Move over, TAM. There’s a new key metric in town.
Over the years, I’ve looked at thousands of data points from growing SaaS companies and identified growth indicators beyond the “highlights” most VC firms consider — and those most relevant to today’s scrutinizing funding environment. The predictability of a startup’s viability and success runs deeper than total addressable market (TAM) — much deeper.
In the heyday of VC-backed growth, startups only had to lock in two key metrics to secure funding: TAM and revenue growth. the bigger the better. But the recession in early 2022 brought another priority to the fore: sustainable growth.
It’s hard because it’s not a single measurement – it’s more of a movement.
In many ways, sustainable growth looks different across industries and products, but for the average SaaS company, it’s underpinned by one key concept: product scalability. In SaaS, scalability is measured through several metrics, including ARR (annual recurring revenue) per employee, R40 (Rule 40), and others. We’ll get into that shortly.
First, we take a moment here to acknowledge that there are exceptions to every rule. Think disruptive technologies where astronomical cash with no clear path to profitability is still allowed by equity investors. Today we focus on metrics and business environments that apply to most SaaS companies — not unicorn outliers.
Key Performance Benchmarks for Increased Fundability
The scalability and economics of SaaS make the industry attractive to VC investors. However, the “growth at any cost” mentality and the depletion of B2B marketing channels have tested investors’ belief that startups have what it takes to reach profitability and scale success.
Today we focus on metrics and business environments that apply to most SaaS companies — not unicorn outliers.
Gross and net margins are great metrics to monitor. However, investors are now looking at the fine print of these financials and indicators related to GTM (go-to-market) effectiveness, an essential aspect of due diligence.
If you’re looking to raise money in 2024, it’s important to know the metrics that investors value. These are the essentials:
- ARR per employee: This provides a clear picture of the business effectiveness and impact of each new employee, which becomes especially important once the GTM team begins to scale. This is where AI automation of specific tasks can pay off. Success stories like Ramp, which reached +$100 million ARR with just 50 employees, show the potential and the high bar for SaaS companies.
- R40: The Rule of 40 is a primary predictor of success and growth ability. While many startups in our portfolio have experienced a reduction in growth velocity over the past 12 months, most have also seen an improvement in efficiency and margins. R40 — the idea that top-performing startups have profit margins and growth rates (profit + growth) in excess of 40% — is a great way to visualize those gains.
