#039 Metrics that Matter : How we look for traits of Anti-fragility in Enterprise SaaS businesses

Metrics serve as quantitative indicators of businesses and tell us how healthy and robust the company is, not just financially, but also in terms of its resilience and ability to grow even when faced with challenges.

In the world of SaaS, metrics like ARR (Annual Recurring Revenue), MRR (Monthly Recurring Revenue), CAC (Customer Acquisition Cost), and LTV (Lifetime Value) are like vital signs, giving us a clear picture of company's performance and potential. As the SaaS industry undergoes rapid expansion, businesses are increasingly prioritizing metrics that accurately assess their adaptability and resilience within the ecosystem. Notably, when it comes to Enterprise SaaS these metrics need to be far more profound.

A truly strong Enterprise SaaS company, in our view, are metrics like DSDE (Dollar Spent to Dollar Earned), NER (Net Expansion Rate), and MRV (Months of Revenue Visibility). These go beyond the surface and show us how well the company can handle tough times. It's like having a built-in resilience that helps it not just survive, but thrive, especially when things get rough - making it truly anti-fragile!

DSDE (Dollar Spent to Dollar Earned) - a representative of “Account level profitability”

DSDE tells us how effectively a company's spending on serving customers translates into revenue generation (in simple terms, how much $ is spent to earn a revenue of $1). It encompasses all costs associated with serving customers including customer success, customer support, account-based apportioned costs incurred in managing the customer’s account such as all direct and operating costs towards maintaining the account, financing costs towards credit periods, etc. (excluding sales & marketing costs), thus providing a comprehensive view of Profitability at Customer level.

If DSDE ratio is low, it indicates effective pricing strategies, good customer adoption and usage, opportunities for upselling etc. We simply tell our founders to prioritize such customers!. Conversely, a high ratio implies inefficiencies in servicing the particular customers, opportunities to find solutions of reducing such costs, or eventually phasing out such accounts which do not perform at the DSDE level, leading to a higher DSDE.

One must track the DSDE performance every quarter at account level to ascertain trends of how this metric is moving and how quickly is it moving towards positive scale. Ideally, in a 3-to-9-month period, an account should turn green from a profitability perspective! This is the time a new customer might take to adopt a certain product/platform and stabilize usage, given that there is additional support and customer success interventions needed in the early phases of onboarding a new customer.

As investors, the DSDE metric really helps us qualify the quality of growth that a company is building and helps create early warnings when things aren’t going too well. Much like looking under the hood of a car when nothing is broken to assess if there’s a possibility of break down and taking pre-emptive actions to avert the same. Additionally, in many cases DSDE is commonly used in public companies while in early stage/ privately held companies the same metric is often retained as account level profitable.

Net Expansion Rate (NER) – showcasing “Growth Endurance” of a SaaS business

NER a growth scorecard for companies. It measures the health of growth of a company at a rationalized level where no single account is an indicator of the trend. Instead of focusing on customer churn alone, NER further assesses growth achieved from current customers and demonstrates higher adoption of the product / platform.

NER ratio is typically driven by :

• Usage Expansion: Help existing customers expand usage of the current product / platform – add number of users, take to new teams, segments, geographies, etc.

• Upselling Strategies: Invest consistently in expanding relationships with existing customers and run upselling strategies, where new products and solutions could be marketed to existing customers.

• Business Model Changes: Moving to revenue share models and value-share models from simple usage-based models often enhances the revenue realization from customers

The ideal range of value of NER is 120% or higher, and often indicates the power of the product / platform, the impact it creates for customers, stickiness, customer satisfaction, and a more qualified means to measure net promoter score (NPS) in comparison to customer surveys!

Months of Revenue Visibility (MRV) – helps ascertain the “Innate Sustainability” of a SaaS business!

MRV is like having a crystal ball for business's future revenue. It tells us how much recurring revenue can be expected in coming months and for how many months is the visibility qualified based on contracted revenue which is to be delivered over these months.

