The metrics driving SaaS valuations in 2022
2021 was another record breaking year for SaaS – with a 125% year-on-year increase in the number of companies going public (source: BMC) and average series A and B investment rounds in Europe increasing +20% and +33% respectively (source: Serena Capital).
But what did those companies have in common and how can you make sure your business is counted for in what are set to be even more impressive stats at the end of 2022?
Our recent report (State of SaaS 2022: A meta report) compiles insights, data and key takeaways from 13 industry reports to tell you just that.
In this blog, we’ll use those findings to uncover the trends and SaaS metrics driving valuations in this increasingly competitive market.
Let’s get into it.
NRR is still a guiding light
Net revenue retention (NRR) has been the cornerstone of SaaS performance metrics for some time. Particularly in the midst of the pandemic, when new customer acquisition was more difficult and businesses needed to understand whether or not their growth was sustainable. That’s because it shows how much your business can grow (or shrink) if you stopped acquiring new customers. It’s for this reason that it will continue to be a core metric for both those leading SaaS businesses and those looking to invest in them.
With NRR, anything over 100% indicates stability or growth, less than 100% means your revenue churn is greater than the amount you retain. ForEntrepreneurs found that the
median NRR in 2021 was 101.8%, only just greater than churn.
For you as a SaaS leader, this means that you need to focus on growing your NRR – 101% won’t help you stand out in the crowded investment space. To do this, you need a watertight retention strategy to make sure that you don’t lose revenue unnecessarily to involuntary churn and that you have a seamless user experience to keep the customers you do have happy.
CAC payback period: the new north star metric?
As we continue to work through very uncertain times, growing sustainably has only become more important.
As such, businesses and investors are putting a magnifying glass over how much they spend acquiring customers in the first place.
In metric terms, that’s where customer acquisition cost (CAC) and CaC payback period take center stage.
In 2021, Serena Capital found that a decent CAC payback period was:
- For SMBs (€5–10 million ARR): < 12 months
- For mid-market (€10 million+ ARR): < 18 months
- For enterprise (€100 million ARR): < 25 months
Meanwhile, forEntrepreneurs' survey found that new customer CAC payback took an average of 26 months, while it took 18 months across new and existing customers (including upsells and upgrades).
There are two workflows to consider when it comes to meeting (or beating) these benchmarks – and attracting the attention of investors:
- Lowering your CAC: Review your sales processes and the channels you use to acquire customers to find the most cost efficient, yet high performing routes to conversion.
- Reducing your payback period: Implement a stellar onboarding experience that helps new customers to realize the value of your product as quickly as possible. From here, you can look at how you can add value and encourage those customers to spend more with you.
Beyond profit: Value driving metrics for SaaS businesses
CAC payback period and NRR certainly tell investors a lot about the financial stability and profitability of your business but they aren’t the only metrics that will impact your valuation.
In its 2021 Financial & Operating Benchmarks Report, OpenView identified the value drivers that investors look at - regardless of funding stage.
Depending on your business stage and industry context, OpenView suggests that you should be able to illustrate performance with metrics across 4 key areas:
1. Size and growth
As it sounds, here investors will expect to see metrics that relate to the size of your business and its growth over time. Metrics include:
- No. of employees
- Total amount of funding to date,
- Annual recurring revenue (ARR).
For financial performance, think about your costs and spend as well as income. The OpenView report identified sales and marketing spend, research and development spend, and gross margin as the key metrics here.
3. SaaS value drivers
These are the guiding light metrics mentioned above. While business size, spend, margins and diversity, equity & inclusion are important, it all falls down if you can’t prove that your business is financially viable. In addition to CAC payback period and NRR, you should cover gross dollar retention here too.
Diversity is becoming an increasingly important aspect of running a business and growing a team. According to Openview, leadership teams are under the spotlight with women in leadership and black, indigenous and people of colour (BIPOC) in leadership key metrics to focus on.
Whichever metrics you track, one thing is for sure: investors expect the data to be accessible and accurate. Deciding what to track, and how to track it means wading your way through a lot of jargon (save yourself some time by checking out our A-Z of SaaS metrics). More than knowing your numbers, you also need to collect and display your data in a way that tells your business’ story in a compelling way.
Part of that process is knowing where you sit against competitors and industry benchmarks – so you can better showcase where you’re performing best. Read the report for more on the industry standards that investors are coming to expect and further insights into the state of play for SaaS businesses in 2022.