Another SaaS Metric? Yes. And a Good One!

posted in: SaaS Modeling

Cash Conversion Score – a Good SaaS Metric for a Company at Any Stage of their Journey. 

In late 2019 Bessemer’s Mary D’Onofrio and Jeff Epstein created quite a bit of buzz with a new SaaS Metric – Cash Conversion Score (CCS) as an indicator of future success.  Interestingly the metric can be applied at any stage in a revenue generating company’s journey.

What is CCS?   

Quite simply, it looks at how capital spent to date has been converted into ARR.  The ROI of one dollar invested into a company.

In a formula it’s the company’s current ARR / [Equity + Debt – Cash].

Bessemer looked across its portfolio and discovered some fascinating correlations.  A cloud company with a CCS >1 yielded an Internal Rate of Return (IRR) of 120%.   

Using their Good, Better, Best, framework they saw even more correlations.

A CCS of .25-.5x (Good) had an IRR of ~40%.   CCS of .5-1.0x was ~80%. And with a CCS >1.0 as written above, the IRR was ~120%.  The relationships held regardless of company stage.

Public cloud companies had a median CCS of 1.3x at $100M of revenue.   Across 50 public cloud companies, <5 had a CCS <.5x at that size.

It would be wrong to conclude that raising capital is a bad idea. Instead we see that high CCS companies used the capital they raised to accelerate growth.

A CCS of 1.0x means that $1 invested into the business yields $1 of topline recurring revenue.  Let’s assume the average cloud company is receiving a 10x revenue multiple (about where we are at this writing).   So the $1 of revenue equates to $10 of enterprise value. Likewise, a CCS of .1x would equate to $1 of enterprise value (.1 CCS x 10x).

The table below, assuming a 5 yr holding period and a 10x exit multiple, shows the dramatic IRR impact of differing CCS values.

Table Source: Bessemer Venture Partners: Cash Conversion for Cloud Companies

Takeaways:

  1. Until you have product-market fit and a scalable sales and marketing organization, raise and spend as little money as needed.  Otherwise your CCS will be low, causing unnecessary dilution in your cap table. Both product-market fit (to generate sales) and a scalable sales and marketing organization (to have a low CAC payback period) are important.
  2. Once you have product-market fit, and a scalable sales and marketing organization, then raise as much capital as you can efficiently deploy.  Since market leaders receive outside valuations this is the time to step on the fundraising and capital spending gas to accelerate ARR.

The B-Bottom Line (Burkland Bottom Line) – Raise money when it will drive ARR and your valuation will follow.