As an operator in the SaaS world, the past few years have been challenging, ever evolving, and in many ways exhilarating. For me personally, managing through Covid, replanning the many replans, and now navigating the unknown market conditions has come with a lot of professional growth.
As someone who sits at the intersection of GTM Strategy & Financial Management (reporting to a CFO), I thought the following would be helpful to anyone who is trying to narrow their reporting focus to the metrics that matter the most in today’s climate.
It’s no secret that VC funded startups operate very differently from traditional businesses. They depend on large upfront cash injections to grow fast before worrying about profitability. But in today’s economy, many startups (and scaling businesses for that matter) are being asked to change the way they measure success.
Instead of burning through cash quickly in an effort to grow, grow, grow, many companies are being asked to start calculating how effective your performance really is, not just how it’s perceived to be.
Top 5 metrics for understanding your startup performance
Over the past few months, I’ve spoken to many CFOs and investors about the current market conditions and the health of their businesses. Here are 5 metrics they care about the most–and why they matter.
#1 ARR Growth Rate
In many ways, this metric is the cornerstone of software companies. The amount of Annual Recurring Revenue (ARR) shows how much a company makes during a fiscal year. ARR also happens to be a key metric that investors use to determine a company’s valuation.
Your ARR growth rate helps investors ascertain whether your company has the product, sales efficiency, and market differentiation to become a profitable company. The higher your ARR growth rate, the quicker your company will grow in its valuation. Every company needs to have clarity over what their ARR is and the levers they’re deploying to increase this number over time.
#2 Cash Burn
Cash burn is how much your business is spending in relation to the revenue that your business generates. Your burn rate is the rate at which a new company is spending its capital on overhead before it starts generating positive cash flow from its operations. In short, cash burn equals negative cash flow.
Burn rate is a way to measure runway, which is the amount of time the company has before it runs out of the capital needed to stay in operation. If you have a low burn rate, you’re more likely to see revenue and reach profitability.
The two fastest ways to reduce your burn rate are to increase revenue or cut costs on overhead. The latter is something that nearly every company is evaluating at the moment since it tends to be a lever that’s easier to control than accelerated revenues.
Customer acquisition cost (CAC) is the cost of the resources required to bring on a brand new customer. You can calculate this by adding sales and marketing expenses together, then dividing by the number of new customers. CAC helps companies understand the return on their marketing investments.
CAC can include:
- Ad spend
- Employee salaries, commission, bonuses
- Technical costs like software, hardware, and subscription costs
- Inventory upkeep like updates and patches to improve your product
Your CAC must be sustainable, or in other words, you need to make more than you spend. For example, if your CAC ratio is 1.4x, that means that every dollar that you spend brings in $1.40. Overtime this is a powerful measure of just how effective your GTM motion is and tells you a ton about the effort you’re spending to grow your business.
#4 Net Retention
Retention is an important measurement of your startup’s health because it retains the unit economics of your historical customer acquisition cost (CAC). A high net retention means that you’re keeping your existing customers.
There’s less of a “leaky bucket” problem, which can be a problem when sales and marketing spend is only focused on new business. In other words, lots of cancellations will negate your progress.
The better your net retention, the more capital you have to spend on S&M operations. According to VC OpenView, the best valuations in 2020 and 2021 were for companies that had over 100% net dollar retention. For companies over $20M+ in ARR, you’ll see 110-115% net retention.
Closing new customers is great, but if you don’t have a powerful customer journey that provides value touch points along the way, the effort of expanding that customer is significantly harder.
#5 Gross Margin
Last but not least is gross margin. Gross margin is your company’s revenue after the costs of goods sold divided by revenue. It measures how effectively your company delivers to your customers. If you have a low gross margin, you’re spending too much of your money on product delivery. A high gross margin means that you spend less capital on product, and can invest more into your sales and marketing efforts.
In today’s climate, there are huge efforts being put into decreasing the cost of goods sold through automation, increasing usability of the product, and more self service offerings for customers to get what they need in an on-demand fashion–all with the hopes of improving gross margin.
Empower your RevOps team
My belief is that your RevOps team, in partnership with Finance, should be tracking and analyzing these 5 metrics on a recurring basis so they can consistently have a pulse on the health of the business and be able to make key recommendations to leadership teams based on what’s transpiring.
I also think it’s incumbent upon RevOps teams to make decisions with improving these metrics in mind. By consolidating duplicate tools, getting rid of underused tools, and improving integrations, RevOps can reduce spend, create better experiences for their internal teams, and play a key role in improving these 5 metrics.
Reducing headcount can cut costs fast, but will leave you without the resources you need for important projects, not to mention having to let go of valuable employees. If you do find yourself in this situation, try outsourcing your stability by working with other organizations that can hire your technology admins.
Outsourced providers like Delegate can take over the employment of your system admins, so they can keep working on your projects while filling the rest of their time with other clients. They’ll always have enough work and your company can continue to tap into their expertise.
Learn more about the benefits of RevOps
Wondering how RevOps as a function can help your company move towards profitability? You can learn more about this in our article, Technology Ownership: The Rise of Revenue. While you’re at it, subscribe to our blog for new content every month.