The Financial Metrics That Actually Matter at Each Stage of SaaS Growth

Metrics matter for your SaaS startup. They can help provide objective insight into your startup’s performance, guide strategic decision-making and ensure your startup is growing in a healthy and sustainable manner. Tracking the right metrics can also help you better understand customer behavior so you can make decisions about the future of your startup accordingly.

Yet, not all metrics are created equal, underscoring the importance of tracking the right ones at various stages of your startup’s growth. When you track the right metrics, you can tell a story about your startup based on its current state and growth trajectory, something that can help guide leadership decision-making and be influential during fundraising campaigns.

In this post, we’ll take you on a SaaS startup stage-by-stage journey through the evolution of your metrics, describe how they change over time and provide guidance on the ones that matter most. Read on to learn more or contact Graphite Financial today for more information.

Why Your Financial Metrics Strategy Must Evolve with Growth

Metric priorities shift as SaaS companies mature over time because priorities change amid growth. For example, in the early days of your SaaS startup, the biggest priority is finding the right product-market fit and gaining a customer base. For young SaaS startups, metrics like customer acquisition, activation, retention rate and customer churn become important to gaining customer traction.

As your startup scales and evolves, product-market fit becomes less important as scaling and sustainable growth take center stage. During growth stages, metrics such as customer lifetime value and customer acquisition cost become more crucial. Then, as your startup looks to maintain profitability and sustain growth as it matures, a new set of metrics becomes important to track.

It all goes to show how important it is to track the right metrics at the right time. Tracking the wrong metrics can result in misguided decision-making, poor financial reporting and forecasting, and challenges with earning investor trust. On the last point, it’s also important to note how investor expectations change with various fundraising rounds. While investors are gauging your startup largely on its potential in seed funding, they want to see tangible proof of your startup’s traction in the market and where it’s heading in later fundraising rounds. Failure to focus on the right metrics can miss the mark with investors during these key stages, presenting difficulties with fundraising.

One way to ensure that your startup’s financial data is presented compellingly is to create a narrative around it. Also known as financial storytelling, this narrative uses financial data to explain your SaaS startup’s performance, potential and direction — all while doing so in an engaging and impactful way. A good financial story also helps make your financial data available to stakeholders, investors and even your own people when they want to see it. However, your investors want to see more than just the “why” behind the numbers; they want to see a narrative that explains the right numbers at the right time in your startup’s evolution.

Pre-Seed to Seed Stage: Foundation Metrics for Early Validation

So, what metrics are the most important in the pre-seed and seed stages when validating product-market fit? Prioritize the metrics that can signal potential rather than those that identify growth and efficiency. Some of the most important metrics to track at this stage include:

• Monthly recurring revenue (MRR): This is predictable revenue from subscribers that can help determine accurate forecasting. Tracking annual recurring revenue alongside MRR can also provide a longer-term view of revenue stability.
• Customer acquisition cost (CAC) measures the cost of acquiring a new customer. Early-stage SaaS startups should aim for a low CAC that reflects efficient sales and marketing strategies.
• Customer lifetime value (LTV): This measures the total revenue one customer is projected to generate throughout their entire relationship with your startup. The higher the LTV, the better for your startup. High LTVs indicate value and satisfaction from using your product.
• Churn rate: This is the percentage of customers who stop using your service. A high churn rate indicates significant customer turnover. Churn rate can also be a great teaching tool for your startup, as it can help identify areas for improvement to help keep current customers engaged and interested in your product or service.

Other key SaaS metrics to consider tracking include your growth rate and burn rate. Growth is important to any startup’s evolution, but it’s important that growth is sustainable. Burn rate is an indicator of cash flow and helps a startup understand how quickly it’s going through its cash reserves.

Series A Stage: Growth Efficiency and Market Expansion Metrics

Series A investors aren’t as interested in your startup’s potential as they are in its unit economics and scalability. Noting that, your financial storytelling as you enter this stage of your SaaS business should aim to reflect that for the best results.

LTV and CAC are important in proving profitability, but they’re best presented as the LTV/CAC ratio at this stage, which is designed to compare total revenue that a customer brings in over their entire relationship with your startup versus the cost of acquiring them. Ideally, you want this LTV/CAC ratio to be 3:1, as this indicates a profitable and sustainable model and demonstrates that you’re earning three times what it costs for new customers acquired. You can also track average revenue per user to better understand revenue contribution across your customer base. Conversely, ratios of 1:1 or less indicate that your startup is losing money on each customer.

Cohort analysis is another important strategy for demonstrating sustainable growth patterns. Cohort analysis is a method of breaking down user data into groups to track behavior over time. It can help identify trends, problem areas, and influence product and marketing strategies.

Series B and Beyond: Scale Efficiency and Market Leadership Metrics

When you get to Series B fundraising, investors are looking for data on how you plan to scale an already proven business model. They want to see strong revenue growth, effective and efficient customer acquisition, and a clear path to profitability. One of the most crucial metrics they look at during this stage is Net Dollar Retention (NDR), or the measurement of how revenue is retained from existing customers over a given period.

