From Seed to Scale: The four metrics that matter most for investors

Laura Lenz, partner at OMERS Ventures offers an in-depth insight into which financial metrics are of the highest importance to investors in the COVID era.

Right up until late 2019, ambitious businesses that were picking up pace in their growth journey could measure their progress by hitting a number of milestones that indicate success. Now, as a result of disruption from COVID-19, the standard rule book has become more fluid with no concrete blueprint to follow. This has left some SaaS companies scratching their heads about which metrics will matter most to investors during crucial growth changes.

As a partner of OMERS Ventures, and with more than 17 years of experience in venture investing, Laura Lenz has her finger squarely on the pulse of the exciting Canadian business ecosystem. In a recent Sage Intacct webcast, Laura identified the most valuable metrics from an investor’s perspective in a time when Venture Capitalists (VCs) only want to fund the most promising businesses.

Why do Metrics matter?

Every business that is seeking fundraising knows that no credible fund is going to believe the hype and cut them a check without a very close look at your books, conducting multiple reference calls with your stakeholders and scrutinizing your data. When set up correctly, there is an abundance of data available to business owners, making it very easy for investors to see the inner workings of a business and identify whether or not it has the potential to scale and become profitable. However, as Laura Lenz reminds us, metrics aren’t just important to investors. Business owners that have a firm understanding of their data show that they are clued into the core operations of their organizations.

“The metrics matter because it’s helps you with fundraising, the metrics matter because it’s one way to manage your company to know sort of what the instrumentations are in your business. The metrics that you should be putting into a board deck to present to your investors on a quarterly basis, as well as future financings, of course,” says Laura.

Here are the four most important metrics from an investor’s perspective.

1. Net dollar retention

What’s most material to VCs during COVID, is Net Dollar Retention (NDR). VCs are focusing on this metric because they know how hard it is to get face-to-face with a customer, let alone a new customer, therefore it’s better to sell to an existing customer. A purchase is considered anything outside of a renewal and could include an additional license or additional product offerings. It sounds simple on paper, just sell more to your existing, engaged client base. However COVID-19 has put pressure on companies to not only demonstrate their ability to increase NDR, but to do it better than anyone else.

“NDR is something that investors have really focused on in the pandemic. And I would have said three years ago, an NDR of 110% would have been awesome but if you’re not at 130% today with NDR, then you’re not in that top percentile which is really important with fundraising if you want to be in the top of your fund,” explains Laura.

2. Capital efficiency

The size of the checks that are being cut to businesses from VCs may be bigger than ever but fiscal responsibility is under more scrutiny than ever. Just like someone would ask a friend or colleague ‘what would you do if you won the lottery?’, the C suite executives of funded businesses need to present a clear vision of how they would put the cash injection to work in their organization and demonstrate how it would propel them forward. “Series A checks used to be, I don’t know, five million now they might be 10 to 50 million for a company….We want to make sure that founders are consuming capital in the most cost-effective way,” says Laura.

3. Profitability

When businesses present an expected timeline of profitability, they are projecting to investors how soon the organization can stand on its own and turn a profit without the need to fundraise. This ‘lift off’ moment for the business is a strong sign of self-sufficiency and one of the earliest indicators that investors are likely to see a return on their investment.

“It’s easy to continue to grow without looking at your unit economics, but you need capital debt or dilutive equity in order to keep growing. At some point you might want to put the brakes on the capital raise and [show] you can get to profitability,” says Laura.

4. Velocity

Velocity refers to how quickly a business can generate revenue in a specific timeframe. It shows how long prospects spends in the pipeline before becoming a paying customer. The subset of KPIs associated with this metric include revenue growth, gross dollar churn, conversion of marketing qualified leads to sales qualified leads and total days in the sales cycle. Investors expect businesses to have complete visibility of their velocity so they can build models to predict or measure how changes in processes and other differentiating factors will have a positive or negative effect on future sales efficiency.

Learn to love and leverage metrics

Metrics shouldn’t be treated as a reporting obligation, they need to be constantly analyzed and capitalized on to help drive the business forward. Some organizations fail to treat metrics as vital levers in their business that can identify weakness and opportunity. Laura uses the SQL to MQL conversion rate as an example of this.

“If you know the percentage of your marketing qualified leads converting to your sales qualified leads…is greater than 15%. then you better go spend some more money in marketing because it’s working right. Where if it’s less than maybe 10%, you should look at fixing it before you put more money into it. So [the metrics are] not necessarily just about fundraising, right? It’s about how you manage your business on a week-by-week basis as well,” says Laura.

Be prepared to open up your data

Transparency is key when it comes to producing your data to investors. If investors are looking at the performance in key areas of your business as a traffic light system (green, orange, red) it’s acceptable if there are some orange lights next to some measures, as it shows potential for growth. But massaging the numbers or using a reporting view that comes with a thousand caveats and exceptions in attempt to ‘turn the light green’, isn’t going to hold water with VCs who have been digging down to the granular data level of  many promising organizations for decades.

“There’s always massaging or manipulation of data, right? ‘My churn is 4%’.Well, that’s churn based on this target segment. When I, you know, look at ‘upside down on a Sunday’ kind of thing versus your overall [performance]…don’t massage your data because we will be digging into it. Our job for the first three months of our relationship is to ask all the hard questions. It’s also to assess the industry and assess the leadership team, but it is our job in diligence to identify the risks in the business. So we uncover everything in ways that obviously a public investor would never uncover. So we’re going to find it.”

Implement a complete core financials solution

For a SaaS company to start their data analysis journey the right way they need to ensure they are utilizing a cloud native solution that can offer multiuser access to a shared data set. The sales, marketing and finance team will all have different metrics to measure, but everyone needs to be singing of the same hymn sheet. Interactive dashboards are the new normal and help maintain a consistent workflow in your company, free of Excel and manual entry. Learn more about Sage Intacct, the #1 cloud accounting and financial management solution, join us for a live demo: https://www.sage.com/en-ca/sage-business-cloud/intacct/coffee-break-demo/

This is an extract from a Sage Intacct webinar, ‘Investor Insights on Scaling from Seed to Growth Stage’.  Click to watch the full webcast recording with Laura Lenz now.

To access additional resources for Finance Leaders, including reports, videos and additional webcasts, please visit the Sage CFO Central hub: www.sage.com/en-ca/cfo-central/