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Top 10 Metrics for SaaS Startups Part 2

by Lauren Thibodeau

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:

  1. Given the stage I'm at, what key metrics should I be laser focused on and why?

  2. For those key metrics, what does great look like, and how do I stack up?

In Part 1, we counted down the Top 10 metrics that investors in Canadian SaaS startups said founders and leaders should focus on in the early days, and why. Now, in Part 2 we reveal their perspective on what great looks like for each of these metrics.

The investors 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 Investors

The Metrics & What Great Looks Like

In Part 1, we underscored that at the startup stage, your core objective as a founder or SaaS leader is to find Product Market Fit.

As Kathryn Wortsman, Amplify Capital Managing Partner puts it, "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, adds 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."

Not surprisingly then, the early metrics to focus on are the ones that reveal signals you're on the right track to finding product market fit, to solving an important problem, and to understanding your best fit customer.

So what do investors say great looks like for the top 10 metrics they called out as most important at the startup stage, and what are some of the nuances to consider depending on your context? Let's have a look.

10. Customer Acquisition Cost

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

You may recall from Part 1 that a North Star KPI is a proxy for the value and utility you deliver to your customers. 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. So while what great looks like 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

Closely related to the North Star KPI, this is a metric where what great looks like will vary with expected usage patterns. A usage metric is key to understanding and cementing Product Market Fit, which as we know is the core objectives at the startup stage. As Patrick Hankinson of Concrete Ventures states, "Product really is everything. You need a strong product foundation before financial metrics are worthwhile and relevant."

7. Number of Customers

Here investors called out number of customers as a key metric to track, because it's a key component of calculating customer growth rate and customer retention rate.

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

6. Customer Acquisition Cost Payback Period

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.

5. Total Addressable Market

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".

4. Recurring Revenue

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

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 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

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.

1. Recurring Revenue Growth Rate

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.

Related Resources

  1. SaaSCan's Top 10 Metrics for SaaS Startups - Part 1

  2. 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

  3. Klipfolio's MetricHQ - Robust metric definitions, formulas, and examples

  4. Product Market Fit - A great primer from VC Firm Andreessen Horowitz

  5. North Star Metrics - The North Star metrics 40 high growth companies are measuring

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