In this interview, host Akeel Jabber talks with SaaS investment expert Joseph Pizzolato about the quantitative metrics investors prioritize when evaluating SaaS companies. Pizzolato emphasizes growth as the primary signal, referencing the Battery Ventures T2D3 framework (triple revenue for two years, then double for three) as a benchmark for early-stage ARR growth. He discusses capital efficiency, defined as ARR divided by total capital raised, noting that a 2:1 ARR‑to‑capital ratio is solid while 3:1 is best‑in‑class. The conversation moves to go‑to‑market health, highlighting CAC‑to‑LTV, payback periods, and especially the "magic number" (new revenue divided by prior period sales & marketing spend) as a litmus test for scalable sales efficiency; a magic number above 1 is favorable, while values below 1 signal potential product‑market fit or GTM issues. Red flags include wildly unfavorable magic numbers or payback metrics. Pizzolato then describes post‑investment founder relationships, ranging from informal, frequent communication (e.g., WhatsApp chats) to more structured quarterly board updates, stressing the need for a symbiotic, trust‑based partnership. Finally, he offers advice to aspiring investors on building credibility: leverage personal public‑market investing experience, demonstrate a track record of small‑scale capital allocation, and consider diverse pathways (operational experience, founding startups) beyond the traditional banking route. Throughout, the tone remains conversational and supportive, aiming to demystify SaaS investment criteria and provide practical guidance for both founders and emerging investors.
Chapters
And what would you say are some other key metrics that you guys are looking at when you guys are looking at SaaS businesses as investors? So revenue, you know, let's say a million ARR, you're growing, you're looking to grow, you know, raise some capital at this point. What else are some— key points you guys, you guys like to look at?
Yeah. Yeah. It's a, it's a good question. It's like, it's funny. It's one that we discuss a lot internally, you know, that one of the beauties about software is, you know, once you've kind of got an established product and you have your go-to-market ready, you know, you can really just like roll out the business and grow methodically, uh, which is something that, you know, I think is very rare in a lot of other segments. And so SaaS kind of tends to lend itself a lot more strongly to a metrics-based approach. You can really actually, benchmark businesses, even if they're different verticals or, you know, horizontal layers, there is a sort of that nice replicability. So I do spend quite a lot of my time kind of like looking at SaaS metrics. I think, you know, really the first one that I always think strongest about is just growth. You know, like what is your business growing? What's your top line growth rates? And again, you need to kind of like, every business is growing at different levels, but, you know, there's a really nice framework. I'm not sure if you've come across it. It's by Battery Ventures. It's the T2D3 framework. And it's kind of like, it was established a while ago and some people say it's a little bit outdated, but it's really at the core, it's kind of like when you hit a million of ARR, your kind of next few years, you should triple for 2 years and then double for the next 3 years. And it's funny. So essentially you're going from $1 million in year 1, $3 million in year 2, $9 million in year, you know, year 3, it's kind of that. And then you start doubling. And it's really interesting. I've spent a bit of time kind of like benchmarking some of our companies and some of the other ones that we've met. And you tend to see there's a little bit of a correlation to, you know, some of the best performing companies that growth curve almost. So there's no, it's no hard and fast rule. That's just kind of something that I find quite interesting to always look at. Um, so that's kind of like one of them. I think there's always other things that you look at around like, you know, the magic numbers and, you know, the rules of 40 that people are always, you know, there's a lot of stuff like that's in vogue. Um, and yeah, so we kind of look at all of those things. We look at, I guess, you know, capital efficiency, which is kind of, you know, how much capital has been raised for your level of ARR.
Mm-hmm.
And there's different rules of thumb there. Sometimes it's, you know, a 2-to-1 relationship, sometimes it's a 3-to-1 relationship depending on, you know, if you've got different scale. And then there's always—
You're talking about specifically about the CAC to LTV ratio there?
No, no, this is capital efficiency. It's slightly different. So it's kind of like how much have you spent as a business to get to where you are for your ARR base? So you're essentially taking your ARR and you're dividing it by your capital spent to date, if that makes sense. You know? So yeah, yeah. It's kind of an interesting one to benchmark just to get a sense on how efficient has the business been. Because, you know, a company could be at $1 or $2 million of ARR, but if they spent $20 million to get there, that's probably less interesting than some other businesses. So I think that's always an important one to look at.
So 2 to 1 is probably a good— I mean, 3 to 1 would probably be pretty— yeah, 2 to 1 is probably a good benchmark, right?
Yeah, exactly. 2 to 1 tends to be pretty good. And 3 to 1, I would kind of say is like best in class. You know, if you're around there, then you're doing pretty well. Pretty, pretty frequently.
So is there something that you'd look at and you say, look, this is a red flag and automatic deal breaker that you've typically seen?
Like, yeah, that's a good question. I find, um, you know, there's, there's a lot that you need to understand around like the go-to-market and the sales metrics. So, you know, like your paybacks, like you said, you know, your, your CAC to LTV and your payback are 2 really important ones. If those are completely out of whack, then that is a pretty big red flag. Um, and, and I do think, you know, one of those, the key ones that I do spend a lot of time is actually the magic number. So, Yeah, I don't know if you're familiar with the magic numbers. It's the one that, which is essentially you take, you know, your new revenue for a period and you divide it by your sales and marketing costs for the previous period. So essentially, you know, how much new revenue are you adding for every dollar of sales and marketing? Um, it's kind of a good, another good sort of benchmark just to understand, you know, and the general rule of thumb is, you know, if it's above 1, that's probably good. You know, if you add a dollar of revenue for every dollar of sales and marketing, that's a pretty scalable business model, right? But, you know, it's funny, you'll see some businesses where those metrics are just completely out of whack. Like they're adding like $5 or $6 of sales and marketing to get $1 of revenue. And that for me starts to become a bit of a red flag just because I think it can be an indicator that you haven't found product-market fit or you haven't actually kind of really nailed your go-to-market as well. You're still probably kind of fishing around for that.
