One of the primary challenges many SaaS and subscription businesses face is determining what metrics to track. While all B2B SaaS and subscription businesses are different, there are a handful of key metrics that most can benefit from to optimize performance, propel growth, and attract investors. We’ve outlined the metrics investors are looking at during each of the SaaS growth stages to see if you’re on track and to help you prepare for what’s ahead.
Attracting Investors: Key SaaS Metrics for Early Stage and Series A Funding
SaaS and subscription businesses in the early stage are often still trying to find their footing: they may still be determining product-market fit and may not have gained robust market traction. In addition, their financial tracking may not be fully mature. At this stage, investors are asking broader questions, including:
- Is there a market for this product?
- Can the company grow or is it beginning to grow?
They may look to metrics like CARR and CMRR growth as an indicator of market fit and to determine if that growth is steady and predictable (or at least has the potential to be.) Cash flow is a critical metric at every stage, but early-stage companies face particular challenges as they seek to cover startup and operating expenses at a time when they have very few customers. Investors may pay close attention to operational issues that drain cash flow and whether the company can cost-effectively attract enough customers to help sustain it.
While these early metrics remain important as SaaS and subscription businesses move into Series A, investors begin to dig deeper in a broader set of metrics. They may look at CAC to better understand the cost of acquiring new customers, what types of activities are driving that spend, and how high-touch those activities are (as high-touch activities like personal interaction can be more costly or challenging at scale.) They may look closely at churn to determine how long customers are staying, if customer lifetime is long enough to cover CAC payback, whether they are renewing, and what the potential impact of their behavior is on cash flow. They may also begin to look at gross margin to understand whether the business model has potential for levels of profitably that meet their expectations.
Attracting Investors: Key SaaS Metrics for Series B Funding
When SaaS and subscription businesses begin to grow and are well into Series B, they have validated product-market fit and investor dollars are focused on growing revenue engines. At this stage, investors begin to ask additional, more detailed questions that tell them more about the viability of those revenue engines, they are looking for early indicators for when they will become profitable, and just how profitable they might be, for instance:
- Is the company growing, and if so, how quickly?
- Can it scale in a rapid and predictable way?
- And also, why is the company growing? What are the primary drivers and can levers be adjusted to accelerate growth?
At this stage, some of the more telling metrics include gross margin; CLTV-to-CAC ratio; customer, gross and net revenue churn; as well as gross and net dollar retention.
Gross margins are increasingly important at this stage, and investors may want to know what gross margins are achievable. For more mature businesses, they may also look to whether gross margins have improved over time: improving margins may indicate increasing operational efficiencies and economies of scale that translate to increased revenue per customer. Digging deeper, they may want to understand the drivers behind gross margins to determine its overall health: for instance, subscriptions may drive greater gross margins than related professional services.
The CLTV-to-CAC ratio is another important metric at this stage, as the business has matured enough to start producing consistent trends that can be used to predict future behavior. Investors will want to understand not just how much it costs to acquire a customer, but also whether a business is spending too much relative to the CLTV, and whether those costs can be brought into alignment in the short or long term. If the business has an extremely high CLTV-to-CAC, they may want to explore further investing in sales and marketing to accelerate growth and leverage first-mover or fast-mover advantages.
Churn becomes ever more important at this stage. Investors will want to dig deeper into the financial impact of churn, possibly expecting to explore logo, net, and gross churn by customer or product cohort. Investors at this stage will also have a keen eye on net churn as an indicator of the organization’s ability to plug the leaky bucket.
Simplifying the Complexities
Investors are more likely to be attracted to businesses that have a deep understanding of their financial growth metrics and can present them in a confident, concise way. If your spreadsheets and manual processes aren’t getting you what you need, it’s time to consider automating your SaaS dashboards and key SaaS metrics with Baker Tilly SaaS Intelligence. Please download our White Paper, “How the Right B2B SaaS & Subscription Metrics Tools Accelerate Growth & Attract Investors” to find out the roadmap to achieve automated SaaS metrics.
Please contact Baker Tilly with questions or for guidance about how Baker Tilly can help propel the growth of your SaaS or subscription business. If you're ready to leave Excel behind and clearly see your CMRR growth drivers, use this button to find a time to talk to us about getting started.
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