For the annual FLG offsite, I gave this presentation on understanding SaaS metrics and using them for fundraising. Several people have DM'd me for the presentation, so I'm posting it here.
3. SaaS Business Models
The SaaS business model offers software licensing on a
subscription basis with delivery from a centrally-hosted
location
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4. How big is this industry?
“By 2020, all new entrants and 80% of historical vendors
will offer subscription-based business models” -Gartner
“Moving to a Software Subscription Model”,
May 30, 2018, Christy Pettey
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10. How do we measure SaaS performance?
▪ SaaS Metrics are the Non-GAAP measures used to
evaluate a company’s performance because GAAP
financials do not provide the most complete picture
▪ Two types:
▪ Top Line Metrics
▪ Unit Economic Metrics
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11. How do we apply SaaS metrics?
▪ Specific use of these metrics varies widely among
companies, but I see similarities between
▪ Enterprise software companies with low customer counts and
high price point
▪ Small & Mid-Market (SMM) software companies with high
customer counts and low price point
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13. Top line metrics describe the earliest revenue activity
▪ Bookings
▪ Billings
▪ Annual Recurring Revenue, ARR; and,
▪ Contracted ARR, CARR
▪ Monthly Recurring Revenue, MRR; and,
▪ Average Revenue per Unit or Account (ARPU/ARPA)
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14. Bookings
▪ The Bookings metrics is used by Enterprises with
minimum deal terms of 12 months or more
▪ Bookings can be defined as
▪ Total Contract Value - TCV identifies the contract value of the
deal over its lifetime
▪ Annual Contract Value - ACV represents the value of the deal
over the first year
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15. Billings
▪ Billings - Billings represents the date of the customer
invoice
▪ SMM companies using payment processing define Billings as
the date on which the customer’s account is charged
▪ SMM & Enterprises that send invoices use Billings to indicate
the date that the customer agrees to pay for the deal
regardless of revenue recognition
▪ Billings kicks off Annual Recurring Revenue, ARR
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16. Annual Recurring Revenue, ARR
▪ ARR represents the revenue a company expects to
receive from its current base of customers over the
next twelve months
▪ Contracted ARR (CARR) represents the ARR under an
annual contract and is used by companies with contract
terms ranging months to a year or more
▪ SaaS company valuations are based upon ARR and
expressed in multiples of the company’s current ARR
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17. Monthly Recurring Revenue, MRR
▪ MRR is simply ARR divided by 12
▪ MRR does not equal GAAP subscription revenue
because not all revenue recognition criteria are met at
time of Billing
▪ MRR forms the basis for unit economics and is often
used in evaluating a company’s operating margins
because GAAP revenue varies too much month to
month
▪ Average MRR is often referred to as Revenue per Unit
(or Account) – ARPU or ARPA
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19. Unit economics provide the atomic-level view
▪ The term - unit economics - refers to the measurement
of the revenues and costs associated with a customer
cohort on a per unit basis
▪ A cohort is a set of customers grouped by a specific unit
of time, usually one month
▪ Because revenue is earned over time, companies
closely monitor changes in customer cohorts from
period to period
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20. The cohort analysis shows the unit economics
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Month 1 2 3 4 5 6 7 8 9 10 11 12
January 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
February 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
March 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
April 100% 100% 100% 100% 100% 100% 100% 100% 100%
May 100% 100% 100% 100% 100% 100% 100% 100%
June 100% 100% 100% 100% 100% 100% 100%
July 100% 100% 100% 100% 100% 100%
August 100% 100% 100% 100% 100%
September 100% 100% 100% 100%
October 100% 100% 100%
November 100% 100%
December 100%
21. Of course, the charts will look more like this
21
Month 1 2 3 4 5 6 7 8 9 10 11 12
January 100% 60% 40% 30% 25% 22% 22% 21% 21% 20% 20% 20%
February 100% 70% 50% 30% 20% 15% 15% 14% 14% 13% 13%
March 100% 80% 60% 40% 30% 20% 10% 10% 9% 9%
April 100% 50% 30% 20% 15% 12% 12% 11% 11%
May 100% 60% 30% 25% 20% 17% 17% 16%
June 100% 60% 40% 30% 25% 22% 22%
July 100% 60% 30% 20% 15% 12%
August 100% 60% 40% 30% 20%
September 100% 70% 40% 20%
October 100% 70% 50%
November 100% 60%
December 100%
22. Example: Dropbox uses quarterly subscription
revenues and monetization by annual cohort
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Source: www.sec.gov, Dropbox, Inc. S-1 1 d451946ds1.htm
23. Magic Number
▪ A simple metric to evaluate a company’s growth
efficiency calculated as the change in revenue over two
subsequent periods divided by the sales and marketing
expenses of the first period
▪ Needs to be greater than 1.0 for positive ROI on S&M
spend
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24. CLTV/CAC
▪ A more sophisticated metric to evaluate a company’s
growth efficiency calculated lifetime value of a
customer divided by the cost to acquire that customer
▪ Companies need to show >3.0 for fundraising
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Note: CAC formula uses variables tagged with 0 to indicate prior period and 1 for current period
25. Important cautionary note on LTV and CAC
▪ The LTV/CAC ratio is the least precise SaaS metric due to,
▪ the large number of variables; and,
▪ the varying methodologies in use to calculate the ratio
▪ To improve the value of this metrics,
▪ provide a consistent definition;
▪ disclose your methodology (internally and externally); and
▪ show 2 -3 scenarios using varying assumptions
▪ CAC calculations typically attempt to match the S&M
expenses that drive revenue; however, using same-period
S&M and New Customer for the calculation is acceptable
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26. CAC Payback Period
▪ The number of periods required to achieve break-even
on an investment in customer acquisition
▪ Median range 19 – 21 months*
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*Source: 2018 SaaS Survey Results, Key Banc
27. Retention rates
▪ Retention rate represents either the period-to-period or
the cumulative change in customer revenue, based
either dollars or count.
