At Hum Capital, we have seen thousands of companies from various industries seeking to raise capital. No two businesses are the same, but there are some metrics that we evaluate for almost every company fundraising on the ICM. Once you move past the early-stage startup phase, it’s almost impossible to tell your story as a business without touching on these ten SaaS fundraising metrics.
- Revenue: It’s almost too obvious to include, but revenue matters! Whether you count revenue as Last Twelve Months (LTM), Annual Recurring Revenue (ARR), or Monthly Recurring Revenue (MRR), investors want to know how much money you are making. Understanding when and how you make revenue, investors will gauge your revenue forecasts against their own. Revenue growth is always good. SaaS companies will be familiar with the term “T2D3”, coined by Neeraj Agrawal in 2015, which says that investors often look for a company’s revenue to “triple, triple, double, double, double” in the first five years. If you are on the path to achieving this, you are on your way to becoming a unicorn and highly successful business.
- % of Recurring Revenue: Recurring revenue is… drumroll… revenue that predictably recurs. This is nice to have for many reasons, particularly that you can forecast with confidence how much money you are going to make not just this month, but this year, and even next. Investors like to value companies as a multiple of revenue, and recurring revenue gets vastly higher multiples than revenue that is reoccuring or unpredictable. While businesses are totally allowed to have non-recurring revenue (such as from add-on services, implementation, or transactional fees), if you are trying to raise capital in any form, the more your revenue is recurring, the larger your advance rate will be, all else being equal.
- Lifetime Value (LTV): Lifetime Value is how much money your customers make you over the span of your entire relationship with them. This is a tricky metric, because it may be hard to really predict how long your customers will stay with you and how much you can cross-sell or upsell as your relationship with them matures. Especially when growing the value of your customer depends on investing in a risky new product category, acquiring a company that can serve features you need, or dealing with competition that arrives to try and peel your customers away in 18 months. You can estimate LTV by looking at past cohorts (defined as customers acquired at the same time or in the same product category), and watching how their spend evolves over time.
- Customer Acquisition Cost (CAC): CAC is the dark side of your LTV. It’s a global term that describes everything you have to expend to hire that ideal customer. Depending on your business, you may have ad spend, sales teams to compensate, product support, and so forth. Something you have to internalize is that you cannot ever truly hide your CAC, and it might be a lot higher than you think. For instance, you might want to think about the cost of retaining a customer in addition to acquiring them. Lest you become too keen to zero out all of your marketing spend, it can be easy to fall into the ROI trap, where you are so focused on reducing your CAC that you stop investing in your business. Bottom line is that acquiring customers is a good thing, just be honest with yourself about every fixed and variable cost that goes into acquiring your customers, and make sure you tell that story clearly to investors.
- Customer Retention: Retention is the % of customers you keep, usually measured on an annual basis. There are flavors of retention that measure the amount of revenue you are retaining when including upsells and cross sells (net retention) vs. when you only include revenue from existing contracts to existing customers (gross retention). As you can imagine, retention is a kind of magical metric for good and for ill. If your retention is really high (say you retain 98% and churn only 2% of customers a year), that compounds into efficient customer LTVs over time, because most of your customers are with you forever. But if you churn a lot, then you have to increase your CAC to acquire more customers, who are likely to churn out anyway unless you can fix whatever is causing your customer base to cancel.
- Profit Margins: Profit margins are a way to calculate on a variable basis how much cash the company is accruing. In other words, does selling one more widget of your business for $10 make you $8 dollars or $2, all else equal? Investors like to understand this metric because variable expenses are the ones that can be ramped up (or down) relatively easily – and therefore strong profit margins mean the business has potential to grow without changing the underlying business model. Large profit margins also make life so much easier for yourself because it means you generate the cash you need to fund your business. While businesses with strong profit margins attract competitors, they also give you leeway to innovate and get ahead of competition without seeking additional funds to stay afloat.
- Customer Concentration: Imagine a business with 100% recurring revenue and 100% retention making $10M per year. Sounds pretty good right? What if I then told you that the business only has one customer and this year they were thinking about taking their business to a competitor? Concentration is a measure of how diversified your business is in generating its revenue. Lower concentration is good because it protects the business against the risk that a customer cancels or goes out of business. It also proves that you have a scalable business as opposed to a solution custom-built for just a handful of customers.
- Cash Flow Cycle: The cash flow cycle describes the balance of your current assets to current liabilities. This determines how much you have to pay for what you do each period. When there is a consistent mismatch between your current assets (often your receivables) and current liabilities (often your payables), it means that you are either being too conservative or too aggressive with your business. When you have more current assets relative to your current liabilities, you have positive working capital and this can mean you are not investing enough in growth. Conversely, when you have more current liabilities relative to your current assets, you have negative working capital and this can mean that your business requires outside financing each period to stay afloat. This Investopedia article does a good job of laying this dynamic out in more detail.
- Net Promoter Score (NPS): NPS measures how much your customers love your product and service. Lots of happy customers mean loyalty, retention, and LTV, while lots of unhappy customers mean difficult sales calls, churn, and rising customer acquisition costs signaling you have a lot of work to do.
- Dilution: When taking outside capital to grow your business, you will want to pay attention to dilution and you and your employee’s ownership. Venture Capital will provide capital you don’t need to pay back, advice, and access to a wide network, but your ownership will be diluted. On the contrary, non-dilutive financing means less dilution to expand your company, but has an an obligation of repayment and business continuity that can limit your capacity to innovate. In this blog, we talk about how to align your financing with your growth goals. In summary, pay close attention to which financing method is the right option to scale long-term.
So there you have it. We would love to learn more about your business and peek under the hood to see what makes your business tick. If you are thinking about raising capital in the near future, whether debt or equity, contact our team here.