Demonstrating your ability to bring in revenue is crucial if you’re a SaaS entrepreneur looking to fundraise. Despite the growth of SaaS startups, many traditional equity and debt investors remain reluctant to fund a company without physical assets.
Whether you’re looking for seed funding or a bank line of credit, you can meet the challenge head on by knowing your key metrics.
“SaaS/subscription businesses are more complex than traditional businesses,” writes David Skok in his post “SaaS Metrics 2.0.”
“Traditional business metrics totally fail to capture the key factors that drive SaaS performance. In the SaaS world, there are a few key variables that make a big difference to future results,” Skok said.
Recurring revenue is the most reliable indicator of future revenue. When investors (or lenders) evaluate your financials, they’ll look at all your income sources, and then they’ll look at MRR and CMRR to understand your company’s recurring revenue potential.
Proving revenue potential
Expect two specific SaaS metrics to drive investor review of your recurring revenue: monthly recurring revenue (MRR) and committed monthly recurring revenue (CMRR).
MRR measures the monthly amount of total revenue that’s subscription-based or recurring, and highly likely to continue into the future. This number excludes all one-time, non-recurring payments (such as implementation or professional service fees, hardware, and discounts).
CMRR encompasses MRR and adds signed contracts going into production, while subtracting revenue that’s likely to churn (leave) within that period.
To make a strong impression with investors, you want to know your MRR and CMRR data and be able to share those numbers from memory. Then you should have thorough documentation to back it up.
With these metrics, you can show investors your historic core product revenue growth (MRR) and future expected revenue growth (CMRR). Showing evolution over time is key to attracting investors.
Successful SaaS companies track their MRR to measure growth and momentum, as well as for use in financial forecasting and planning. As a key indicator for growth, measuring your MRR on a month-over-month basis is critical for understanding whether you’re gaining traction or starting to stall.
Tech entrepreneur and investor Jason M. Lemkin says that a good month-over-month growth rate is in the double digits: “10% a month growth is a good target until you get to $20M ARR or so, when simply doubling is going to be your goal.”
However, MRR is only part of the picture—investors will look at your customer churn and retention rates to get a true understanding of your company’s revenue potential. While MRR only yields insight into the current run rate of a company, CMRR incorporates potential future changes, providing a forecast for your company’s performance, based on what you know about your customers today.
While your CMRR currently may be more or less positive than your MRR, CMRR trending over time can more accurately forecast revenue and provides a better picture of your company’s standing.
Here’s why lenders and investors look closely at MRR and CMRR metrics:Why it Matters MRRCMRRDownside protectionConsistent recurring revenue means increased likelihood of making payments than when revenue is lumpy.Using CMRR allows the credit line to grow or shrink based on the performance of the company, ensuring that the lender is not taking an outsized risk.Pricing mechanismThe amount of revolving credit extended to SaaS companies is often based on a variation of CMRR.
How to accurately track CMRR
Are you confident in tracking these metrics for your company? Do you use an accurate and consistent formula to calculate your numbers?
As I noted in my previous post about CMRR, as with any SaaS metric, there is no one industry definition for measurement. As you begin tracking a specific metric, be sure to document how you’re calculating the number, and remain consistent over time. Having thorough documentation will make it easier when you have to share this metric with potential investors and lenders.
Here’s a simple formula to determine CMRR:
CMRR = MRR + Signed Contracts – Expected Churn
Having a clear understanding of how your company is performing against key SaaS metrics demonstrates that you know your business well, which is critical when you get in front of investors.
Companies also find that once they start tracking key SaaS metrics, they use this data to guide strategic decision-making.
Want More SaaS Metrics?
This guide explains the core metrics used to measure SaaS company success. Using simple examples, we’ll show you how to calculate each metric, and describe why specific indicators are important to investors.