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Why the Most Important Success Metric in SaaS is Misleading

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Presentation given by Blake Bartlett from OpenView Venture Partners. What’s the first metric VCs hunt for in your pitch deck? Easy… committed monthly recurring revenue (CMRR). Everyone knows that, right? In their famous report on the laws of cloud computing, Bessemer Venture Partners rightly says, “[CMRR] is the single most important metric for a Cloud business to monitor, as the change in CMRR provides the clearest visibility into the health of any Cloud business.”

Ask any cloud / SaaS investor, and they’ll say the same thing. This is the foundational metric that everyone scours the pitch deck to find.

But is CMRR growth everything? Let’s compare two companies with nearly identical CMRR growth curves. We’ll call them Company ABC and Company XYZ. The chart below shows that indeed, both companies are on the same CMRR trajectory.

Read more at http://blog.openviewpartners.com

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Why the Most Important Success Metric in SaaS is Misleading

  1. Blake Bartlett OpenView Venture Partners @blakebartlett Why the Most Important Success Metric in SaaS Is Misleading Featuring the stars of the new Vince Vaughn movie – Unfinished Business (and other celebrities)
  2. What’s the first metric VCs hunt for in your pitch deck? That’s easy..
  3. Committed Monthly Recurring Revenue
  4. “[CMRR] is the single most important metric for a Cloud business to monitor, as the change in CMRR provides the clearest visibility into the health of any Cloud business.” Bessemer Venture Partners Laws of Cloud Computing
  5. Ask anyone.
  6. This is the foundational metric that everyone scours the pitch deck to find. But is CMRR growth everything?
  7. Two Companies / Same CMRR Trajectory $0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 Total CMRR Over Time Company ABC Company XYZ Which company is more interesting?
  8. It’s not a trick question.
  9. How does a VC decide which of these two companies to invest in?
  10. Contrary to popular opinion, it is (a little) more scientific than a blindfolded dart-throwing contest.
  11. First things first…let’s look at the next level of detail beneath total CMRR growth trajectory
  12. Gross New CMRR Added per Month Since each month can be viewed as a new customer cohort (upsells are excluded), this tells you the size of each new cohort you’re adding (in $). This is basically your new customer sales. $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 New Customer CMRR Per Month Company ABC Company XYZ
  13. $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 New Customer CMRR Per Month Company ABC Company XYZ Now which company is interesting? Clearly, ABC.
  14. I MEAN… THAT GROWTH THO!
  15. $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 New Customer CMRR Per Month Company ABC Company XYZ ABC has grown the new cohort size (aka sales) by 2.4x in 2 years. ABC clearly knows how to scale! XYZ is so boring. They’ve been adding $10K of new CMRR every month for two years. WOMP WOMP. No thanks XYZ.
  16. THAT GROWTH THOUGH!Wait one second…
  17. Aren’t these two charts both examining the same two companies? Identical on one chart  Completely different on other 
  18. Huh?
  19. Solving for end-of-month CMRR (1st Chart) is pretty simple arithmetic. End-of-Month CMRR = Beginning-of-month CMRR + New Customer CMRR + Upsell CMRR - Downgrade CMRR - Churned CMRR.
  20. Let’s look at the inputs: 1. Beginning-of-month CMRR: more of an input than a variable here, ignore 2. New Customer CMRR: we know this from Chart 2. Again, XYZ is growing and ABC is flat 3. Upsell CMRR 4. Downgrade CMRR 5. Churned CMRR These are all sub-elements of retention
  21. We can conclude…Company ABC has a churn issue.
  22. What’s the best way to measure churn and benchmark against other SaaS companies? Net dollar retention. If I acquire $1 of CMRR today, what is that $1 worth over time?
  23. I’ve seen a lot of companies recently with strong CMRR growth But weak net dollar retention – with $1 of CMRR shrinking to 40-50¢ within 12 months
  24. People call this a leaky bucket
  25. But… The best companies are seeing that $1 grow (not shrink) over time. Welcome to net negative churn.
  26. I know I’m not the Christopher Columbus of negative churn.
  27. But it’s important
  28. It can be easy to ignore a leaky bucket early on
  29. These guys are good They’re growing! Go-to-market is scaling!
  30. But in comparison
  31. This equation measures CMRR in Month X as a % of CMRR in Month 1 0% 20% 40% 60% 80% 100% 120% 140% CMRR in Month X as a % of CMRR in Month 1 Company ABC Company XYZ Let’s look at the net dollar retention curves of Company ABC and XYZ to understand what’s going on…
  32. Wow. This is dramatic.
  33. And the rose-colored glasses come off
  34. Let’s assume XYZ is able to scale its go-to-market like ABC. Which will give us a true apples-to-apples comparison $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 New Customer MRR Per Month Company ABC Company XYZ
  35. +
  36. =
  37. $0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000 $450,000 Total CMRR Over Time Company XYZ
  38. Compared to ABC…
  39. $0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000 $450,000 Total CMRR Over Time Company ABC Company XYZ
  40. XYZ pulls away from ABC. XYZ is now ~58% bigger than ABC. All thanks to superior net dollar retention.
  41. Which makes VCs say…
  42. Let’s invest in XYZ!
  43. What you need to remember 1. Improving net dollar retention gives you much more leverage on the go-to-market front. 2. The 1-2 punch of accelerating customer acquisition and healthy retention is the magic formula for exponential growth and lots of VC love.
  44. Blake Bartlett OpenView Venture Partners @blakebartlett You can find more content on expansion-stage growth at www.openviewpartners.com Thanks!

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