Before the investors start moving to the next round of investments, they want to see specific metrics. If you don’t prepare these metrics, your valuation can easily be reduced.
That’s why we at Consero wanted to give you an overview of the most important SaaS metrics by venture stage which is bound to improve your valuation.
We’ve compiled these metrics through our experience and with the help of other SaaS finance leaders, including private equity investors. After reading the text, you’ll know the key objective for each stage, as well as how to measure them and what they mean for your business. You’ll also learn what your finance team has to do, the processes you have to use, as well as how to do it all using Sage Intacct, which Consero has built into our tech stack.
1. Bookings – Annual contract value (ACV)
The first metric is for the very first stage where you’ve raised around $2.5 million. It’s one of the core SaaS metrics over which every operator obsesses.
At this stage you want to prove your SaaS product, you want to secure and serve the first ten happy customers. You need them more than you need 100 customers who only consumed your product.
Your most important metric is cash at this stage. That’s why cash management is the life force of all early-stage businesses. It’s essential for you to have enough money at hand until you accurately figure out the market.
You should keep it simple at this point to save money. You don’t have to hire an accounting staff, outsourcing is a great alternative to building an in-house accounting & bookkeeping team. The 3rd party outsourcing partner will build the right systems and processes to:
● Collect cash
● Pay the bills
● Implement a simple bookkeeping program
2. Committed monthly recurring revenue (CMRR) – Customer acquisition cost (CAC)
At this point you’ve raised around $6 million, some 75% of the sales team is meeting its predesigned quotas, and your yearly revenues are tripling in growth each year.
Your business is growing fast, and that’s why you need to start worrying about the product’s unit economics.
Now you need to hire real finance experts who know how to work with companies at your level and above.
You need their help as it’s time to shift some of the F&A functions out of the CEO’s hands and into the hands of the outsourced Finance as a Service experts.
There are several processes which need to be done to increase the cash flow by 20% or more:
● Many companies decide to move away from QuickBooks at this stage, and you consider doing the same if you want to keep everything synchronized and thus know and automate the billing rules and schedules for revenue recognition.
● Work with sales to build the first quotes.
● Use a credit card processor for high-volume billing to speed up the cash flow.
● Build a repeatable quoting process in Salesforce for example. It will help you create consistency in performance obligations.
3. Customer lifetime value (CLTV) – Gross and Net Churn
The 3rd stage is the one where you reach your first $10 million raised. That means that you need to keep the growth above 50% and prove that your customers are staying with you long-term, coming back once or twice, or even more.
Now is the high time to have a CFO because now you have to watch over the whole customer lifecycle and you’ll also need to use all of that information to make forecasts.
The critical metric at this stage is the net change in CMRR. It’s vital because it includes new sales, add-ons, renewals, churn, and much more. You can effectively simplify it all with the use of this single metric.
At this stage there are plenty of processes you need to worry about:
● Start testing the quote-to-cash process for scaling, which can reduce the churn by as much as 5%.
● If your finance team builds the quote and if your volumes are high enough, it’s time to automate it. With the automation in place, you can also automate billing as that comes with a wide variety of options for the customers – options that can add more value and maximize monetization.
● To start bundling products and services together and handle multi-element arrangements, most businesses at this stage opt to put in a CPQ solution (configure price quote), and you should do the same, as long as you have a land-and-expand or a high ACV model in place.
4. Cohort Analysis – Gross Margin
Once you move past $23 million raised, your primary goal becomes growing to $100 million in gross profit. You can do that by growing more than 40% with a repeatable process that includes:
● Product development
● Customer success
At this point, you can genuinely create an efficient and profitable company that operates like a well-oiled machine.
Your team now needs to track profit and not revenues, because many business models are low margin. For the same reason, your primary metric at this stage needs to be gross margin as it effectively measures how much you keep in sales revenue once the cost of goods is factored.
It’s also time for some change in your processes:
● Deepen cohort analysis in F&A.
● Tighten the close to get the data to your F&A team a lot faster than before.
● Treasury management (including rigor, compliance, and control) should now become a priority.
5. Market penetration – Earnings before interest, taxes, depreciation, and amortization (EBITDA)
You have finally crossed $75 million in raised funds, and it’s now time to expand your product line, reach new markets, and potentially time for acquisitions.
Now you need to worry about how well you’re doing with your FCF and EBITDA margins. That’s why the main metric at this stage is capital efficiency.
In the end, you’ll need to move to new processes as well:
● Create a system that will help you increase your average revenue per customer.
● Start tracking your exposure to gross profit on the foreign exchange.
● Increase the number of product lines you have for each customer.
All in all, these five metrics are the most important ones you need to worry about at each stage of your journey to reach $100 million with your SaaS company.