In the world of SaaS, building great products for customers in large markets is the key formula founders must follow for growth and building value. But a good financial partner for these founders knows that unlocking a company's growth potential requires trade-offs on where to invest time, energy, and capital. Financial metrics help provide a roadmap to priorities, and few people know this better than Javier Rojas, Founder and Managing Partner at Savant Growth. With his team, Javier has established 13 key metrics to help SaaS companies optimize their outcomes and reach their full potential. He compares this with the famous book Moneyball by Michael Lewis (Read my book review!), where the Oakland A’s used analytics to drive strategy and win the championship.
Recently, we had the pleasure of speaking with Javier about his insights into SaaS metrics and how they can drive growth and profitability for companies.
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At Savant, you have set financial goals and established 13 key metrics to optimize outcomes for SaaS companies. Can you explain the most important ones?
Certainly. NRR is one of our most important metrics and one all founders should keep in mind. Improving NRR is the single best way to improve the long-term revenue growth and value of the company. It’s an essential indicator of the strength of your product-market fit and how well you have defined your ICP, which likely correlates with your rate of referral business. New logo acquisition is expensive and growing revenue by retaining and upselling customers is often more cost effective where possible. Based on research by BVP, the average cost to acquire $1 of new ACV was $1.13, while the average cost to upsell $1 to an existing customer was less than 30 cents. Upsells and cross-sells are why the most efficient SaaS companies have net retention scores over 100%. In fact, the top 20% have scores of over 120%. NRR helps SaaS companies measure their ability to retain and grow revenue from their existing customer base. Probably the most missed point is the benefit of the compounding effects of improving NRR - a 5 pct lift in NRR over 5 years can deliver 30 pct more revenue and 2x+ profit at exit.
A common challenge is that upsells and renewals are usually handled by the CSM team. This works well for SMBs when selling more of the same product to the same people. However, when moving up to larger ACVs and more complex sales processes, it's usually an AE who owns the relationship and is best positioned for upselling. In scenarios where an inside sales rep closed a $20k ACV deal within a local division of a large corporation, that same rep may not have the skills needed to close a $1M company/country-wide deal. In those cases, it makes sense to have heavy hitters and a dedicated account management team that can appropriately target existing accounts top-down.
What should founders focus on after NRR? Profits?
It could be - we need to make payroll :) - but I would start by focusing on making sure you have healthy gross margins. We look for businesses with high gross margins or the opportunity to improve them with software, scale, or network effects. High gross margins mean there's more room to invest in sales, product development, and long-term profitability. It's also a sign of a defensible product with high perceived value.
Can you explain what you mean by "gross margin"?
Gross margins are the direct costs you need to incur with each sale. Let me give you an example. Let's say I sold spoons. If I bought a spoon for $1, added no value, and tried to sell it to you for more than $1, you wouldn't pay much more than that because you could buy it on Amazon for the same price; my gross margin would be zero. But if I painted a beautiful work of art, printed it on the spoons, and sold each to you for $100, my gross margin would be $99. You are paying for the art, not the spoon. With a high gross margin, the company creates and retains a lot of value.
That’s why, as I mentioned, the second thing we look at is gross margins, which are typically around 90% for SaaS businesses that are doing well. Tech-enabled businesses have gross margins of around 70%, while service businesses' margins are in the 50-60% range. The potential to invest in software to solve more of the customer's problems is an exciting opportunity to increase gross margins over time.
What is the third metric you look at?
The third thing we look at is CAC payback, which measures how long it takes to recover a dollar of investment in customer acquisition costs. CAC payback varies depending on the size and price of the product, but generally, a CAC payback of six months is good for products under $50K, and 18 months or more is good for products over $100K. This metric is critical because it determines how fast you can grow without dilution and potentially how much faster you can grow if you raise capital. If you have a CAC payback of 12 months and you spend $10 million on sales and marketing, you should be able to add $10 million of incremental ARR in the next 12 months. With a CAC payback of 2 years, it will take you 2 years to add $10 million; you are spending the same amount but adding sales at half the rate.
There are many other metrics that we consider, such as growth rate and positive EBITDA, if the company has a profitable model given its metrics. Having a positive EBITDA is essential when bootstrapping your business since you have to be self-reliant. However, once you achieve compelling operating metrics such as an attractive NRR, GM, and CAC payback, it can justify spending more money to increase your growth rate and market share by raising capital and running an EBITDA loss for a period of time.