▪ Gross and Net Retention are related
▪ Gross Retention is the customer dollars/count retained after
lost and contraction
▪ Net Retention is the net of Gross Retention and expansion
and upsell
▪ Quick Ratio is a Retention Rate derivative that takes
into account new revenue
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28. Retention rate presentation varies between
enterprise and SMM companies
▪ Enterprise companies use gross and net retention
because they employ a “Land and Expand” strategy
▪ Gross and Net Retention vary widely depending upon the
success of the strategy
▪ SMM companies use typically use net retention only
because expansion opportunities are limited
▪ Customer engagement metrics have a larger impact on
customer lifetime value
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29. Count-Base Retention Rates
Month 1 2 3 4 5 6 7 8 9 10 11 12
January 100% 70% 60% 50% 40% 36% 34% 32% 30% 28% 26% 26%
February 100% 80% 70% 50% 30% 24% 22% 20% 18% 16% 14%
March 100% 90% 80% 60% 40% 28% 16% 14% 12% 10%
April 100% 60% 50% 40% 30% 26% 24% 22% 20%
May 100% 76% 56% 50% 44% 40% 38% 36%
June 100% 54% 36% 24% 14% 8% 4%
July 100% 70% 50% 40% 30% 26%
August 100% 70% 60% 50% 40%
September 100% 80% 62% 46%
October 100% 80% 70%
November 100% 70%
December 100%
Dollar-Based Retention Rates
Month 1 2 3 4 5 6 7 8 9 10 11 12
January 100% 82% 73% 67% 62% 57% 55% 54% 53% 53% 53% 53%
February 100% 87% 81% 76% 72% 69% 67% 67% 66% 66% 66%
March 100% 80% 70% 63% 57% 52% 50% 49% 48% 48%
April 100% 85% 78% 72% 68% 64% 62% 61% 61%
May 100% 88% 82% 78% 74% 71% 70% 69%
June 100% 83% 75% 69% 64% 60% 57%
July 100% 81% 72% 65% 60% 55%
August 100% 91% 87% 83% 81%
September 100% 88% 82% 78%
October 100% 81% 72%
November 100% 91%
December 100%
SMM companies use both count- and dollar-based
net retention rates
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Customer Count-Based
Retention Rates
Customer Dollar-Based
Retention Rates
50
customers
per month
$1,000
ARPU
Note: Hypothetical Small & Mid-Market consumer company onboarding 50 customers per month each with a $1,000 ARPU
30. For investor presentations, use a higher level chart
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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
ARR $600,000 $944,400 $1,280,400 $1,570,200 $1,617,834 $1,714,126 $1,666,915 $1,737,084 $1,815,613 $2,005,341 $2,100,189 $2,179,062
Revenue $50,000 $78,700 $106,700 $130,850 $134,820 $142,844 $138,910 $144,757 $151,301 $167,112 $175,016 $181,588
Customers 50 85 120 155 165 176 174 184 190 209 222 231
ARPU $1,000 $926 $889 $844 $817 $812 $798 $787 $796 $800 $788 $786
-
50
100
150
200
250
$0
$200
$400
$600
$800
$1,000
$1,200
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Sample Company Fiscal Year Metrics
Customers ARPU
Note: Hypothetical Small & Mid-Market consumer company onboarding 50 customers per month each with a $1,000 ARPU
31. Enterprise SaaS companies use both net and gross
retention rates, usually only dollar-based
31
Churn =
Lost +
Contraction
Dollar-Based Retention Analysis
Period Quarter 1
Opening ARR $50,000,000
Opening MRR $4,166,667
New MRR $250,000
Lost MRR -$125,000
Expansion MRR $50,000
Contraction MRR -$2,500
End of Period $4,339,167
Quarterly Churn -3.1%
Annualized Churn -11.7%
Net Retention, Quarterly 98%
Gross Retention, Quarterly 97%
Note: Hypothetical Enterprise SaaS company adding 6% in new and 1.2% expansion MRR; 3% lost and 0.1% in contraction MRR
32. Renewal rates ≠ Retention rates
▪ Renewal rate represents the % of customers that renew,
at the point of time of renewal – Exposed ARR
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Dollar-Based Retention Analysis