Yeah. See what's sticking. So that's interesting. So just to clarify, you would take, Incremental growth of revenue and then divide that by a period of time over your combined sales and marketing budget. Okay.
Exactly. So you take your previous period. So, so like if normally it's done quarterly, you kind of look at this quarter's new revenue and last quarter's sales and marketing. And I find that a really strong metric.
I like that. Cool. So once you guys invest in the company, how would you describe the relationship afterwards between you and the founders and how you guys work with them after the investment has been made?
Yeah, it's funny, that one, 'cause I think every business is different and every investor is different, right? And personally, like, for anyone who gets to know me, I'm a pretty informal, you know, informal guy. Like, I kind of like to build like a personal relationship with the founders. So, you know, I've got some founders who have me on WhatsApp and they text me every other day, right? Like, you know, just like updates and the sort of, you know, sort of people who will go to the pub together and get a drink. But, you know, at the same time, there's other companies who tend to take a lot more of a structured approach. You know, They'll only, you know, keep you updated at quarterly board meetings. They'll kind of, you know, keep you at slightly arm's length. And I think that's kind of one of the, you know, the elements of being a good investor is really kind of working with your founders in the way that's quite symbiotic. You know, you don't wanna be, anyway, in my belief, you don't wanna be sort of like a really hands-on guy or putting a lot of pressure on them if that's not the right situation for that. So I think, you know, every good investor should really build, you know, focus on their relationships.
Yeah, that makes sense. So I realize you joined, Felix, you know, slightly later, you weren't there at the early stages, but I'm just kind of curious here, maybe, you know, you've also worked in investment banking, so maybe you understand this problem. Obviously you need capital to make deals, that's kind of the fuel of the fire, but you also need deals, you need track records to get that capital. You know, it's obviously a chicken and egg problem that you're facing. What would your advice be to maybe some upcoming investors to kind of solve that issue?
Yeah, it's a really good one. It's definitely, I think, like, I'm sure a lot of people find it frustrating when you look outside in, you're like, you know, how the hell does this industry make any sense? Because to do deals, you need to have track record to invest money, right? It's kind of slightly counterintuitive. I guess, you know, one thing that I think, like, is most helpful is, you know, the public markets, right? Like, you can invest in companies on the public market with a dollar, right? And Actually, that was kind of like one of the things that I did because I've been doing, you know, like I said, public investing since I was like 15 years old. Not that you can build like a, you know, go out and raise money on your public exposure as a, you know, a young person, but it really just kind of helps you kind of like credentialize yourself a little bit when you get into those discussions. Like when you first say, I want to become an investor and you start talking to people, if you can show you're really passionate about, you know, investing and you've put your own money to work and you can sort of pitch a few stocks and say, you know, like, invested in this company a couple years ago, I got this sort of return. And, you know, it's not something that's bulletproof, but it definitely helps you kind of just get your foot in the door a little bit, right? So I think anybody who, you know, the most fortuitous people follow this sort of the very, I guess, traditional linear route into investing, which is, you know, you study finance at university, you get a job in banking, you work for a few years or as a consultant, and then you can kind of leverage that to get in. But, you know, I think that's not not the norm these days, actually. I think there's a lot of people coming at it from different solutions, people with operating experience, people who've made a startup and they want to get into investing. It's kind of show a passion and try and show some sort of a track record where you can.
That's smart. I mean, at the end of the day, they're looking at you like capital allocators. And if you know how to do it at the small— what's your decision-making framework looking at small investments? It doesn't matter what it is. And then you can apply that to— that makes makes sense.
Yeah.
Cool. So, you know, beyond the, you know, the track record and your performance, I think the next step is obviously, you know, trust in this investment industry. I think that's probably one of the most valuable assets that you can build as with the GP, right? Or as the GP with your LPs. What do you believe are maybe some of the, maybe let's say 3 main reasons why you can trust someone after the first meeting? Like when you look at, you know, between you and the entrepreneur, or, you know, LPs trusting you as a GP.
Yeah, it's also— you're full of good questions today, Akeel. It's, uh, definitely not your first, uh, first podcast. But I think like for me, trust, you know, really in a weird way it comes down to intuition a little bit. Like I feel like you can, once you meet somebody, especially face to face, you know, it's a little bit harder these days when it's like, you know, removed by Zoom, but you can get a kind of quite a good sense pretty quickly if someone's genuine, if they're kind of, you know, leading you, leading you on or not. And I think you kind of need to really trust your gut a little bit and, you know, get a sense of that person. But, you know, if you don't have that sort of, you know, that gut reaction, there's always, you know, track record and references, right? Like you can go back to data, you can look at somebody's history, where have they worked, what have they done in the past, can I talk to people they've worked with and build that sort of, you know, a little bit of a view of that individual in their history, right? So you've kind of got to lean a little bit on your network as well, I think, or if not yours, you know, people associated people within your network and you can get references. You can find out quite a fair bit about people and about investors using those 2 levers.