The Rule of 40: Balancing Growth and Profitability

Growth-stage startups should aim to balance growth with efficiency. The Rule of 40 represents a key framework that investors closely analyze. Commonly used in the SaaS industry, the Rule of 40 evaluates the balance between growth and profitability. More specifically, it states that a good SaaS startup’s revenue growth rate and profit margin should add up to at least 40 percent.

While investors analyze for the Rule of 40, this metric can also help influence your startup’s decisions. By assessing growth and profitability, your startup can make better decisions on resource allocation, pricing, and sales and marketing efforts.

Net Dollar Retention: The Growth Stage Gold Standard

NDR is the single most important metric for growth-stage SaaS startups in the eyes of investors. That’s because it serves as a key indicator of long-term financial health and growth, can signal customer satisfaction with a product or service, and can have a positive impact on your startup’s valuation.

Startups can calculate NDR by following this formula:

• NDR = (Beginning MRR + Expansion MRR – Churned MRR) / (Beginning MRR)

SaaS startups should shoot for an NDR of 100 percent or higher. This signals that your startup is growing revenue from its existing customer base, which indicates a solid product-market fit and is affecting upselling and cross-selling. An NDR of about 120 percent is considered exceptional, while anything below 100 percent indicates a loss of revenue from existing customers.

Advanced Metrics for Exit Preparation

Is your startup gearing up for IPO readiness or to be acquired? That calls for a totally different set of metrics. Those who make strategic acquisitions treat SaaS startups differently than they’d treat other financial buyers. In addition to meeting GAAP compliance requirements for public markets, including SEC filings, external audits, detailed reporting and more, investors want to see metrics that allow a startup to defend its market share and profitability from its competition. These competitive moats are often indicated by high and stable profit margins, a strong return on invested capital, strong customer loyalty, strong intellectual property and intangible assets, and the presence of economies of scale.

Market leadership is evidenced by revenue growth and profits, customer satisfaction and brand reputation, and product development and innovation.

Common Metric Mistakes and How to Avoid Them at Every Stage

Failing to prioritize and communicate the right metrics can be disastrous for your startup. Yet, it’s common for more inexperienced startups to make mistakes in metric selection and interpretation throughout the growth stages.

For instance, one of the most common mistakes startups make is tracking only vanity metrics. These metrics are easy to measure but ultimately meaningless, distracting from real progress. Other common mistakes include:

• Timing mistakes, such as optimizing for efficiency too early.
• Relying too much on incomplete or inaccurate data.
• A lack of clarity or consistency in understanding metrics.

The Vanity Metric Trap and Premature Optimization

Vanity metrics are those that are easy to calculate and may seem impressive, but are really non-predictive and useless. Furthermore, they can actually cause more harm than good to your startup, notably in misleading decision-making. Here’s a look at vanity metrics and how they can be replaced with more actionable metrics:

Transform Your SaaS Metrics Strategy with Expert Guidance

Are you ready to prioritize the metrics that matter at each stage of your SaaS startup’s growth? If you need help identifying and calculating these metrics, working with a qualified financial services partner like Graphite can help. Our specialty is helping startups grow across all funding stages, and we’ve helped more than 300 to date. Bottom line: Your startup can’t afford to be focused on the wrong metrics. Contact Graphite today for more information and to schedule a consultation to learn more about how we can help you.

FAQs

How do I know when it’s time to shift focus from one set of metrics to another?

Shifting metrics should be done as your startup grows and evolves accordingly. Startups progress through various growth stages, each with unique objectives and priorities. Knowing these objectives and priorities can help you align metrics accordingly as your startup evolves.

What’s the biggest mistake early-stage SaaS startups make with their metrics?

Startups often focus on vanity metrics and fail to prioritize the metrics that really matter to their startup. Vanity metrics look good but are essentially meaningless, and they can inspire poor decision-making.

How should I present metrics differently to seed investors vs. Series A investors?

It’s important to know what investors are looking for at various seed stages. While investors are merely looking for product-market fit and potential in the early funding rounds, they want to see more tangible evidence of growth and business sustainability as fundraising rounds progress.

Which metrics should I track if I’m not sure what stage my startup is in?

Core financial metrics like revenue, expenses, CAC, LTV, churn and monthly active users are all ideal to track regardless of the stage your startup is in.

How can I ensure my metrics are investor-ready for my next funding round?

It all starts with focusing on the right metrics. Once you settle on the right metrics relevant to your fundraising round, you need to ensure they’re clear and strong.

What role should a fractional CFO play in evolving my metrics strategy?

A fractional CFO can help you define and refine metrics, structure metric reporting accordingly and help craft the metrics into a compelling narrative to tell your startup’s financial story. Fractional CFOs can also help improve processes, leverage data for better decision-making and drive continuous improvement.

How often should I reassess which metrics I’m tracking?

This depends on the stage that your startup is in, but it’s generally best practice to always review your metrics to ensure they remain relevant.

What are the warning signs that my current metrics aren’t serving my business stage?

Metrics need to adapt as your startup evolves and grows. If your metrics are out of alignment with your goals, it’s likely time to reassess them.