The 3 SaaS Metrics that matter
As a founder preparing to raise capital, having a good handle on the key metrics that matter in your business will make the fundraising process smoother and faster. In the growth equity stage, metrics are an important part of the conversation and knowing the core ones will allow you to identify the investors best fit for your business and spend the most time with them.
3 metrics that matter the most to software growth investors:
Growth
Retention
Capital efficiency
ARR (annual recurring revenue) or revenue growth. Companies that are acquiring and expanding new customers quickly are most likely to become breakout market leaders and generate top tier investment returns. Growth rates become harder to maintain at larger scale.
Gross dollar, net dollar, and logo retention. On an individual customer basis, a measure of whether customers are renewing and increasing or decreasing contract sizes. Do customers get value from the products, renew (high gross retention), buy more and expand year after year (high net retention)? Investors value stable, predictable and growing revenue streams highly.
Capital efficiency. Simplest definition is annualized cash flow burn relative to the revenue a company is producing in the most recent month. A capital efficient business has maximized resources and doubled down on strategies that work after experimentation to minimize spend on things that don't produce revenue. Efficient businesses also benefit from having control over when they raise their next round because they don't 'need' capital to scale.
Resources like the KBCM SaaS Survey and SaaS Capital's Survey provide good benchmarks for private SaaS companies. In my experience and a random unscientific survey of friends at other growth firms, "great" metrics in fundraising context fall somewhere in the range of:
Growth: 80-100% YoY if less than $10M ARR, 30-50% above $10M ARR
Retention: 60-80%+ annual gross, 100%+ net
Capital efficiency: free cash flow burn of 1x ARR or less
The rule of 40 is more relevant for a public company or scaled business greater than $100M ARR. A 'spike' of very high growth or very high profitability is valued most highly in the private markets.