Business

What to monitor in a SaaS startup - what investors are looking for

Discover which metrics are used by investors to valuate a startup
Filippo Burattini
8 min to read

What to monitor in a SaaS startup - what investors are looking for

If the job of building a startup wasn’t hard enough, we also need to add on top of it the full-time job of searching for investors and, in recent years, they have become more and more picky.
Luckily the amount of available information has also increased, with more investors and VCs starting to share what they look for in a startup before deciding to invest in them or not. This guide will help you understand which metrics investors look at before deciding to invest in a startup, especially in a SaaS business, just remember, that every investor is different and this might not fit all of them.
Luckily SaaS is one of the simplest business models to monitor and to understand the meaning of the metrics and how they work together.

Table of contents

  • Monitoring marketing
  • Monitoring sales
  • Monitoring customer success
  • 3 key profitability ratios

Monitoring marketing

The first thing that you should track from your marketing is the number of visits to your website. This is the common starting point of every possible funnel that you might have.

To go one step deeper you will need to divide between paid and organic traffic. Paid traffic comes from ads that you place around and is traffic for which you pay for, so it is limited in how much you can scale it. Organic traffic, on the other hand, has no limits on how much it can scale, that’s why investors prefer having the big majority of your traffic to be organic.

Next up we need to monitor the first interaction that they have with your site, which is usually your CTA (call to action), so scheduling a demo, talking to sales or signing up for a trial. At this point, we will call these visitors to the site which have shown interest, leads. This will act as your second step in the funnel.

Finally we need to monitor how many of those leads convert and become paying customers. Regardless of your sales process, at the end of the day, we need to know how many visitors convert to leads and finally to customers.

How to monitor

Most hosting platforms (like WebFlow or WordPress), already provide statics around your website traffic, but you could get more details by installing a tool like Google Analytics or Simple Analytics.

Benchmarks

For companies with an ARPU < 10k

  • most signups should come from organic traffic, more than 80%
  • there should be a consistent growth of signups month over month, this means that your organic marketing strategy is working
  • the conversion rate from visitors to signup should be around 3-5%
  • the conversion rate from the second step in the funnel (trial or demo) should be around 5-10%

For companies with an ARPU > 10k

  • the number of inbound leads should be increasing month over month
  • the company should show that it can generate leads from outbound marketing

Monitoring sales

This is the part most dependant on your specific sales cycle. If you are a self-service SaaS, which basically means that your customers onboard and checkout by themselves without the need of any human intervention, then you don’t need to monitor this part, since you don’t have it. For the other companies with a sales process they need to understand their sales pipeline.

You need to understand and track how your lead moves through your pipeline and the percentages of movement between one step and the next. For instance, a typical sales pipeline might look like this: prospect → demo/trial → proposal → negotiation → won/lost. A funnel diagram would be the best in this scenario with distinct number of leads in each part of the funnel and with the conversion rate to show the percentage of leads that pass from one step to the next.

The nice thing of knowing your performance in your sales pipeline is that it becomes real easy to communicate with the marketing department to determine how many leads are needed. For instance, if the overall performance is 18% and we want to finish the year with 100 customers, then we will need 556 leads in the year.

How to monitor

If you are using a CMS or a sales monitoring tool, than you should already have all that data, otherwise there is till the option to do it manually on Excel.

Benchmarks

  • the overall performance of the sales pipeline (from the first step to the closed step) should be around 25-30%
  • the size of the pipeline (which means the number of leads that are in it) should be 3-4 times the target revenue

For companies with an ARPU < 1k

  • sales cycle should be around 30 days

For companies with an ARPU around 10k

  • sales cycle should be around 2-3 months

For companies with an ARPU > 10K

  • sales cycle should be around 3-12 months

Monitoring customer success

The first thing that you should when monitoring customer success is defining your north star metric. This is the single and most important metric for your business and is the main indicator of your success. For Facebook, this was the number of daily active users over monthly active users (DAU/MAU), for Typeform, the number of forms a single user would create in a month and for Airbnb, the number of bookings. As you can see the north start metric can vary depending on your business, so be sure to think about it and track the correct one.

Next up you can start monitoring your net promoter score (NPS). This is a big topic and may need a dedicated article, but in short, you send out surveys to your users and ask them how likely they are to recommend and share your product, you then rank those responses. If you want to learn more, check out this article.

Then, of course, you need to monitor churn. Churn is maybe the most direct metric in telling you is your customers are happy after having bought your product. More about churn rate can be found here.

How to monitor

Understanding your north star metric requires some deep and serious thinking about your business, but it should come out naturally once you start thinking about it. Don’t over-engineer it.

NPS can be measured with a simple survey that you send out and then collect and organise the data in a spreadsheet, of course there are also tools that help you do that.

Benchmarks

For companies with an ARPU < 10k

  • NPS should be around 25-30

For companies with an ARPU > 10k

  • NPS should be around 10-20

For companies going after SMB

  • Churn rate should be around 3-7%

For companies going after Mid Market

  • Churn rate should be around 1-2%

For companies going after Enterprise

  • Churn rate should be around 0.5-1%

3 profitabilities ratios

After monitoring those three important parts of your business, you can introduce some ratios, which can tell you if you are going to be profitable or if you need to reconsider some aspects of your business.

CAC

Customer Acquisition Cost. There is a lot to say about CAC, but in simple terms, it is the number of new users divided by the total marketing (and sales) spend in that period. For a more detailed explanation click here.

One of the most important things about CAC, is that it allows you to understand your unit economics, which is the most important part of any business and that is not talked about enough. By measuring CAC you can understand where you fall in the matrix below. I don’t think I need to explain where you shouldn’t be.

CAC Payback

This is very easily the amount of time it takes you to recover the cost of acquiring a new customer. So, for instance, you charge $100/month and your CAC is $400, then you will recover your investment in four months, meaning your CAC payback is 4 months.

One very nice thing that you can see here, is that if your customers pay annually instead of monthly, then your CAC doesn’t increase, but the payback is cut down to just one month. This allows you to more heavily invest in growing your company without needing outside capital

A good CAC payback is less than 12 months, but depending on your churn, you might to have a faster payback.

CAC to LTV

And the last one is the holy grail that everyone is searching for, the golden ratio of all SaaS metrics, the ratio between CAC and LTV, that should be bigger than 3.

Disclaimer

All the benchmarks that I’ve talked about are for very good companies on their way to massive success, so if you are not clear on all of them, don’t worry, you have time to adjust and remember, that sometimes to accelerate growth, you might need to sacrifice some metrics here and there, just don’t be careless. The most important thing is probably that you actually understand why those metrics are important and that you track them.

Wrapping it up

We probably know better than anyone else how hard can tedious it can become to track all these different metrics, you end up wasting hours and hours jumping from dashboard to dashboard, checking all your various tools and digging through messy excel exports. Luckily this is exactly the problem we are solving: we know how difficult the job of running and growing a startup is, but we also understand that it just can’t be done without measuring important metrics.

So we have developed LlamaFinancial to help you manage and keep track of all your metrics from acquisition, through revenue and to expenses. Come check it out now and stop wasting time and money!

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