SaaS businesses are extremely sensitive to a small number of important variables. If you are running a SaaS company, understanding how these variables drive your business model is crucial to long-term success. In this talk, David Skok, author of the now famous SaaS Metrics 2.0 blog post will talk through those key metrics and their impact on the overall SaaS business model.
5. SaaS Valuations: Driven by Growth + Profitability
Growth Rate (% YoY) + Operating Profit (% of Revenue)
Enterprise Value
Gross Profit
Sometimes known as
the ”Rule of 40” as
the ideal is that the
sum of these two
numbers is greater
than 40
Note: the industry norm is to look
at Enterprise Value as a multiple of
Revenue, which yields a similar
graph, but with a wider dispersion
(lower correlation coefficient).
Credit goes to Jared Sleeper of
Matrix Partners for using Gross
Profit instead of Revenue to get a
better predictor of Enterprise Value
11. Key SaaS chart: 4 components of bookings
$(15.0)
$(10.0)
$(5.0)
$-
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
$35.0
Jan Feb Mar Apr May Jun
ARR Bookings
New ARR
Net New ARR
Expansion ARR
Churned ARR
Always look at a
chart that shows the
trendlines to see if
there is growth
42. Negative Churn – Crucial for Long Term Success
Revenue Lost with
2.5% monthly Churn
Renewals
Lost due
to Churn
YEAR 3
$3m $7m
Becomes harder
& harder to
replace this with
new bookings
Renewals
Lost due
to Churn
YEAR 6
$30m $70m
51. Impact of faster growth
$(10,000,000)
$(5,000,000)
$-
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
2 more
Customers/Month
5 more
Customers/Month
10 more
Customers/Month
52. Impact of faster growth
$(10,000,000)
$(5,000,000)
$-
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
2 more
Customers/Month
5 more
Customers/Month
10 more
Customers/Month
Cash Flow Trough
gets deeper
53. “The thing that surprises many investors &
boards of directors about the SaaS model is
that, even with perfect execution, an
acceleration of growth will often be
accompanied by a squeeze on profitability and
cash flow.”
Ron Gill, CFO at Netsuite
54. When your SaaS business
is losing money at an
increasing rate, how can
you tell if the business is
going to work eventually?
55. Guidelines for SaaS success
LTV CAC> 3x
Months to
recover CAC < 12-18 months
Required for Capital Efficiency
56. Months to recover CAC can dictate acquisition spending
If we make $10k from the customer in the first 12 months…
We can afford to spend up to $10k to acquire them
57. The Power of Unit Economics applied to Segments
Brad Coffey, HubSpot
“When we started this analysis, we had 12 reps selling directly into the VSB market and 4 reps selling through Value Added Resellers (VARs). When we
looked at the math we realized we had a LTV:CAC ratio of 1.5 selling direct, and a LTV:CAC ratio of 5 selling through the channel.
0
1
2
3
4
5
VSB VARs
LTV:CAC
0
3
6
9
12
VSB VARs
No of Reps
58. 12 Months Later
Brad Coffey, HubSpot
The solution was obvious. Twelve months later we had flipped our approach – keeping just 2 reps selling direct and 25 reps selling through the channel.
This dramatically improved our overall economics in the segment and allowed us to continue growing.”
0
3
6
9
12
VSB VARs
No of Reps
0
5
10
15
20
25
VSB VARs
No of Reps
0
5
10
15
20
25
VSB VARs
No of Reps
62. Impact of a year’s payment in advance
$(5,000,000)
$-
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
$30,000,000
$35,000,000
$40,000,000
Month1
Month3
Month5
Month7
Month9
Month11
Month13
Month15
Month17
Month19
Month21
Month23
Month25
Month27
Month29
Month31
Month33
Month35
Cumulative Cashflow comparision -
monthly payments vs year in advance
Eliminates the
cash flow trough,
and means $35m
more cash in this
scenario
64. Key Metrics and Levers
• Bookings
• Lead flow x Funnel conversion rates x Average deal size
• Bookings when there are Sales Reps
• No of Reps x PPR (Productivity per Rep)
• Customer Happiness / Retention / Churn
• Unit Economics
• Months of Cash collected up front
65. The Three Keys to success in SaaS
Acquiring
Customers
Retaining
Customers
Monetizing
Customers
66. 9 Step Model to get to Repeatable, Scalable,
Profitable
Search for
Product/Market Fit
Search for Repeatable & Scalable
& Profitable Growth Model
Test
Hypothesis
Prove the
Value
Prove it can
be sold
Find
Repeatable
Sales Motion
Prove non-
Founders
can sell
Make it
Scalable
Ensure
Customer
Success
Make it
Profitable
Hit the Gas
and Scale
Scale the
org & its
processes
Etc.
1 2 3 4 5 6 7 8 9 10 11
Scaling the
Business
67. [ ]FOR MORE INFORMATION
WWW.FORENTREPRENEURS.COM
Notas del editor
15 minutes is way too short to be able to do justice to such an important topic, but I will do my best…
You might be wondering why this is so important. There are a couple of reasons. First…
Secondly…
Anyone tracking public SaaS companies will tell you that there are two key drivers of valuation: Growth Rate and Profitability.
So our goal as we look at what matters is…
I always like to try to simplify things. And in this case we are lucky that there is a way to really simplify how you look at a SaaS business.