Critical SaaS Metrics to Secure Your First Investment

A company’s fundraising period can be stressful. It’s particularly hard on the CEO and finance/analytics team, who have multiple demands on their time.

The phase may feel like endless fire drills as investors request more and more money. But, we’ve been there, and we know that understanding the essential concepts will help overcome the challenges. It should be possible to avoid the chaos if you’re at an early stage and raising money, especially if you’re a SaaS company.

This guide aims to get you ready for VCs’ overwhelming questions when they try to get more information about your company. There’s a very high chance that all of these metrics will be on any serious investor’s list of requests in some form or another. However, the exact breakdown will vary from company to company. In addition, these requests may arise during diligence if they haven’t been made before a term sheet is signed.

Identifying and understanding each of these metrics in your business takes time. You have to do many analyses and experiments to know what you can do. If you get a question from an investor about these metrics, you don’t want to be considering them for the first time. Be prepared. Try to hire an analyst who can handle this if you don’t already have one.

Also, if you don’t track these metrics already, it’s time to get started. The VCs ask for these metrics for a reason; they are the vital signs of your business. You’ll be a better manager when you know them well.

25 SaaS Metrics You Should Know for Fundraising & Optimization

If you’re raising money or improving your business, here are the SaaS metrics to help you:

MRR
ARR
Gross Churn
Net Churn
Cohort Retention
CAC
LTV
Contributing Margin
Payback period
Quota attainment
Sales funnel
Sales customer economics
Available pipeline
Sales Payback Period
Magic Number
Active users
Time Spent on product
Activity in product
Gross Profit Margin
Department Spent
Operating Income or Loss
Market Opportunity
Projections
Customer References
Conversion rate

Here’s how they work:

Monthly Recurring Revenue (MRR):

The total amount of revenue you generate from your recurring subscriptions each month.

Annual Recurring Revenue (ARR):

The total amount of revenue you generate from your recurring subscriptions each year.

Retention

You can’t fill a bucket full of holes if it’s not going to grow – MRR retention is key to your SaaS business’ growth. You’ve probably heard a million times that investors will be heavily focused on this aspect of your business. So you should know which metric you should focus on by now.

Gross Churn:

How much of your committed revenue was lost this period? Count your customers, too.

Gross MRR Churn = Churned MRR / BOP MRR

Gross Customer Churn = Churned Customers / BOP Customers

Net churn:

How much of all committed revenue was lost this period net of upsells?

Net MRR Churn = (Churned MRR – Expansion MRR) / BOP MRR

Cohort Retention:

The churn metrics above are a snapshot of the business at a specific time. However, the average is derived from all customers at various lifecycle points. It allows you to see how successful you are at keeping, up-selling, and cross-selling each specific customer and how this has evolved over time. Basically, how much money do you have six months from now, a year from now, and so on…

Customer Acquisition

It’s all about how you get new customers. So how do you do that?

What is driving the changes in traffic/lead sources over time? Is it a recurring pattern?

How many unique visitors do you receive monthly, and how many are from organic traffic versus paid traffic?

Your acquisition strategy must be economically sound. To ensure a successful business, you must carefully calculate the following.

CAC: Cost of Acquiring a Customer.

CAC = (Total money spent on S&M) / (Total new customers)

LTV: Customer Lifetime Value.

LTV = ARPA / Gross MRR Churn

Contribution Margin: Also called contribution per unit, it tells you how much profit a product contributes.

Contribution margin = (LTV x GP Margin) – CAC

Payback Period: It is how much it takes you to regain your CAC.

Payback Period = CAC / (ARPA x GP Margin)

Calculating paid campaigns specifically requires the above metrics. As a first step, recalculate the metrics via S&M spend, new customers and gross MRR churn only observed through paid marketing.

If you’ve hired a sales team, you’ll have to demonstrate their productivity and traction. The following metrics will assist you.

Quota Attainment

Ideally, you’ll want to show quota attainment on an individual rep basis and at the team level. You want it to be high if you build a sales team early. If your reps are doubling their quotas, you can add to the sales team and reasonably expect those new reps to be productive.

Sales Funnel

Are you closing a lot of your pipeline, and how long do sales take on average? It’s a key indicator of how quickly you’ll be able to expand your sales team and have them contribute to your business.

