Top 10 Metrics for SaaS Startups Under $1M in Annual Recurring Revenue
At SaaSCan, we love empowering Canadian SaaS founders and leaders with credible SaaS metric research that so you can answer two key questions with confidence:
Given the stage I'm at, what key metrics should I be laser focused on and why?
For those key metrics, what does great look like, and how do I stack up?
We recently sat down with 10 investors in Canadian SaaS startups to get their take so we could share it with you. They included Angel, Pre-seed, and Seed-stage investors. Here's the deal on who they are and the type and size of SaaS company they normally invest in.
The Startup Mission
At the startup stage, your core objective is finding Product Market Fit. You want to be asking questions like:
What problem are we solving?
How big is the opportunity?
Who is our best fit customer?
What's our North Star Key Performance Indicator (KPI)?
What are we learning from customers who churn?
And while data may be sparse in the early days, some data is better than no data. As Forum Ventures Partner Jonah Midanic says, "The difference between a real-world story and a fairy tale is the proof. Focus on the proof points that support your narrative."
Kathryn Wortsman, Amplify Capital Managing Partner adds, "Metrics are just part of the story. The most important thing at the seed stage is whether a founder deeply understands the problem they're trying to solve, and who their customer is."
StandUp Ventures Managing Partner, Michelle McBane, notes that at the seed stage she and her team work with founders to start thinking about their SaaS KPIs. "Companies don’t often have the data history to reliably track SaaS metrics until they’re past about half a million in Annual Recurring Revenue (ARR). However it’s key at this stage to establish what the series A milestones should be and progress towards them."
In the sea of metrics you COULD measure, what's the short list you actually SHOULD measure at the startup stage, when you may just be starting to generate revenue, or getting closer to the $500K ARR mark? Here, we count down the Top 10 metrics that SaaS startup investors we spoke with collectively said SaaS startup founders and leaders should focus on and why. We then share their perspective on what great looks like for each of these metrics.
SaaS companies are often not profitable for years. However, you need to be sure that on a unit basis, the math makes sense. As Jennifer Francis, Chair of the Board for Capital Angel Networks says, "Your go to market channels need to match your target market and price point. If you have an inexpensive product, keep your CAC extremely low."
What does great look like? Quite simply, investors here advise you to get your CAC as low as possible given your context. Jonah Midanic of Forum Ventures explains it like this, "We want to see a go to market channel that matches the sales price." Here it's all about the unit economics, so that you can get to profitability at the unit level.
9. A North Star KPI for Customer Value
Customer Value is of particular interest to Isaac Souweine, Partner at Real Ventures, at the pre-seed stage. As he explains, customer value generally means increased revenue or time/money saved for customers. And it stands to reason that customers will only continue using and renewing a SaaS product if they get ongoing value from it.
That's why Pablo Srugo, Principal at Mistral Venture Partners, recommends you "Figure out the core value your company provides, and track it. That's your North Star KPI. Your entire team should obssess over that metric." Put another way, it's a way to measure how effective you are at helping users "complete the jobs they're hiring your product to do", as explained in this North Star Metric article.
What does great look like? While that will vary here, it's no surprise that you want to see this KPI going up and to the right. Here are a few examples of North Star KPIs for Canadian SaaS Companies:
8. A Usage Metric like Daily, Weekly, or Monthly Active Users
As Patrick Hankinson, General Partner at Concrete Ventures points out, "You can trick yourself into thinking you’re delivering a great product because someone is paying you. But if they’re not actually using the product, you’re going to be facing churn at some point. Track metrics such as Daily Active Users to Monthly Active Users, Free vs Paid users, or create your own."
What does great look like? It looks like sticky usage of product features that you hypothesize or know are bringing customers value over and over again.
7. Number of Customers
Kathryn Wortsman, Managing Partner at Amplify Capital underscores the importance of this metric and explains, "The velocity at which a company is attracting new customers is an indication of urgency around the need for the product. This is paramount at the seed stage."
What does great look like? Jonah Midanic of Forum Ventures recommends startup founders compare themselves to these customer growth targets, depending on the size of customer they're targeting:
Enterprise: a good target is signing up 2 - 3 new customers/quarter.
Mid-market: a good target is a Proof of Concept conversion rate of almost 100%
Taylor Wilson of Golden Ventures advises startup founders to target customer retention rate ranges based on the size of the customer they serve:
40-70% for Consumer SaaS
40-60% for SMB
80-90% for Mid-Market
90-95% for Enterprise
Patrick Hankinson was one of numerous startup investors who called out this metric as key at the startup stage. He prefers this metric over Lifetime Value to Customer Acquisition Cost (LTV:CAC) because assumptions on margin and churn in LTV can skew the numbers dramatically, whereas it's generally more clear cut how long the CAC payback period is.
What does great look like? The ideal range for startup investors we spoke with varied between 6 to 18 months. Patrick Hankinson of Concrete Ventures ultimately likes to see a CAC payback period of about 6 months, but calls out that "it's rare to hit 6 months in the early stages." Snita Balsara of MaRS IAF, rather than calling out a specific target, advises founders to focus on the trend of this metric, and work to reduce it as they grow the company.
At the pre-seed stage, Pranavi Cheemakurti, Venture Investor at Forum Ventures, looks for companies with a clear path towards building a venture scale business, in other words the ability to reach $100 M in Annual Recurring Revenue one day. As a result, she looks for founders to understand and be able to articulate the TAM in their space.
