald on why investors are obsessed with churn :) 

• Logo Churn

• Dollar Churn measures the absolute amount lost due to either cancellation or downgrading of subscription plans in a given period, often monthly or yearly

• Gross and Net revenue retention

• GRR is the percentage of recurring revenue retained from existing customers in a certain period, excluding any new / expansion revenue

• NRR is the recurring dollar amount retained and includes expansion

• NRR tells a more complete story than GRR and should be tracked at cohort level. For a successful business, NRR is likely to exceed 100%

Business Growth:

Metrics for business growth provide a view of economic health and scalability:

• ARPU (Average revenue per user) measures the average revenue the business can get from a customer, averaging of paying and non-paying users and across pricing plans

• It is a vital metric, especially for subscription based companies to understand their financial potential and to benchmark themselves against competitors. A too low ARPU might reveal problems in one or more of the aspects: sales and marketing efficiency, pricing strategy, and strategic focus on low value vs high value customers. 

• MRR (Monthly recurring revenue) & ARR (Annual recurring revenue)

• Variations: Upsell xRR (increase in xRR due to current customer switching to more expensive pricing plan), Downsell xRR (opposite of Upsell xRR); New xRR (increase in xRR due to new customer acquired), renewal xRR (increase xRR due to current customer renewing subscription); Churn xRR…

• MRR & ARR measure the recurring revenue normalised into a monthly / yearly amount.

• Annualised Run Rate (last month’s revenue * 12) is a metric that quantifies the scale of fast growing businesses whose past revenue figure is not representative. Make sure you understand the difference between annualised run rate and annual recurring revenue, as their acronym names can lead to confusions sometimes…

• Burn rate is the speed at which an unprofitable company consumes its cash reserves. Cash runway means how many months can sustain its operations without raising new capital.

• Always manage your cash runway and track your annual budgets, that’s a startup CEO’s No.1 job.

And now is the time to reveal the answer to the question at the beginning: less than 3 minutes, on average, per pitch deck, as highlighted in the research by Docusend. 

Having a good understanding of these metrics will not only allow you to speak ‘VC language’ and be precise and to-the-point when talking to potential investors, but will also guide your thinking when performing internal analysis to get a feel of your business performance. They enable you to benchmark your SaaS business against industry peers, spotlight areas ripe for optimization, and steer strategic decisions based on data-driven insights. As you track and improve these metrics, not only do you improve your business as a whole, but also make it more attractive to potential investors.