This article originally appeared in Sifted, the Financial Times back publication about high growth startups in Europe.
Software companies have stolen European investors’ hearts since 2020, and in a digital ecosystem that prizes cloud computing above oxygen, everyone’s clamouring for a seat at the table.
But claiming a slice of the $56.2bn SaaS market isn’t for the faint-hearted. Picture the pace of any other industry’s scaleup, on steroids: one study says if your SaaS startup doesn’t hit a robust 20% annual growth, there’s a 92% chance of failure within a few years.
Younium, a B2B subscription management service, provides software solutions for SaaS startups and scaleups on how to stay on top whilst automating subscription and billing processes. Commercial director Wolter Rebergen tells Sifted that the crowded market has fostered a thriving SaaS community across the continent, where knowledge sharing is welcome but reputation is fragile and all-important.
“In these hubs, when a company loses its reputation, it spreads fast. We see companies sink below 20% [growth] and fail and they have to relocate internationally and start over. They go somewhere else to register as a separate entity.”
Rebergen summarises the climate neatly: “Hire, develop, scale: SaaS companies are up for sale. We’re being hunted for acquisition; you absolutely need to get your metrics in order.”
So which KPIs actually predict success for a SaaS?
1/ Customer Acquisition Cost (CAC) vs Annual Contract Value (ACV)
Rebergen puts Customer Acquisition Cost — compared with the Annual Contract Value — at number one because “it simply translates to profitability.”
CAC is calculated by combining the costs spent on marketing and sales divided by the total number of customers, showing the average cost to acquire each customer. By comparing this amount to ACV brought in — or the average contract value of your customer subscriptions — it assesses the efficacy of sales and marketing strategies, and most importantly, highlights what isn’t working.
“If your ACV divided by your CAC has a sound ratio of 1 or above… this is a good indication that spending more money on sales and marketing will give good returns”
“If your ACV divided by your CAC has a sound ratio of 1 or above, it’s a really efficient growth machine. This is a good indication that spending more money on sales and marketing will give good returns,” Rebergen says.
He emphasises: “The shorter the customer journey from interaction to signing the contract, the lower your CAC will be.” A good ratio is key for a growing SaaS company.
Your worst enemy and best friend. Churn is the number of customers per month who decide that your subscription service isn’t for them — and it’s the metric you need to know at all times.
Armand Naessens, an investment analyst at Netherlands-based VC fund Newion that invests in many SaaS companies, stresses that the deadliness of churn depends on the nature of the product and its competitors. For example, for SaaS companies with multiple subscriptions, he says: “If there is little churn but zero upsell then the key target market must be sufficiently big to be able to reach the hyper scaling phase.”
Churn is occasionally called “full churn” or “hard churn” thanks to its sister KPI, contraction/soft churn, which indicates the number of customers who downgrade their subscription instead of cancelling outright.
3/ LTV/CLV — Customer Lifetime Value
Lifetime value, which predicts what a client will provide to the company over the duration of their contract, is why having an accurate churn rate is so crucial.
Without years’ worth of historical data on how long a customer’s lifetime actually is, the ability to calculate the capital that they’ll provide over the course of their subscription means a SaaS can forecast their income can over months or years, allowing for experimentation and expansion — the lifeblood of a SaaS startup.
But, Rebergen says, there is one big pitfall when it comes to LTV — when you have extremely low churn, LTV will skyrocket: “Having a 30-year horizon in SaaS doesn’t make much sense,” he says, as software will change rapidly in three years, let alone 30.
4/ Net retention
“Net retention really asks you: am I growing revenue on my base, or are existing customers slowly decreasing their service?” Rebergen says.
“Net retention really asks you: am I growing revenue on my base, or are existing customers slowly decreasing their service?”
Measured as a monthly percentage, net retention is essential to services with an array of subscription options as they demonstrate both revenue and customer satisfaction.
What makes for a good net retention score? The average net retention across SaaS companies is kept at a 100% baseline; net retention of 129% indicates upselling across the board, and if it sinks to 90%, it’s time to call a product meeting.
5/ Sales duration cycle
Often forgotten in pitch decks is how long it takes for a lead, or the initiation of a sale, to result in a signed contract — but Naessens says this length of time can make or break his faith in a startup.
“There is less room for experimentation and, consequently, creating the predictability required by growth investors, will probably take more time. This has to be matched in the financial plan with a lesser aggressive burn rate to prevent the company from running out of cash,” he tells Sifted.
If the spiral isn’t caught in time, founders will have to raise a bridge round in between larger funding rounds — an investor’s worst nightmare.
It’s not all numbers…
Proven ability to scale is never more essential than when a SaaS founder meets with investors. And yet, Naessens warns the lack of available data points forces investors to take a holistic view of early-stage startups as well as a numerical one.
Without razor-sharp metrics tracking, SaaS startups can’t grow
“Our research is much more qualitative than quantitative,” he says, “which means that key metrics aren’t that useful when they are not put in their respective and often unique context. When we investigate a company, we study the product, the market it is operating in and the team and use metrics to verify the quality of the business plan.”
Without razor-sharp metrics tracking, SaaS startups can’t grow. As well as hosting its own SaaS Knowledge Hub, Younium offers a range of B2B subscription services to automate both tracking and billing processes, providing secure and transparent reports that enable startups and scaleups to focus purely on building a competitive product.
In order to gear up for long term growth, SaaS startups should be looking into subscription management solutions like Younium, which easily connect to existing systems and automate billing, reduce errors and give valuable insights on forecasting.