This is a definitive indicator of the health of the business, cash availability in the coming months, survivability if difficult market conditions, ability to deal with macro headwinds, etc. and thus provides a significant input in building strategies for budget management, cash conservation, cost reduction, as needed to see the tough times through. We often use this metric as a tool to do a quick dip-stick on how the funding positions of our portfolio companies are and also predict timelines for the next fund raise.

A higher MRV implies stability, self-sufficiency, and reduced urgency for external funding, which bolsters the confidence to pursue growth plans. On flip side, a low MRV implies flying blind into the future, uncertainty about what lies ahead and cash sufficiency, which often spooks investors and makes it harder to raise capital in the future.

How these 3 metrics are core constituents of Antifragility in any business?

During times of turmoil like economic downturns or global crises such as pandemics, businesses face immense pressure to adapt or risk collapse. Many businesses, even those once considered strong, falter under stress. So, what sets apart the few that not only survive but thrive? The answer lies in their ‘Antifragility’.

Antifragile businesses don't just weather the storm; they flourish amidst chaos.

How? By embracing change, innovating swiftly, and leveraging their strengths to see the tough times through. They build deep connections with customers leading to persistency in business, pivot strategies when needed, and always have a backup plan ready to ensure continuity.

Take the COVID-19 pandemic, for instance. While it wreaked havoc on many sectors, certain industries like e-commerce and online education thrived. But what about enterprise software? Interestingly, it found its silver lining. Enterprise SaaS startups saw increased adoption of their platforms across various sectors. This is because SaaS businesses inherently possess traits of antifragility – recurring revenue, seamless scalability, customer retention, and inherent agility. Enterprise customers doubled-down on SaaS businesses as these helped automate workflows (especially critical in a remote working environment), reduced operating costs in an environment where every enterprise was dealing with uncertainty, helped rapidly become digital to adopt to new realities!

In essence, Enterprise SaaS businesses didn’t just survive adversity; they thrived in it. They emerged stronger, seized new opportunities of growth, and set themselves up for long-term success – truly Antifragile!

How have our portfolio companies demonstrated resilience?

As a fund, we've invested in Core platform solution companies that drive top-line or bottom-line growth for their customers even in capital-constrained situations. When customers face constraints, they lean on these solutions to enhance their businesses, driving both top-line and bottom-line improvements. Their models are built to be low-cost, with minimal or no capital expenditure required. They operate on a pay-per-use basis and have evolved into value-sharing models, aligning their success with that of their customers, making them Antifragile.

Of course, the tenets of this Antifragility also emerged validated through this time, and how?

1)      Account based Profitability (DSDE) – we saw adoption of several digital tools on the customer success and servicing side, leading to healthier DSDE ratios across our portfolio companies. Furthermore, the uptick in revenue across customers led to higher profitability!

2)      Growth Endurance (NER) – enhanced usage, expanded adoption within an organization, and pull demand for upselling and cross-selling which was supported by quick innovations to create new functionalities and capabilities, led to significant growth from existing customers for our portfolio companies. This was probably the most cost-efficient growth they had experienced through their life-cycle.

3)      Innate Sustainability (MRV) – while it appeared like we will hit several cash crunch situations, the expanded revenues from existing clients, a significantly enhanced pipeline, and seamless, easier, faster contract cycles (with decision making being crunched), created significant cash-flow visibility that put our companies in a much stronger position.

Conclusion

DSDE (Dollar Spent to Dollar Earned), NER (Net Expansion Rate), & MRV (Months of Revenue Visibility) are intricately interconnected metrics that we believe are crucial for evaluating B2B SaaS or Enterprise SaaS companies.

These are the metrics we use to assess both new investment opportunities and portfolio companies, and naturally we prioritize those which score well on these parameters. But beyond selection, these metrics can truly define the interventions necessary and strategies to be deployed across these companies to deliver sustained growth!

While not every company may excel in all three metrics, we work along-side founders to strengthen these parameters and build core business strength, foster growth and establish resilience to face market volatility and macro-headwinds, ultimately enabling companies adapt, emerge stronger and become antifragile!

- Payal Punatar Doshi