Sales Customer Economics

Is there any variation in the size of deals and in churn? Both should be positive.

Available Pipeline

The way your sales team can be scaled depends on its performance in the future.

Sales Payback Period

It shows how quickly you will recoup the cost of your sales team. Here is how it works:

Payback Period [in months] = 1 / ( (New ARR in period) / (Total sales spend [base + variable + overhead] in period) ) x 12

Investors will use the metrics above to determine the effectiveness of your sales and marketing engine.

Conversion Rate

The percentage of users who take a desired action, such as signing up for a free trial or purchasing a subscription.

The Magic Number

Your acquisition costs can be effectively summarized using the magic number. Using the magic number, investors will compare your marketing and sales spend with other SaaS companies. Here is how it’s calculated:

(Change in ARR during the period) / (S&M spend in prior period)

and

Your payback period on acquisition spend (in months) = (1 / magic number) x 12

Choosing a suitable period for your business is very important. In the early stages, a magic number below 1 can be troubling. The payback period is greater than one year for every $1 spent on sales and marketing. The magic number in the range of 1-1.5 generally indicates reasonable spending—as long as churn is kept in check. You generate over $1 of ARR for every dollar you spend on S&M, with a payback period between 8 and 12 months. Anything more than 1.5 will catch investors’ attention. You can likely spend more on S&M and grow even more rapidly.

Engagement

Consumer engagement metrics are becoming increasingly important as enterprise software becomes more commercially accessible. As a result, you will have to identify a few consumer-like engagement metrics that demonstrate that your tool/app/service is heavily relied upon. These include but are not limited to the following.

Active users
Retention
Product usage

Showing that your product generates value and keeps people’s attention is critical. It means you need to ensure that your customers use your product frequently and long-term.

Market Opportunity

How does returning at least ten times on the investment you seek sound? A simple place to start with investors, regardless of the stage of the company, is to prove to them that a tenfold return on their investment is possible. The ten times rule isn’t firm but is a useful indicator.

You’ll be in a good position if you can convince VCs that your company’s upside is at least ten times. You need to convince investors that you can become a $500M company if you’re raising $10M at a $50M post-money valuation, for instance.

You’ll have to think outside the box for this. For example, to get to your ten times valuation, you might want to map out customer and ARPA growth.

Financial Statements

Prepare your cap table and all three financial statements—income statement, balance sheet, and cash flow. Investors will pay close attention to your income statement. The most significant metrics on your income statement are as follows.

Gross Profit Margin

Gross profit (GP) is the Revenue minus Cost of Goods Sold (COGS), the direct cost of goods sold to customers. If today, you were not to acquire any new customers and did not do any product development, COGS is, for example, the costs of hosting, support, and infrastructure. Consequently, the gross profit margins of great SaaS companies are 70% or higher.

Department spend

Make three buckets for non-COGS spending.

Research and Development (R&D)
Sales and Marketing (S&M)
General and Administrative (G&A)

Your business’ proportions will tell you where you have invested your time and money.

Operating Income or Loss

In this case, the calculation is as follows.

Revenue – COGS – R&D – S&M – G&A

Investors need to know how much you burn every month and how long you still have left in your bank account.

Projections

Investors might be sceptical of your rosy projections, but they want to know how you plan to deal with the future. The best place to start would be with a detailed forecast for the next 12 months with realistic scenarios applied to the following 2-3 years. A well-projected income statement and monthly recurring revenue are essential.

It is important to understand the assumptions used to build out these projections. Still, you should point to these predictions confidently, particularly if they are close to reality. In addition, remember that the projections will likely be used to evaluate your performance if the deal closes.

Customer references

Before it’s time for fundraising rounds, your customer references should be ready. Investors are typically interested in connecting with your most valuable customers. The value is defined by the amount they pay and their company’s reputation—if you’re B2B. Additionally, they will ask to speak with a subset of your largest churned customers. The preferred method is to reach out to these customers and ask for their consent.

All investors are different and will evaluate your business individually. Therefore, this is not a comprehensive list of SaaS metrics. If your business is weak in these areas, you will be scrutinized and approached more often about those topics. Because of this, you’re never fully prepared for the fundraising process. However, we’re confident that you’ll impress potential investors and run a much more streamlined process if you pay attention to the cited metrics.

Written on: 25 May 2022

Updated on: 17 February 2023