During our recent webinar, Trinity Ventures General Partner Karan Mehandru and I discussed how savvy investors evaluate SaaS startups. The topic generated a ton of interest, and we were pleased to see many great questions from attendees. In fact, there were so many questions that we were unable to get to all of them in the allotted time. Here are my answers to a few of the questions that Karan and I were unable to cover.

In case you missed the webinar here’s a link to our full recap post.

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Q: Is cohort analysis something that should be shown to potential investors or kept with current stakeholders?

A: Both! Potential investors can learn a lot from cohort analysis, and these days it’s rare for a due diligence process to take place without cohorts coming into play. Existing stakeholders can use cohort analysis in the same way — to better understand your customer economics and the health of your business.

But even more importantly, you should be using cohort analysis for your own benefit. Its value stretches far beyond just impressing investors. To learn more, visit cohortanalysis.com

Q: What is an optimal LTV:CAC ratio for SaaS companies in various stages? What is the percent of MRR that shows a good growth of a company? What is the target ratio for Cash to Burn?

A: These numbers will vary based on your industry, stage, and market conditions. However, there are helpful benchmarks out there that provide answers for SaaS businesses. A few that I know and respect are the Pacific Crest SaaS Survey and the Insight Partners Periodic Table of SaaS Metrics.

Q: What should we look for when hiring someone to put together these metrics? What stands out in a candidate to you?

A: It’s important to find a well-rounded candidate, because understanding statistics and knowing the definitions of SaaS metrics are just the table stakes. This person will likely have to work with third party vendors, navigate your organization to make sure the correct data is being used, and coach managers on how to consume and interpret this data. This is why the role of data analyst is such an in-demand position and often very difficult to fill.

Q: Can you clarify the difference between discretionary churn vs. regular churn?

A: Typically, a company’s churn is expressed as the recurring revenue lost in a period divided by the total recurring revenue that existed at the end of that period. In other words, churn is the percent of your revenue that went away.

However, it can also be useful to use a different denominator in your calculation: the amount of revenue that actually had the opportunity to churn in that period. This is discretionary churn. For example, if you have 100 customers but only 3 had contracts that allowed them to cancel in a given month, the denominator for discretionary churn would be just the revenue from those 3 companies as opposed to including the other 97 who couldn’t have churned even if they wanted to. Because of this, the discretionary churn percentage is definitionally always the same or larger than the regular churn percentage.

Q: With the SaaS magic number equation, do you ever take into account other costs such as overheads, salaries, etc. or is it just sales and marketing?

A: The overhead associated with sales and marketing (sales salaries, meals and entertainment, software, etc.) should be included in the customer acquisition cost (CAC) number. But this isn’t true for all departments.

For example, customer success expenses typically impact gross margin, and R&D expenses can sometimes be capitalized and amortized over time. Because of this they don’t reflect on your acquisition efficiency, so including them in CAC and the magic number would be unnecessarily punitive.

If you want to learn more details on the metrics every SaaS company should be tracking, sign up for our next webinar on June 18th: The Ultimate 30-Minute Guide to SaaS Analytics.

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