An overview of the SaaS KPIs and metrics that investors and acquirers look at when evaluating a company.

1. Matt Tortora
Managing Director: Technology Services
BMI Mergers
P: 312.702.2611
E: mtortora@bmimergers.com
SaaS KPIs That Matter Most To Investors
& Acquirers

2. Introduction
➔ There are over a dozen KPIs
investors and acquirers rely on
when evaluating an investment or
acquisition.
➔ Optimizing these metrics provides
SaaS companies with a path to
sustainable growth and puts them
in a position to successfully raise
growth capital or be acquired.
➔ Connecting the dots from hundreds
of conversations with acquirers
and investors, there are some
metrics that tend to be more
important than others.
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3. Tier 1 KPIs
These are the KPIs that acquirers and investors will typically look at
first when evaluating an opportunity. If the boxes don’t check, the
conversation usually doesn’t go any further.
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4. ARR Run Rate
The higher your annual recurring revenue, the more attractive you will be to
investors and acquirers. A meaningful ARR run rate shows product-market fit and
long-term viability.
$5M - $10M ARR
The mean valuation for all transactions is 5.6x TTM revenue with the majority of
acquisition activity occurring in the 4x - 6x range.
$10M - $50M ARR
The mean valuation for all transactions is 9.2x TTM revenue with the
majority of acquisition activity occurring in the 5x - 11x range.
$100M + ARR
The mean valuation for all transactions is 12.3x TTM revenue with the
majority of acquisition activity occurring in the 8x - 15x range.
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5. Growth Rate
Year-over-year growth rate is one of the first things buyers will look at. No growth or
negative growth usually is a sign of a declining market, lack of strong product-market fit,
high churn, or an inability to scale the business.
Chart courtesy of SaaS Capital
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6. Churn Rate
In the eyes of most investors and buyers, an acceptable annual churn rate is in the
5% to 7% range. Best of breed SaaS companies are typically around a 3% churn
rate.
If churn rate is not where it needs to be,
it can scare buyers and investors off
quickly. Is the product-market fit, strong?
Is there a good customer success
infrastructure in place? Is your product a
must-have with a high switching cost or
just a nice to have?
Meeting or exceeding industry
benchmarks as it relates to churn rate
begins to address some of these
questions and is another indicator of
predictable growth and revenue in the
future.
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7. LTV: CAC Ratio
The customer lifetime value to customer acquisition cost ratio is a great measure of
sales efficiency and scalability. A good benchmark for LTV: CAC ratio is 3:1.
3:1 <
<
Greater than a 3:1 ratio
you’re not spending enough
money on customer
acquisition and are missing
out on capturing market
share.
Lower than this ratio and you
are spending too much on
sales and marketing or your
customer acquisition process
is broken.
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8. The Rule of 40
Rule of 40 states that a SaaS company’s growth rate and profit margin should add up
to 40% or more.
The proxy for profitability is typically
EBITDA.
ARR or MRR is used to measure a
company’s growth rate.
At earlier stages investors place a
greater emphasis on growth over
profitability.
Weighted rule of 40 gives twice as much
weight to growth versus profitability.
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9. Tier 2 KPIs
While still very important, these metrics are less top of mind when
buyers and investors initially look at an opportunity.
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10. 100%
Net Revenue Retention
NRR represents a company’s ability to not only retain customers but also drive
expansion revenue across those customers. It is calculated by looking at customer
revenue, including expansion revenue, and subtracting lost revenue (revenue churn),
including lost customers and downgrades.
100% 140%
140%
Buyers and investors want to
see NRR at 100% +.
Companies that can achieve an MRR
of 140% can double every 5 years.
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11. 90%
Gross Revenue Retention
GRR reflects a company’s ability to retain its customers and, in the eyes of many,
carries a bit more weight than does NRR. GRR tracks revenue retention and any
expansion revenue and subtracts revenue churn, which includes lost customers,
downgraded contracts, etc…
90% 95%
95%
GRR of 90% + is an ideal
benchmark to shoot for.
Best-of-breed enterprise SaaS GRR
is at 95% +.
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12. Software vs. Services Revenue Mix
With the exception of ultra-low
touch tools, there is a service
revenue component in almost
every SaaS business. Put
plainly, services revenue is
valued less than software
revenue.
The predictability, scalability, and higher gross
margins software licensing revenue brings are a lot
more appealing to investors and buyers.
At least 80% of total revenue should come from
software licensing.
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13. Gross Margin
Gross margin is a strong indicator of the
company’s ability to grow and its overall
financial health.
A good benchmark for gross margin is in the 75% to 80%
range.
//
A strong gross margin gives a SaaS
company the ability to invest more into
product and customer acquisition.
//
75% - 80%
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14. 30
Net Promoter Score
NPS is a great indicator of a SaaS company’s support function as well as the utility,
usability, and quality of the product.
30 40+
40+
An NPS of approximately 30 is
the SaaS industry average.
Companies with an NPS of 40 plus
are considered high performers.
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15. Wrapping Up
It’s never recommended that any CEO
or founder builds their organization
just to be a good investment or
acquisition target. Instead, focus on
building strong product-market fit and
achieving revenue growth targets year
in and year out. Optimizing these
KPIs will not only help SaaS
organizations achieve that vision of
building a great business with
meaningful growth. They will also help
build an organization that will be quite
attractive to potential investors and
acquirers.
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16. Matt Tortora
Managing Director -
Technology Services
BMI Mergers
E: mtortora@bmimergers.com
Contact Info
Web: bmimergers.com/techservices
Chicago:
125 South Wacker Dr., Suite 300
Chicago, IL 60606
312.702.2611
Philadelphia:
One Liberty Tower
1650 Market Street, Suite 3600
Philadelphia, PA 19103
215.240.7648
Tom Kerchner
Managing Director
BMI Mergers
E: tkerchner@bmimergers.com
For over twenty-five years, we have been
successfully engaged in the practice of buying,
selling and managing the business acquisition
process. Our professionals have been engaged in
transactions in a multitude of industries. They have
completed multi-million dollar deals, and they have
also successfully integrated businesses
post-merger. Whether your business is worth $5
million or $100 million, this experience is put to
work to achieve your desired result.
About BMI Mergers
Matt Tortora brings over fifteen years of business
ownership, sales leadership, and consulting
experience in both technology and professional
services. He has founded three companies and
held strategic leadership positions at growth stage
technology companies. Most notably, Matt was the
co-founder and CEO of a Chicago based software
company which he successfully grew and sold to a
strategic acquirer.
About The Author