SaaS Metrics That Matter Most to Investors at Each Funding Stage
Business leaders and investors have the same goal: to generate profits using a well-defined business strategy. However, the metrics that investors and business leaders use to determine if a business is successful can differ.
For early-stage SaaS companies, understanding this difference can help guide funding and business growth. While there are many metrics that investors use to gauge the worthiness of a potential investment, business leaders should be aware of the most common metrics investors use so they can maintain strong investor relations through numerous funding stages.
5 Common Metrics Investors Use to Determine if a Company Is Worth Investing In
1. Annual Recurring Revenue
Many SaaS companies offer their services to their customers on a yearly subscription basis. This makes it easy for business leaders to use a metric like committed annual recurring revenue (ARR) to measure how much the company is expected to earn from subscriptions within a year. This metric represents the committed amount of customer revenue in a given forward-looking one-year period. ARR is used by many SaaS companies because their software is delivered continuously throughout contracts that last at least yearly. It is critical that every business leader who communicates with investors become intimately familiar with the metric.
2. Net Revenue Retention
Net Revenue Retention (NRR) is often cited as the gold standard to measure whether the growth experienced by an early-stage SaaS company is sustainable. NRR refers to the recurring revenue that is retained from existing revenue streams over time. This metric allows businesses to view how subscriptions generate revenue over time and how it may have been impacted by factors like churn, upgrades, or downgrades.
3. Customer Acquisition Cost
It is often said that one has to spend money to make money. This spending, while necessary, should always be tracked and measured against revenue to ensure responsible spending of usually stretched budgets. Customer acquisition cost (CAC) is the metric that highlights how much money is spent to acquire a single customer. This can then be scaled to analyze the effectiveness of marketing efforts in converting potential customers to paying ones.
4. Lifetime Value
CAC is often used in conjunction with the lifetime value of an SaaS customer. The lifetime value of a customer (CLV) is defined as the revenue that they generate for the business over the course of their relationship with the company. For a business to become successful, it should aim for the CLV to consistently be higher than the CAC.
5. Burn Multiple
The Burn Multiple refers to the amount of money a business spends to generate each incremental dollar of ARR. The higher the Burn Multiple, the more a company is spending to create revenue growth. This metric can also be used to gauge where a business is in their growth journey and the pace of their growth.
How the Needs of Investors and Companies Change Across Funding Stages
This stage of funding occurs at the extremely early stages of a SaaS company’s development. Pre-Seed funding is often used to develop early beta versions of software offerings. As such, investors look for basic metrics such as funding needs, predicted business costs, and projected revenue that demonstrate a well-considered plan from business leaders. At this stage, it is more important for businesses to have a strong proof of concept that instills confidence in otherwise wary investors.
During the seed funding stage, business leaders often approach venture capitalists and angel investors to procure funding to acquire talent, purchase equipment, and prepare the product for eventual rollout. At this stage, investors are looking to evaluate their addressable market size, business valuations, and earning estimates. Business leaders can use ARR and the Burn Multiple to decide if the user base is stable enough to focus on growth and scale operations.
Series A–E Funding
While each series of alphabetized funding is unique in its own way, the entire series is intended to procure funding for growth and scaling. During these stages, NRR can help to assure investors that the growth experienced by a business is organic and highly sustainable. Metrics such as CAC and CLV can then be used to optimize growth processes and evaluate the effectiveness of marketing efforts as business needs change.
Initial Public Offering (IPO)
Many SaaS business leaders aim to reach the IPO stage of funding their operation and continuous growth. Investors at this stage are often evaluating a wide range of factors and metrics that have been generated over the course of the business’ growth cycle. As the variance in public SaaS company valuations reduces significantly, there is much less likelihood of inflated growth and valuations that rely on short-term metrics. SaaS companies are now under pressure to collect, organize, and present long-term business and financial data to potential investors. This pressure will only grow as the SaaS market becomes more saturated and less diverse.
How to Use Technology to Accurately Collect and Share This Data with Investors
SaaS businesses have a significant advantage over other startups because they can easily collect and consolidate operational and financial data. However, as businesses collect, store, and analyze vast amounts of data, it is important that business leaders keep a close eye on the metrics that matter the most to their investors across different funding stages.
To find out how Place can help you effectively collect and share important financial data with internal and external stakeholders, schedule a demo with us today. If you found this article helpful, please share it on social media.