SaaS Money Metrics:
Why VCs Should Focus More on Retention Than Growth
June 2014
3
IVP History
4
IVP Summary
 Current Fund: IVP XIV, a $1 billion later-stage venture capital fund
 Target Sectors: Tech only (Consumer...
5
IVP SaaS Investments
6
SaaS Money Metrics
1. About IVP
2. SaaS Market Overview
3. Measuring SaaS Efficiency
4. Retention is King
7
The World Has Changed
44%
Decline
8
Growth No Longer Rewarded as Highly
Source: Bank of America Merrill Lynch
9
Red is the New Black: LTM EBITDA %: 2012-2014 Software IPOs
(110.0%)
(90.0%)
(70.0%)
(50.0%)
(30.0%)
(10.0%)
10.0%
30.0%
10
SaaS Money Metrics
1. About IVP
2. SaaS Market Overview
3. Measuring SaaS Efficiency
4. Retention is King
11
ThrustSSC
760 MPH
.04 MPG
12
Chevy Spark EV
89 MPH
128 MPG
13
Two Measures of SaaS Efficiency
1. Magic Number
2. LTV / CAC
14
Magic Number
Magic Number =
(Q1 GP$ - Q4 GP$) *4
Q4 S&M$
A Magic Number of 1 means you break even on
your sales and mar...
15
Magic Number Example
Q4 2013 Q1 2014
Revenue 22,501 25,092
Gross Profit 14,848 16,097
Operating Expenses
R&D 4,551 5,17...
16
LTV / CAC
LTV / CAC =
GP$ Per Customer * Avg. Customer Life
Customer Acquisition Cost
17
LTV / CAC Example
LTV / CAC = = 7x
$700 * 5
$500
• You sell your product for $1,000 per year at 70% GP
• Customers chur...
18
-100%
0%
100%
200%
300%
400%
1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97
LTV / CAC Over Tim...
19
SaaS Efficiency Goals
1. Magic Number = Above 0.5x (Less than 2 years)
2. LTV / CAC = Above 5x
20
SaaS Money Metrics
1. About IVP
2. SaaS Market Overview
3. Measuring SaaS Efficiency
4. Retention is King
21
Retention Trumps Growth
Company A
$200K New Revenue Per Month
90% Monthly Retention
3 Years Later = $2.0M Run-Rate
Comp...
22
Retention vs. Growth
High
Growth
Hare Unicorn
Low
Growth
Sloth Tortoise
Low Retention High Retention
23
Case Study: Hare (AVG Technologies)
Source: Company filings. Analyst reports.
$0
$100
$200
$300
$400
$500
2007 2008 200...
24
Case Study: Tortoise (Concur)
$0
$200
$400
$600
$800
$1,000
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014E
201...
25
Case Study: Unicorn (Workday)
$0
$200
$400
$600
$800
$1,000
$1,200
2008 2009 2010 2011 2012 2013 2014E 2015E
109% CAGR
...
26
Retention vs. Growth
High
Growth
Hare Unicorn
Low
Growth
Sloth Tortoise
Low Retention High Retention
27
Retention vs. Growth
28
Measuring Cohort Revenue
Source: David Skok. SaaS Metrics.
29
Tortoise or Hare?
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
$180,000
Jan 12 Feb 12 Mar 12 ...
30
Cohort Revenue (Negative Churn)
Source: Model adapted from Startup Calculus (Joe Floyd)
$0
$20,000
$40,000
$60,000
$80,...
31
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
$180,000
Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun ...
32
Questions
Jules Maltz
General Partner, IVP
jmaltz@ivp.com
@julesmaltz
Thank You!
[PREMONEY 2014] Institutional Venture Partners>> Jules Maltz, "SaaS Money Metrics: Why VCs Should Focus More on Retention ...
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[PREMONEY 2014] Institutional Venture Partners>> Jules Maltz, "SaaS Money Metrics: Why VCs Should Focus More on Retention Than Growth"

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"SaaS Money Metrics: Why VCs Should Focus More on Retention Than Growth"

[PREMONEY 2014] Institutional Venture Partners>> Jules Maltz, "SaaS Money Metrics: Why VCs Should Focus More on Retention Than Growth"