Can you explain the importance of the RD/revenue metric in SaaS businesses and how it can impact customer satisfaction, reduce churn, and drive growth?
The RD/Revenue metric, which measures the percentage of revenue that a company invests back into research and development, is important in SaaS businesses because it demonstrates a company's commitment to innovation and improvement. Companies that invest more in R&D can offer better products and services, which can improve customer satisfaction, reduce churn, and drive growth. However, companies are limited by revenue and available cash if they have raised money. When you're a bootstrapped company, you typically don't have a lot of money other than what you get from revenues. That is why we focus on capital-efficient teams to develop as much technology as possible with the resources available.
So the real question is: How do I get as much top-notch development done for the lowest cost possible?
Right. There's really no good way to score R&D versus product outcome in the market because it's so specific to each company. Some companies have looked at the number of agile stories created per dollar, but there's no common definition for the workload or value of a story, even within a company, much less across companies. It’s difficult to do the same kind of analysis as you do with the CAC payback.
So the test we look at is typically how much you are spending on development relative to revenue and the size and caliber of the team. The outcome we look for is a healthy NRR: are the customers happy with the product, and are they buying more?
That's why we've invested in DevSavant, to help support entrepreneurs in solving this problem. We help our portfolio companies by sourcing high-quality engineers in low-cost countries within US time zones. To maintain quality outcomes, DevSavant’s leadership is exclusively focused on our portfolio and is coached by our portfolio CTOs.
How do you help companies improve their CAC payback?
We think the key to helping improve CAC payback is taking a data-driven approach to marketing and sales. This starts with a good definition of your ICP ( Ideal Customer Profile) and good data to identify them, target them, and direct them to the optimal sales motion.
That is why we invested in SalesSavant, which helps portfolio companies target very specific ICP profiles—often narrower than SIC codes—by using web page data signatures in many cases. We found SIC codes to be too broad and not useful for highly targeted campaigns. As an example of a focused, data-driven campaign, the ICP prospects with the lowest CAC payback are executives from former customers that have migrated to new prospects; they have the highest close rate.
We also developed the GoToMarket team at DevSavant to help founders with lead-to-demo processes, including content development, PPC, SEO, and analytics. Again, by developing best practices and having teams in low-cost/US time zone countries, we help portfolio companies optimize their CAC payback.
What mistakes do SaaS companies make when trying to grow and search for funding?
A common mistake is for founders not to raise capital when they have a scalable model. They basically have an early market lead that they were able to pioneer and develop, but they lose that over time.
The second mistake I see is that they try to grow too quickly. We believe you first debug a sales model, then scale it. Too many founders take the money and try to scale a sales model while they try to fix it, and it's really hard to do both at the same time.
What has been the most rewarding experience in 30 years of working with tech and SaaS companies?
What's been exciting for us in our 30 years of working with tech and SaaS companies is learning best practices for how companies continue to improve their operations to deliver better outcomes for their customers and better outcomes for their investors and shareholders.
Most importantly, it's satisfying to see founders create significant value as a reward for their years of hard work starting the company when they were the only believers.
And what does the Savant Accelerator Program offer to the founders?
Our strategy at Savant Growth is to help founders and CEOs create and grow shareholder value as rapidly as possible for the financial community and the rest of the market. In the past, it was just through coaching and advice, but last year we opened up our support platform for companies that are too early or not ready to raise capital to help them accelerate growth. They get the benefit of our operating platform, and we build a relationship in advance of a potential future raise. Our resources can help them with operational challenges, particularly cost-effective product development, as well as data and GTM services to support capital-efficient sales growth.
How would you describe the relationship you want to have with the companies that join the Accelerator Program?
I like to describe Savant Growth as a product manager for founders’ equity. A CEO typically has a head of sales, a head of development, and a head of marketing, but who do you have on your team in charge of managing your equity value? We want to be the product manager for your equity. So basically, we help you get the best value for your equity by helping you tell your story, raise money at the lowest cost, and ultimately sell or go public for the best outcome possible. When we invest, we're buying a seat at the table to play that role.
