Welcome to part-three of Burkland’s series on what startups need to know to raise Series A funding successfully. We explored related topics in part-one, When Should My Startup Raise Series A Funding?, and part-two, How Much Money Should My Startup Raise at Series A?.
This article focuses on critical metrics for Series A funding for SaaS startups. Future articles will focus on Series A metrics for startups in other sectors like Consumer and Fintech.
To raise Series A successfully at the best possible valuation, you need strong numbers that clearly show your traction, growth, profitability, and efficiency.
3 Critical SaaS Metrics for Series A Funding
1. ARR & ARR Growth Rate
The first metric for any SaaS startup looking to raise Series A is Annual Recurring Revenue (ARR). ARR is a key metric investors look at to gauge your current traction in the market.
As a general rule of thumb, your ARR needs to be at least $1MM to raise Series A. To determine how much ARR your particular startup should be generating, it’s important to look at your Capital Efficiency Ratio. See How Much ARR Does My SaaS Startup Need for Our Next Round?, as well as point #3 in this article.
An important related metrics is your startups ARR Growth Rate. Where ARR measures market traction, ARR Growth Rate measures YoY growth. In 2021, the ARR Growth Rate benchmark was 2x though this rate will vary as rates do, depending on your base year’s ARR.
Another metric Series A investors will scrutinize is your LTV:CAC ratio. LTV, or Lifetime Value of a Customer, is the average total revenue one customer generates for your business over their lifetime. CAC, or Customer Acquisition Cost, is simply the average expense to gain one new customer. Measuring the ratio between the two provides a good gauge of your SaaS startup’s profitability.
After all, strong ARR growth isn’t so compelling if it’s being achieved at a break even or a loss. In general, SaaS startups should aim for an LTV:CAC ratio of at least 3:1. For more details and considerations, see What’s a Good LTV:CAC Ratio for a SaaS Startup?.
3. Capital Efficiency Ratio
The next critical metric for any SaaS startup looking to raise Series A funds is Capital Efficiency Ratio, calculated as Total Equity + Total Debt – Cash ÷ ARR. Your Capital Efficiency Ratio is the ratio of how much your startup has spent growing revenue and how much you’re receiving in return. It is the broadest measure of your effectiveness in generating ARR.
A lower Capital Efficiency Ratio is better. In the 2019 SaaS Survey from KeyBanc Capital Markets, the median Capital Efficiency Ratio was 1.5x, with a range of 1.2 – 3.4x for $5M ARR companies.
Capital efficiency tends to receive extra scrutiny from investors in a down economy, as it shows how well a startup is able to maximize runway and also serves as one good indicator of product-market fit. In the early days of the pandemic economy, Craft Ventures’ David Sacks explored capital efficiency in The Burn Multiple.
For more on Capital Efficiency Ratio see How Much ARR Does My SaaS Startup Need for Our Next Round?, and 3 Important Efficiency Metrics for SaaS Startups.
What Else Do Series A Investors Look for in a SaaS Startup?
Solid metrics are essential for raising Series A, but they aren’t everything. You also need a compelling story, a clear picture of your market, and credibility points like a strong management team and customer reviews. Let’s explore a few of the most important factors beyond your internal metrics.
Customer Personas and Journeys
Unless metrics are married to a cohesive story, they’re unlikely to tell your full story to potential investors. Without the story – or meaning – upfront, people automatically default to preconceived notions and assumptions based on their own life experiences.
Start your pitch with the story of your customers and their needs. Present your statistics and metrics within the context of your startup and customer journeys. Paint a vivid picture of your customer and their problems, then back it up with supporting data. For great tips and information on marrying your numbers with your story, see Pitch Deck Math: Telling Your Startup’s Story with Metrics.
Total Addressable Market (TAM)
As important as your internal metrics, are your numbers showing your Total Addressable Market, or TAM. This is where you should look to demonstrate the 10x potential of your startup. In today’s environment, If you’re asking investors for $10MM, you’d better be able to show how those funds can turn into at least $100MM in the coming years. A winning Series A pitch starts with the customer persona and uses the numbers to gently guide the investor to the investment opportunity: how big is the market, and how much of it can a startup actually capture?
You can also expect potential Series A investors to look closely at your startup’s founder and management team. Startups led by a founder with a track record of successful past exits may find a shorter path to a deal, with less scrutiny paid to the certain metrics. On the other hand, startups led by first-time founders or founders with unsuccessful startups in their history may face a steeper road to closing Series A.
Investors will also want to see a strong overall management team including product, operations, marketing, sales, and finance. Many startups partner with a Burkland Fractional CFO in the runup to raising Series A funds, to help prepare for the round and add extra credibility to their management bench.
If your SaaS startup is in the B2B space, be prepared to showcase your best customers. Showing off the companies who are using and benefiting from your software boosts your credibility, and helps paint a picture for investors. Ask your customers for permission to include their logos in your pitch deck, and ask a few of your best and most recognizable customers if they’d be willing to provide a brief testimonial sharing why they like your product and what value they receive from it.
The investment world is always fluid, and venture capital is no exception. What Series A investors look for changes along with industry shifts, changes in the startup ecosystem, and the economy as a whole. In the short time since I began this three-part article series, funding markets have changed dramatically due to a tightening economy. It’s now even more important for startups to have strong metrics that VCs are looking for. Factors like customer story and TAM are still important, but generally carry less weight than they did earlier this year, as SaaS investors are focused on hard metrics based on financial results.
As a strategic finance partner to dozens of leading VC firms, Burkland keeps a constant finger on the pulse of the market. We know what VCs are looking for at each stage of a startup’s growth curve, and our team has helped hundreds of startups through successful fundraising rounds.