Period Quarter 1
Opening ARR $50,000,000
Opening MRR $4,166,667
Exposed MRR $1,041,667
Renewal Rate 88%
Renewed MRR $914,167
Churned MRR -$127,500
Churn Rate -3.1%
Note: Hypothetical Enterprise SaaS company with 25% of ARR base up for renewal
33. Figures for Net Retention Rates at IPO vary widely
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0% 20% 40% 60% 80% 100% 120% 140% 160% 180%
SuccessFactors
Hubspot
Brightcove
CornerstoneOnDemand
ServiceNow
Taleo
Athena Health
Shopify
xactly
mimecast
Square
jive
NewRelic
Mulesoft
ZenDesk
Okta
AppDynamics
talend
Box
Appian
Alteryx
Cloudera
2U
twilioTwilio
Shopify
SuccessFactors
Okta
170%
127%
120%
90%
Source: 2017 Public SaaS Company Disclosure Metrics for Retention and Renewal Rates, Key Banc
34. Human Capital Efficiency rates demonstrate
operating leverage
▪ HC Efficiency measures revenue per employee
▪ ARR per Employee for private companies
▪ Trailing 12M Revenue per Employee for public companies
▪ FTE defined as Full Time Equivalents, meaning all active
employees plus contractors
▪ FTE Efficiency varies by Average ACV, Go-To-Market
strategy, product complexity, use of contractors and
geography, but scale is the most significant factor
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35. Heed context when benchmarking
▪ Choose your comparable companies carefully because
benchmarks vary so widely
▪ Private company median rates vary from $100K to $180K for
ARR of $5M to >$50M respectively(1)
▪ Select newly public companies this year have rates of $130K to
$600K at time of IPO(2)
▪
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(1) 2018 SaaS Survey Results, Key Banc. (2) Source: www.sec.gov
Comp Source HC Efficiency
ARR $5M - $10M KeyBanc $100K
ARR $10M - $25M KeyBanc $122K
Domo DOMO S-1 $134K
Avalera AVLR S-1 $155K
ARR $25M - $50M KeyBanc $157K
Anaplan PLAN S-1 $172K
ARR $50M+ KeyBanc $183K
Eventbrite EB S-1 $280K
SurveyMonkey SVMK S-1 $325K
DropBox DBX S-1 $600K
37. Simplicity rules when presenting your SaaS metrics
▪ Investors expect to see the following metrics,
▪ Growth Rate
▪ Recurring Revenue Gross Margin
▪ Gross Churn Rate
▪ Retention Rate
▪ CAC
▪ Burn rate
▪ Use SaaS metrics to highlight a specific performance
characteristic and explain the context and methodology
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38. Presenting your SaaS metrics – Right and Wrong
▪ Growth Rate
▪ Gross Margin
▪ Gross Churn
▪ Retention Rates
▪ CAC
▪ Burn rate
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▪ ARR
▪ CARR
▪ Average ARR
▪ Average ACV
▪ Growth Rate
▪ Magic Number
▪ Gross Margin, Subscription
▪ Gross Margin, Other
▪ Churn rate
▪ Net Retention Rate, Dollar and Count
▪ Gross Retention Rate, Dollar and Count
▪ LTV
▪ CAC
▪ LTV / CAC
▪ CAC Payback Period
▪ Human Capital Efficiency
WRONGRIGHT
Keep you investor presentation simple; save your SaaS metrics for due diligence
40. Your Presenter
▪ Eric Mersch joined FLG in 2018, bringing nearly
20 years of executive finance experience. Eric
has served as a senior advisor and interim CFO
to venture-backed SaaS companies, specializing
in Strategic Advisory, Fundraising, FP&A/BI and
Accounting & Control.
▪ His public company CFO roles were at ZipRealty
(NASDAQ: ZIPR), a real-estate technology
provider and VitalStream (NASDAQ: VSTH), a
Content Distribution Network (CDN) company.
▪ Eric holds an MBA from Harvard Business
School, a master’s in Nuclear Power Engineering
from the US Navy’s Nuclear Program, and a
Bachelor of Science in Economics from the U.S.
Naval Academy.
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Eric Mersch
emersch@flgpartners.com
