Quantitative metrics to drive a scalable, sustainable business in SaaS Kalaari Capital
In the last 6 months, public SaaS companies have lost about half of their market value; at its high in 2021, the cumulative SaaS market cap was over $2T; it is now down about $1T.
Overall, the average SaaS market cap is down roughly 57% from its 12-month highs. Forward revenue multiples, the main method used to value public SaaS companies, have decreased on average by 67 percent from their 12-month highs and by nearly 90 percent for some businesses. ****On average, public SaaS revenue multiples have decreased from 15x during the peak to 7x today.
What are the implications for early-stage SaaS companies? Several VCs have spoken about extending runway, lowering burn, and aiming for positive unit economics. We wanted to take this opportunity to dive deep into SaaS metrics – to detail out metrics and benchmarks needed to grow a sustainable business in SaaS.
Why are metrics important? For external stakeholders, such as investors, metrics indicate future revenue potential and drive valuations. For internal stakeholders, employees, and leaders, metrics help streamline the company to a common, measurable goal and drive sustainability. We hope this serves as a cheat sheet for founders building sustainable SaaS businesses over the next decade.
“If you can't measure it, you can't improve it” But what’s important to measure?
💡 Who are these metrics relevant for?
SaaS companies that have hit PMF. PMF differs across the board for SaaS companies.
“First to market seldom matters. Rather, first to product/market fit is almost always the long-term winner.”
Rules of thumb for PMF:
Few additional resources to understand whether you have hit PMF –
It is important to note that SaaS metrics become most relevant post the PMF stage – however, it is good to track metrics early on to get a high-level understanding of what is working and what is not.
Typically, businesses used GAAP (Generally Accepted Accounting Principles) to measure the health of their businesses. However, SaaS businesses operate very differently from normal businesses due to the nature of their recurring revenue. At the start, SaaS companies need to lose a lot of money to acquire accounts. We typically see a negative cash flow trough in SaaS companies before they begin generating steady subscription revenue.
SaaS businesses are highly sensitive to small variables in key metrics. Through this article, we demystify specific levers of growth as well as outline common benchmarks for some of these metrics. It is important to note that benchmarks may vary given the stage, customer acquisition strategy, and average contract value of your SaaS business.
What really matters if you’re raising capital for your SaaS company – repeatability, scalability, profitability
What are the core drivers of repeatability, scalability, and profitability?
Quantity of Revenue Revenue, especially for SaaS companies, can be a deceptive metric. SaaS companies can have a mix of services, recurring, and one-time revenues that can be contracted, billed, or realised. To cut the noise from the clutter, focus on MRR.
|Metric||Notes||Benchmarks (if applicable)|
|MRR||For a SaaS business, monthly recurring revenue is a much more valuable metric to track than traditional revenue. It’s the total revenue you received during the month that came from recurring subscriptions.|
|Important to track different types of MRR –||Last 5 Year Averages|
|Seed: $0-50K MRR|
|Series A: $50–200K MRR|
|Series B: $200-500K MRR|