There is a lot of advice on the internet about which KPIs matter to investors in early-stage growth-focused startups. There are amazing resources defining best-in-class SaaS KPIs from industry veterans such as Tom Tunguz and David Skok, as well as guides on effective board decks from the legendary Investment Firm Sequoia Capital.
These sources provide vast insights into the strategy (along with the supporting math) behind various metrics that help guide a startup from the customer acquisition phase through ongoing operations. This article is not intended to be contradictory to these experts but rather act as an approachable way to get to an MVP (minimum viable product) board deck that creates alignment between your business and your investors.
As operators, founders and investors ourselves, some of the best advice we’ve gotten over our careers was to not build a board deck to satisfy (or pacify) the board but instead to present the actual metrics and strategies used to run the business. This alignment between the business and the board will change the dynamics from discussing opaque numbers to driving durable, measurable growth.
Our experience shows too often that in many early and mid-stage growth companies board decks are episodic and laborious, making it difficult to build a strategy and operations plan to measure against. When KPIs are consistently used and tracked over a period of time, 12–24 months depending on the maturity and stability of your business model, the results are clear — businesses run better. When approached this way, board decks can actually be enjoyable to prepare.
Please note that each metric below should be segmented by industry — including any sub-categories you can provide. Knowing a customer is an “information technology'' company is unfortunately not enough. Ideally, you should go 2–3 levels deeper and know that the company is a “managed services provider selling telecom equipment and support services,” for example. While this level of segmentation may seem daunting, especially if you have thousands of customers, there are various ways to perform segmentation, ranging from data services to outsourcing to a marketing services firm (SaaSWorks provides segmentation as part of our core services offering). You can also do a level at a time and gradually evolve your data-set.
Without segmentation, all metrics become blended and less indicative of which leads and customers to focus your sales, marketing and support efforts on. Rome wasn’t built in a day so your data quality doesn’t have to be either.
Here are five manageable KPIs you should include in your board decks:
1. Net Monthly Recurring Revenue (MRR)
Many businesses are evolving to a subscription concept where an agreed-to monthly fee is paid by the customer. We all might be familiar with SaaS businesses as types of software subscriptions, but many consumer businesses are moving in the same direction from toothbrushes (Quip) to cars (Volvo, Porsche). The predictability of these types of revenue streams is what makes these businesses so valuable. Thus, before assuming MRR only applies to SaaS, think again.
Net MRR is the sum of all new revenue sources (including returning customers or customers increasing their spending) minus any cancellations and reductions in spending. When tracked monthly, along with the corresponding rate of growth, boards evaluate this to determine if the business is growing faster or slower, or worse, shrinking (when this is negative). Like it or not, it’s a headline number.
2. Net Revenue Retention (NRR)
We would argue that net revenue retention is actually more important than Net MRR because in most recurring revenue businesses the cost to acquire a customer is one of the biggest factors of profitability. So, while MRR is exciting to watch, you can argue it’s expensive to grow.
Net revenue retention on the other hand measures how much revenue you are holding onto each month, or better yet, how much additional revenue you are adding from existing customers. Best in class recurring subscription businesses run at greater than 100%. Their existing customers are increasing their spending, therefore, relying less on new customer acquisition
3. Customer Lifetime Value (CLV)
In recurring revenue and subscription businesses, where much of the enterprise value is placed on the predictability of the revenue over time, customer lifetime value plays a critical role. In addition, knowing what your customers are expected to spend with you can help rationalize the investment in acquiring and supporting new customers over time.
CLV is defined as the average amount that each customer will pay your business in total over the entire engagement of the relationship. The challenge many early and mid-stage companies face is that there isn’t enough historical data to accurately calculate this value. Therefore many companies extrapolate this by calculating the average customer lifespan (ACL)
Once the ACL is calculated, you can multiply by the average selling price for each customer
4. Quick Ratio
Boards often look at the quick ratio as a proxy for how much new revenue a business is adding (including expanding existing customers) vs. losing each month to customer cancellation (churn). In short, it’s how much new revenue is generated in comparison to how much revenue was lost.
This is most prominent in recurring revenue businesses such as SaaS. Boards look at this number to understand if the growth rate is higher than the loss rate.
5. Revenue Per Employee
Revenue per employee (RPE) is a time-tested metric that often goes unnoticed in the SaaS and subscription economy. It is calculated by taking your total revenue and dividing it by the number of employees (including full-time contractors).
This metric provides the most-basic insight into how much revenue each employee can be associated with. For example, if the average salary for the type of business you are running is $75,000 annually and the revenue per employee is $150,000, congratulations, you are running a solid business. (Please note for companies with large expenses outside of headcount, the RPE needs to be a higher ratio.).
The opposite is often true for high-growth venture-backed companies where the average salary might be $100,000 and the RPE is $80,000 — the business is losing money. High-growth companies will sometimes choose a low RPE but look to improve the metric over time as they target profitability.
Boards look for growing RPEs as a measure of a company’s leverage on its headcount investment.
As someone famous once said, there are no silver bullets — just lots of lead bullets. Our experience is that the best-run companies use their metrics to guide every strategic and operational decision. The metrics that they present to their boards are the same ones they use to guide their business decisions.
Before you say that your data might not be easily accessible or in a workable form, we get it. We encourage you to start somewhere and make small investments to untrap your data.
There is no shame in your data! In a prior life, I was a founding team-member of HubSpot, and I’ll share much of our analysis and KPIs (up to our IPO) were downloaded to Excel for the real analysis. While it might be easy to feel uncomfortable about your data quality, trust-us: there is no data-shaming in SaaS (be on the lookout for a future article on that!)
Jim O’Neill is the Co-Founder and CTO of SaaSWorks. Prior to SaaSWorks he was a founding team member of HubSpot and helped the company grow from 5 employees to over 1,500 and from 10 customers to over 25,000. He was named CIO of the Year by the Boston Business Journal in 2015.