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SaaS Money Metrics: Why VCs Should Focus More on Retention Than Growth June 2014

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SaaS Money Metrics: Why VCs Should Focus More on Retention Than Growth June 2014


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SaaS Money Metrics About IVP SaaS Market Overview Measuring SaaS Efficiency Retention is King


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IVP History


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IVP Summary Current Fund: IVP XIV, a $1 billion later-stage venture capital fund Target Sectors: Tech only (Consumer and Enterprise) Investment Focus: Growth companies, generally with over $10 million in revenue Geography: Primarily United States Team: 6 General Partners with over 100 years of combined experience Portfolio: Over 300 companies, 99 of which have gone public


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IVP SaaS Investments


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SaaS Money Metrics About IVP SaaS Market Overview Measuring SaaS Efficiency Retention is King


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The World Has Changed 44% Decline


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Growth No Longer Rewarded as Highly Source: Bank of America Merrill Lynch


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Red is the New Black: LTM EBITDA %: 2012-2014 Software IPOs


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SaaS Money Metrics About IVP SaaS Market Overview Measuring SaaS Efficiency Retention is King


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ThrustSSC 760 MPH .04 MPG


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Chevy Spark EV 89 MPH 128 MPG


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Two Measures of SaaS Efficiency Magic Number LTV / CAC


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Magic Number Magic Number = (Q1 GP$ - Q4 GP$) *4 Q4 S&M$ A Magic Number of 1 means you break even on your sales and marketing spend after 1 year


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Magic Number Example Magic Number = = 0.44x or 2.3 yrs to breakeven ($16.1 – $14.8) *4 $11.4


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LTV / CAC LTV / CAC = GP$ Per Customer * Avg. Customer Life Customer Acquisition Cost


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LTV / CAC Example LTV / CAC = = 7x $700 * 5 $500 You sell your product for $1,000 per year at 70% GP Customers churn 20% per year (5 year average life) It costs $500 to acquire each customer


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LTV / CAC Over Time Magic Number LTV / CAC


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SaaS Efficiency Goals Magic Number = Above 0.5x (Less than 2 years) LTV / CAC = Above 5x


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SaaS Money Metrics About IVP SaaS Market Overview Measuring SaaS Efficiency Retention is King


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Retention Trumps Growth Company A $200K New Revenue Per Month 90% Monthly Retention 3 Years Later = $2.0M Run-Rate Company B $100K New Revenue Per Month 99% Monthly Retention 3 Years Later = $3.1M Run-Rate


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Retention vs. Growth


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Case Study: Hare (AVG Technologies) Source: Company filings. Analyst reports. 47% CAGR 6% CAGR Consumer Software Churn = 30-40% Per Year


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Case Study: Tortoise (Concur) 28% CAGR Customer Churn = 2% Per Year Source: Company filings. Analyst reports.


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Case Study: Unicorn (Workday) 109% CAGR Low/Negative Churn – 3 to 5 Year Contracts Source: Company filings. Analyst reports.


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Retention vs. Growth


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Retention vs. Growth


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Measuring Cohort Revenue Source: David Skok. SaaS Metrics.


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Tortoise or Hare?


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Cohort Revenue (Negative Churn) Source: Model adapted from Startup Calculus (Joe Floyd)


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Source: Model adapted from Startup Calculus (Joe Floyd) Cohort Revenue (8% Churn)


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Questions Jules Maltz General Partner, IVP jmaltz@ivp.com @julesmaltz Thank You!


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