VC-backed SaaS companies face intense pressure to grow quickly, gain market share and achieve profitability. As such, they require unique performance metrics that help investors evaluate the business's progress. In this article, we'll dive into the top 12 metrics that investors use to assess the health and success of VC-backed SaaS businesses.
Annual Recurring Revenue (ARR): ARR is a critical metric that reflects the company's revenue from subscriptions that renew annually. ARR demonstrates the company's revenue stability and its ability to generate predictable revenue streams.
Customer Acquisition Cost (CAC): CAC is the cost incurred to acquire a new customer. This metric is critical to SaaS businesses, as it helps measure the effectiveness of marketing and sales efforts.
Customer Lifetime Value (CLTV): CLTV reflects the total revenue a customer is expected to generate during their engagement with the business. This metric is important because it demonstrates the company's ability to retain customers and generate revenue over an extended period.
Gross Margins: Gross margins reflect the company's profitability before factoring in overhead costs. A healthy gross margin indicates a company's ability to generate revenue efficiently.
Churn Rate: Churn rate measures the rate at which customers leave the company's service. A high churn rate indicates that the company may be struggling with customer retention.
Monthly Recurring Revenue (MRR): MRR measures the revenue that is expected to recur on a monthly basis. MRR is a crucial metric as it reflects the company's ability to generate consistent revenue streams.
Customer Retention Cost (CRC): CRC is the cost incurred to retain customers. This metric is critical for SaaS companies, as retaining customers is typically more cost-effective than acquiring new ones.
Burn Rate: Burn rate measures the company's monthly negative cash flow. A high burn rate indicates that the company is spending more than it is generating in revenue, which can be problematic.
Quick Ratio: The quick ratio is a liquidity ratio that measures the company's ability to meet its short-term obligations. This metric is essential for SaaS businesses, as it helps investors evaluate the company's short-term financial health.
Net Promoter Score (NPS): NPS measures the willingness of customers to recommend the company's service to others. This metric reflects the customer's overall satisfaction with the service, and a high NPS can be a positive sign for the business.
Lead Velocity Rate (LVR): LVR measures the rate at which the business is generating new sales leads. A high LVR indicates that the company's sales efforts are effective.
Sales Efficiency: Sales efficiency measures the ratio between the sales and marketing expenses and the revenue generated. A high sales efficiency ratio indicates that the company is generating revenue efficiently and effectively.
Conclusion
Understanding these key metrics is crucial for evaluating the performance and potential of VC-backed SaaS businesses. By tracking these metrics, investors and founders can gain insights into the company's strengths, weaknesses and areas for improvement. As a founder or investor in a VC-backed SaaS business, it's essential to keep a close eye on these metrics to ensure the company's long-term success.
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About the author
Sabbir Rahman is Managing Director of Langdon Capital. He has held prior roles with Morgan Stanley, Lazard and Barclays Investment Bank. He has executed over £60 billion in notional value of transactions across financing, M&A and derivatives with global corporates, private equity funds and financial sponsor groups.
About Langdon Capital
With a network of 700+ alternative investors, Langdon Capital raises debt and equity capital between £1m and £25m for high-growth and innovative companies in the technology, environmental impact and renewable energy sectors, who are preferably beyond a Series A funding round or equivalent, to help them fulfil their paths to profitability and growth ambitions.
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