  1. 1. SaaS Money Metrics: Why VCs Should Focus More on Retention Than Growth June 2014
  2. 2. 2 SaaS Money Metrics 1. About IVP 2. SaaS Market Overview 3. Measuring SaaS Efficiency 4. Retention is King
  3. 3. 3 IVP History
  4. 4. 4 IVP Summary  Current Fund: IVP XIV, a $1 billion later-stage venture capital fund  Target Sectors: Tech only (Consumer and Enterprise)  Investment Focus: Growth companies, generally with over $10 million in revenue  Geography: Primarily United States  Team: 6 General Partners with over 100 years of combined experience  Portfolio: Over 300 companies, 99 of which have gone public
  5. 5. 5 IVP SaaS Investments
  6. 6. 6 SaaS Money Metrics 1. About IVP 2. SaaS Market Overview 3. Measuring SaaS Efficiency 4. Retention is King
  7. 7. 7 The World Has Changed 44% Decline
  8. 8. 8 Growth No Longer Rewarded as Highly Source: Bank of America Merrill Lynch
  9. 9. 9 Red is the New Black: LTM EBITDA %: 2012-2014 Software IPOs (110.0%) (90.0%) (70.0%) (50.0%) (30.0%) (10.0%) 10.0% 30.0%
  10. 10. 10 SaaS Money Metrics 1. About IVP 2. SaaS Market Overview 3. Measuring SaaS Efficiency 4. Retention is King
  11. 11. 11 ThrustSSC 760 MPH .04 MPG
  12. 12. 12 Chevy Spark EV 89 MPH 128 MPG
  13. 13. 13 Two Measures of SaaS Efficiency 1. Magic Number 2. LTV / CAC
  14. 14. 14 Magic Number Magic Number = (Q1 GP$ - Q4 GP$) *4 Q4 S&M$ A Magic Number of 1 means you break even on your sales and marketing spend after 1 year
  15. 15. 15 Magic Number Example Q4 2013 Q1 2014 Revenue 22,501 25,092 Gross Profit 14,848 16,097 Operating Expenses R&D 4,551 5,178 S&M 11,404 14,287 G&A 4,693 6,384 Operating Loss (5,800) (9,752) Magic Number 0.44x Time to Breakeven 2.3 years Magic Number = = 0.44x or 2.3 yrs to breakeven ($16.1 – $14.8) *4 $11.4
  16. 16. 16 LTV / CAC LTV / CAC = GP$ Per Customer * Avg. Customer Life Customer Acquisition Cost
  17. 17. 17 LTV / CAC Example LTV / CAC = = 7x $700 * 5 $500 • You sell your product for $1,000 per year at 70% GP • Customers churn 20% per year (5 year average life) • It costs $500 to acquire each customer
  18. 18. 18 -100% 0% 100% 200% 300% 400% 1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97 LTV / CAC Over Time Magic Number LTV / CAC
  19. 19. 19 SaaS Efficiency Goals 1. Magic Number = Above 0.5x (Less than 2 years) 2. LTV / CAC = Above 5x
  20. 20. 20 SaaS Money Metrics 1. About IVP 2. SaaS Market Overview 3. Measuring SaaS Efficiency 4. Retention is King
  21. 21. 21 Retention Trumps Growth Company A $200K New Revenue Per Month 90% Monthly Retention 3 Years Later = $2.0M Run-Rate Company B $100K New Revenue Per Month 99% Monthly Retention 3 Years Later = $3.1M Run-Rate 0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36
  22. 22. 22 Retention vs. Growth High Growth Hare Unicorn Low Growth Sloth Tortoise Low Retention High Retention
  23. 23. 23 Case Study: Hare (AVG Technologies) Source: Company filings. Analyst reports. $0 $100 $200 $300 $400 $500 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 47% CAGR 6% CAGR Consumer Software Churn = 30-40% Per Year
  24. 24. 24 Case Study: Tortoise (Concur) $0 $200 $400 $600 $800 $1,000 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 28% CAGR Customer Churn = 2% Per Year Source: Company filings. Analyst reports.
  25. 25. 25 Case Study: Unicorn (Workday) $0 $200 $400 $600 $800 $1,000 $1,200 2008 2009 2010 2011 2012 2013 2014E 2015E 109% CAGR Low/Negative Churn – 3 to 5 Year Contracts Source: Company filings. Analyst reports.
  26. 26. 26 Retention vs. Growth High Growth Hare Unicorn Low Growth Sloth Tortoise Low Retention High Retention
  27. 27. 27 Retention vs. Growth
  28. 28. 28 Measuring Cohort Revenue Source: David Skok. SaaS Metrics.
  29. 29. 29 Tortoise or Hare? $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 $160,000 $180,000 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug12 Sep 12 Oct12 Nov 12 Dec 12 Jan 13 Feb 13 Mar 13 Revenue Revenue
  30. 30. 30 Cohort Revenue (Negative Churn) Source: Model adapted from Startup Calculus (Joe Floyd) $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 $160,000 $180,000 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug12 Sep 12 Oct12 Nov 12 Dec 12 Jan 13 Feb 13 Mar 13 Revenue Growth by Cohort Mar 13 Feb 13 Jan 13 Dec 12 Nov 12 Oct12 Sep 12 Aug12 Jul 12 Jun 12 May 12 Apr 12 Mar 12 Feb 12 Jan 12
  31. 31. 31 $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 $160,000 $180,000 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug12 Sep 12 Oct12 Nov 12 Dec 12 Jan 13 Feb 13 Mar 13 Revenue Growth by Cohort Mar 13 Feb 13 Jan 13 Dec 12 Nov 12 Oct12 Sep 12 Aug12 Jul 12 Jun 12 May 12 Apr 12 Mar 12 Feb 12 Jan 12 Source: Model adapted from Startup Calculus (Joe Floyd) Cohort Revenue (8% Churn)
  32. 32. 32 Questions Jules Maltz General Partner, IVP jmaltz@ivp.com @julesmaltz Thank You!

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