One thing that is great in SaaS, from a 20,000 foot perspective at least, is You Can See The Future.
It’s the benefit of a recurring revenue stream in a B2B model. If you did $100k last month, and have grown 6% a month each month for the last 12 mos, I can pretty much say you’ll be a $2m+ ARR business in the next twelve months or so.
The thing is, sales is variant, and sales pipelines have big data quality issues — and worse, sales as a metric is a lagging indicator. In fact, your monthly sales tell you about the past. Pipelines are cr*p for predicting the future. Pipeline for This Month is useful, but still dependent on how various reps get probability right. Pipeline for Next Quarter is almost useless for most SaaS start-ups, even once you get pretty big. And actual sales are
One of the most important operating metrics in your SaaS start-up, if you aren’t predictably cash-flow positive, is your Zero Cash Date (“ZCD”).
You hear a lot about SaaS metrics, but this one doesn’t often come up. It should, and should be very near the top of the list of core metrics.
Your Zero Cash Date is the most likely date, at your current spend/burn, that you will run out of cash.
Many start-ups don’t track this religiously, or with 100% certainty, and just as importantly, don’t always share it with every single one of your investors — and your employees.
I didn’t track it as carefully in my first start-up, but it was the #1 metric for my first investor in Adobe Sign / EchoSign. For good reason. Once I tracked it super-carefully, I found it super-helpful. It aligned everyone in the company, and all the investors (including F&F),
In both my start-ups, I was constantly worried about losing all my investors’ money. The first time, my first start-up which we haven’t talked much about, NanoGram Devices, I mainly worried about it because I realized we’d almost never have enough capital to achieve our long-term goals. So, FBOW, we sold for $50,000,000 after 12.5 months.
At Adobe Sign / EchoSign, it was a bit different. My investors included my old bosses, and, as time went on, myself to a material extent. When things were rough in our first 12 months, one of the main reasons I didn’t quit was because I couldn’t bear to lose their money. So that was good, in the end, that fear of losing your investors’ money. At the time, at least. It got us to our “Series B” (what would be called an early Series A today and ultimately a pretty good
SaaS metrics can be more confusing than one might think. What if some of the revenue doesn’t recur? What if the client never deploys? What if a customer churns, but is on an annual contract? Is that just a blip in our NPS?
My SaaS Metrics Primer:
* ARR always = 12x MRR. Always. * There's no such thing as a Gross Burn Rate * If your cash collections < MRR, your MRR is wrong * The later the investor update, the worse the month * There's no churn that "doesn't count" * Your NPS is lower than u think
— Jason BeKind Lemkin (@jasonlk) November 16, 2020
I hear you. Still, let me share 6 flags that when I see and hear them … I worry.
1. ARR always = 12x MRR Always. Look, ARR and MRR aren’t really GAAP metrics. But
So I know you’re gearing up for a big year end push now, and that you’ll crush it next quarter. More on why the great sales teams almost always end Q4 strong here.
But SaaS is a journey. 7-10 years to get anywhere good. And another 7-10 after that to get to the iconic level. Along the way, you are going to miss a quarter. Or 3. Or 5. (And likely even have one Year From Hell).
When it happens, and it will happen, let me just provide some basic thoughts.
First, is it a Soft Miss or a Hard Miss — I.e., were new bookings still higher than last quarter?The difference is super important. If you’d hoped to grow 35% last quarter, and came up short at 25% … but still added more net new revenue than the quarter before — that’s a
So Zendesk has become the latest SaaS leader to cross $1B in ARR. Woah!! I remember back in the day when Salesforce thought Zendesk was just a cute little app they could clone and beat with Desk.com. Well, what happened there? Desk.com is long gone to the dustbin of history. And Zendesk crossed $1B in ARR, growing 24%.
Ok so what are the top 5 learnings here for SaaS and Cloud founders?
Zendesk’s churn is still a bit higher than pre-Covid, but is almost back to pre-Covid levels. And expansion revenue is higher than pre-Covid. So if you sell to SMBs, or a mix of SMBs and enterprise like Zendesk does (with 160,000 total customers), well … enough with the excuses on churn. It’s
One thing I see most SaaS companies do a pretty poor job of until they have a great finance team is a go-forward model. A real financial model for the next year.
It’s not that everyone doesn’t do some sort of financial model. Most do. It’s just … they tend to not really make any real sense. Not when you do a deep dive and really probe the assumptions. If you went from $1m to $3m ARR this year … why exactly are you going to do $12m next year?