What does great look like? Not surprisingly, here investors like Pranavi Cheemakurti of Forum Ventures, Kathryn Wortsman of Amplify Capital, Isaac Souweine of Real Ventures, and Jennifer Francis of Capital Angel Investors, said they want to see a huge TAM, the bigger the better. When asked what great looks like to them, investor answers ranged from "over $1 Billlion" to "over $2 Billion" to "$5 - $10 Billion".
No surprise that for SaaS startups, recurring revenue, whether measured monthly as MRR, or annually as ARR, is key. Snita Balsara, Senior Investment Manager at MaRS IAF stresses the importance at the Seed stage of seeing the repeatability of MRR. She also advises companies to analyze data in cohorts of time and by customer segment, and to look at the company holistically versus just at points in time. In her words, "Context really matters. Pay attention to the trend of your metrics over time."
What does great look like? This can be expressed as Monthly Recurring Revenue (MRR) or Annual Recurring Revenue (ARR). That said, actual MRR or ARR will vary depending on what you're selling, so there's no specific $ target to shoot for, other than to say more is better because it impacts the #1 metric investors called out - Recurring Revenue Growth Rate. You should also be sure you're recording it accurately to only include truly recurring revenue.
For example, Michelle McBane, Managing Partner at StandUp Ventures, shares important advice for seed-stage founders in an enterprise context who are working hard to convert Proof of Concepts (POCs) into SaaS contracts. "Don't call the revenue ARR if it's really POC revenue. Do lay the foundation for a seamless transition from POC success to a SaaS revenue stream right in the contract."
3. Net Churn or Net Retention
Most startup investors SaaSCan spoke with called out high net dollar retention and low net churn as being key things to watch from day 1. At the same time, they noted that a) in the early days this data may not be available as accounts haven't come up for renewal yet, and b) churn will naturally be higher in the early days as some early customers aren't a good long term fit for the product. The goal at the startup stage is to start tracking it and look for early signs of churn/retention challenges given the increasing importance placed on net dollar retention in later stages of growth.
What does great look like? As you may know, net churn and net retention are revenue based metrics that compare revenue at the end of a period (a month or a year) to revenue at the beginning of a period for the same pool of customers. Check out the linked definitions above because net and gross in context of SaaS metrics can easily trip people up.
In the very early days, SaaS startups may not have sufficient data to calculate these metrics. As you grow, seed stage investor Taylor Wilson from Golden Ventures outlines good annual Net Retention Rate ranges to compare yourself to, depending on your SaaS context:
55 - 80% for Consumer SaaS
100 - 120% for Bottoms up SaaS
110 - 130% for Enterprise SaaS
Pablo Srugo of Mistral Ventures advises founders to shoot for a negative monthly net churn rate. As explained on Klipfolio's MetricHQ, "A negative Net MRR Churn Rate occurs when expansions exceed downgrades and cancellations, and is a strong positive indicator of company health."
2. Logo Churn
Similar to dollar churn, startup investors called out logo churn as important to watch starting in the early days, especially from the perspective of what can you learn from the customers who are churning.
What does great look like? Several investors who weighed in here said they wanted to see logo churn low. Others pointed out that in the early days, the data on churn may not be available yet as customer contracts may not have come up against a renewal cycle. Still others mentioned that in the early days, some logo churn may actually be good if the customers churning are not your best fit customers. So more important than the number of customer logos churning is the type and size of customers churning. Are there warning signs to pay attention to given which customers are churning? Or is this just part of the natural process of finding your best-fit customers.
And the number 1 metric investors said startup founders should focus on is:
As Standup Ventures Managing Partner Michelle McBane articulates, "At the seed stage, we help founders establish their Series A milestones. While we don't have a specific growth rate target, we're looking for evidence of strong growth rates and early traction."
What does great look like? What was really interesting here is that investors expressed what great looks like in different ways. Some expressed it as a monthly value, for example they recommend founders target 10% monthly revenue growth or higher at the startup stage, while others expressed it annually. For those who expressed it annually, some shared a growth % they consider a good target for founders, for example 100% growth or higher, while others provided a growth multiple, for example 2x or 3x a year in the early years. As a founder, you'll want to reconcile the different ways you may hear or want to present this metric.
To annualize a monthly growth rate, you use an exponent for the number of months to reflect compounding growth month over month, then subtract 1. So a 10% monthly growth rate becomes (1.10^12) - 1 = 2.138 or 214% when expressed annually. This is a big difference from just multiplying the 10% growth rate x 12 months, which would give you an incorrect annual rate of 120%, which doesn't factor in the compounded growth.
To understand the relationship between an annual growth % versus an annual growth multiple, using annual values we heard from investors, here's a simple table:
So a 10% monthly growth rate is about the same as a 200% annual growth rate or a 3x growth multiple.
The Bottom Line
As a SaaS startup, your singular focus is finding product market fit. Startup investors are clear here. You don't need to measure all the classic SaaS metrics yet - in fact you shouldn't at this stage. You want to focus on a very short list of metrics that gives you insight to:
Customer usage and value
The true cost of acquiring customers, and which channels work best for you
How well you retain both customers and their revenue, and which customers are the best fit
How quickly your recurring revenue is growing
And as Snita Balsara of MaRS IAF states, of utmost importance at the Seed stage is seeing the repeatability of Monthly Recurring Revenue (MRR), of getting into the practice of analyzing data in cohorts of time and by customer segment, and of looking at trends versus just at points in time.
SaaSCan's Full Investor Metrics Research Report - Robust 77-page report on the metrics investors care about most from startup to early stage to later stage growth
Klipfolio's MetricHQ - Robust metric definitions, formulas, and examples
Product Market Fit - A great primer from VC Firm Andreessen Horowitz
North Star Metrics - The North Star metrics 40 high growth companies are measuring