Introduction
In the fast-paced world of Software-as-a-Service (SaaS), gaining a comprehensive understanding of your business’s performance is crucial. However, with countless metrics to choose from, it can be challenging to discern which ones genuinely indicate the health and growth potential of your startup. In this detailed guide, we explore the primary Key Performance Indicators (KPIs) that we, at Craft Ventures, consider crucial when contemplating new investments at the Series A stage.
Furthermore, to empower entrepreneurs in their journey, we’re thrilled to unveil our internal tool, SaaSGrid. We’ve leveraged this robust tool to evaluate KPIs for countless SaaS companies, and now, we’re making it publicly available—absolutely free of charge. With SaaSGrid, founders can conveniently (and anonymously, if desired) calculate metrics for their startups, enabling a clearer view of their business’s trajectory.
Let’s dive into the world of SaaS metrics, and get you equipped with the knowledge and tools necessary to steer your venture towards success.
Expansion Revenue
Our first point of focus is revenue growth – the most potent evidence of product-market fit for a SaaS business.
ARR or MRR: When it comes to measuring revenue, you’ll want to focus on either Annual Recurring Revenue (ARR) or Monthly Recurring Revenue (MRR), depending on your business model. For companies with annual contracts, ARR becomes the gold standard, while for those with monthly subscriptions, MRR is the key metric. And remember, ARR is always twelve times the MRR, highlighting the importance of recurring revenue over one-time payments.
Historically, to secure a Series A funding round, startups required $1 million in ARR. However, today, the expectation hovers around $500k ARR, given the preemption and acceleration of funding rounds.
CMGR: Compound Monthly Growth Rate (CMGR) is your best friend when measuring growth in MRR. It provides a smooth and normalized perspective of growth rather than a bumpy, unpredictable month-over-month analysis. For instance, if your ARR escalated from $100k to $1M within a year, the CMGR would be 21%, a remarkable achievement.
MRR Components: To get a comprehensive understanding of MRR changes, break it down into six components: Retained, Expansion, New Sales, Resurrected, Contraction, and Churned MRR. This analysis allows you to assess where your growth and potential pitfalls lie.
Customer Concentration: This metric investigates whether your growth is driven by many small contracts or a few hefty ones. Having too much revenue depend on a limited number of large accounts may signal a risk.
Retention
Retention analysis involves tracking customers or “cohorts” over time, grouped by their sign-up period. This approach reveals a lot about your business’s health. There are two ways to analyze retention:
Dollar Retention (Net Revenue Retention): This metric looks at how much revenue a cohort is generating relative to its original size in each period. It accounts for expansion revenue and can exceed 100% if expansion outpaces churned and contracted revenue. For instance, if your startup achieves 120%+ Dollar Retention yearly, you’re in the league of the best SaaS companies.
Logo Retention: This retention measure focuses on the percentage of active (non-churned) customers.
Sales Efficiency / Unit Economics
Understanding sales efficiency ensures that growth is both efficient and sustainable. This involves looking at metrics like New Sales ARR vs S&M Expense, Customer Acquisition Cost (CAC), New ACV vs CAC, CAC Payback, and the Magic Number.
Margins
Gross Margin is an essential measure of a company’s profitability, calculated by deducting the cost of goods sold (COGS) from revenue. Lifetime Value (LTV) is another vital metric, which considers CAC, Dollar Retention, and Gross Margin to show overall company health.
Capital Efficiency
The Burn Multiple and Hype Ratio are two methods of measuring capital efficiency. These metrics provide insight into the startup’s spending versus its ARR growth, indicating whether the company’s growth is efficient or costly.
Engagement
Measures such as DAU/MAU and DAU/WAU help assess user engagement levels. High engagement rates can potentially increase free trials or freemium user conversion rates to paid accounts and reduce churn.