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?

<aside> 💡 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:

  1. Revenue & Growth: Double-digit growth when you have hit $10K MRR is an indicator of PMF (Source: SaaStr) Additionally, an increase in ACVs per customer or an increase in usage or accounts per logo can be an indicator of PMF.
  2. Customer Validation: Survey existing users to understand ‘how they would feel if they could no longer use the product?’ – According to Stephen Millard and Joshua Olusanya, if over 40% of users say ‘very disappointed’ you have hit PMF (Source: Notion VC, PMF frameworks) In other words, hit +40% customer NPS.
  3. Marketing spend: Ideally, in the easiest stages of a product development process, pull is happening organically (i.e., without any advertising spending) (Source: a16z on PMF) One of the most common ways that startups die is “premature scaling,” a term first used by Steve Blank. A business is “scaling prematurely” if it is spending significant amounts of money on growth before it has discovered and developed 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.

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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?

  1. 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
    Existing MRR Monthly revenue from your current users.
    (Baseline to grow from) -
    New MRR MRR generated by new customers.
    (Note: measure marketing spends against New MRR) Median
    70-60% of MRR (When total MRR is < $250K)
    50% of MRR (When total MRR i >$1M)
    Expansion MRR Additional MRR from existing customers. Median
    ~30% of MRR, when total MRR is > $1M
    Lost MRR Lost MRR from cancellations & downgrades. Determines churn rate
    Contraction MRR Lost MRR from customers who downgraded. 30% of Lost MRR
    Churned MRR Lost MRR from customers who canceled their subscriptions. 70% of Lost MRR
    Re-activation MRR MRR generated by customers who come back to use the product. Median
    9-13% of MRR
    ARR MRR x 12, will be different from the last 12 months of revenue. -
    ARPA Average Revenue Per Account
    (MRR / # of Active Accounts) Higher ARPA correlates to lower revenue churn
    ACV Value of a customer's contract over a 12-month period. -
    Customer Lifetime Value (LTV) The average amount of money that your customers pay during their engagement with your company – Indicates what your average customer is worth. (ARPA x 1/Customer churn rate) An effective way to calculate LTV is to analyse cohorts (12 months to 3/5 years) -
    Bookings Bookings represent the commitment of a customer to spend money with your company. (Contract signed) Important to track – Bookings to Revenue Conversion (Time taken, drop-off rates)
    Revenue Revenue happens when the service is actually provided. -
    Billings Billings is when you actually collect your customers’ money. (Cash inflow) -