Why the Most Important Success Metric in SaaS Is Misleading

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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)

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What’s the first metric VCs hunt for in your pitch deck? That’s easy..

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CMRR Committed Monthly Recurring Revenue

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“[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

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Ask anyone.

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This is the foundational metric that everyone scours the pitch deck to find. But is CMRR growth everything?

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Two Companies / Same CMRR Trajectory Which company is more interesting?

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It’s not a trick question.

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How does a VC decide which of these two companies to invest in?

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Contrary to popular opinion, it is (a little) more scientific than a blindfolded dart-throwing contest.

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First things first…let’s look at the next level of detail beneath total CMRR growth trajectory

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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.

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Now which company is interesting? Clearly, ABC.

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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.

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THAT GROWTH THOUGH! Wait one second…

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Aren’t these two charts both examining the same two companies? Identical on one chart ? Completely different on other ?

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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.

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Let’s look at the inputs: Beginning-of-month CMRR: more of an input than a variable here, ignore New Customer CMRR: we know this from Chart 2. Again, XYZ is growing and ABC is flat Upsell CMRR Downgrade CMRR Churned CMRR These are all sub-elements of retention

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We can conclude…Company ABC has a churn issue.

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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?

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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

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People call this a leaky bucket

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But… The best companies are seeing that $1 grow (not shrink) over time. Welcome to net negative churn.

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I know I’m not the Christopher Columbus of negative churn.

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But it’s important

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It can be easy to ignore a leaky bucket early on

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These guys are good They’re growing! Go-to-market is scaling!

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But in comparison

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This equation measures CMRR in Month X as a % of CMRR in Month 1 Let’s look at the net dollar retention curves of Company ABC and XYZ to understand what’s going on…

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Wow. This is dramatic.

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And the rose-colored glasses come off

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Let’s assume XYZ is able to scale its go-to-market like ABC. Which will give us a true apples-to-apples comparison

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Compared to ABC…

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XYZ pulls away from ABC. XYZ is now ~58% bigger than ABC. All thanks to superior net dollar retention.

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Which makes VCs say…

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Let’s invest in XYZ!

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What you need to remember Improving net dollar retention gives you much more leverage on the go-to-market front. The 1-2 punch of accelerating customer acquisition and healthy retention is the magic formula for exponential growth and lots of VC love.

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Blake Bartlett OpenView Venture Partners @blakebartlett You can find more content on expansion-stage growth at www.openviewpartners.com Thanks!