Mamoon Hamid / Social Capital: Numbers that Actually Matter for SaaS Founders

He coined the metric quick ratio at the first SaaStr Annual, which every top SaaS startup has gone on to put in their pitch desks. He's led big rounds in Slack, Yammer, Intercom, Greenhouse, Box, and so many other iconic SaaS companies. Please welcome Mamoun Hamid, general partner of Social Capital. Hi everyone, it's so good to be here with my people, the SaaS people of the world. Welcome. You know, as SaaS people, we dream about things at night that— I want to make sure this goes. Can we click? There we go. Okay, works. All right. This is what I dream about, and I'm sure you all dream about the exact same thing at night, right? Don't lie. Don't lie. It's this perfectly parabolic curve that grows exponentially. You know, you sell some, you expand some customers, you add some reps, and it just keeps growing and growing and growing, and it show— makes this beautiful curve. This is all about what we dream about, right? Well, this is someone's reality. You may think it's a very lucky company, But it's actually a company's dream that turns into a nightmare. So this is all what we think about, right? It's too damn high. Well, it's not actually. It's— we like exponential growth, and if we can keep it going forever, that's great. We can go public and make lots of money for our investors. But it's not really that actually. So let's go back to that company. We call it the not-so-fictional SaaS company. This is the first year of operations. It grows from zero revenue to about a million in revenue, which I think is a pretty good outcome for a SaaS company. It grows 33% a month for the first year, and we should be pretty happy about that kind of growth. So, but let's break it down into the sum of the parts, which is The new revenue, the expansion revenue, the churn revenue, and then some contraction revenue. Looks pretty good, right? I think we'd all agree that this is pretty traditional, what we expect to see from a SaaS company in its first year of operations. Well, we start to see some yellow, and the yellow is early customers who decided that they didn't like the product or something or the other. So maybe some lookie-loos or something of that ilk. So then we look at the next thing, which is our beloved quick ratio. I think many of you may know about the quick ratio. We coined it at this conference 2 years ago, and we see that this quick ratio sort of starts to hover down to 4 on this logarithmic graph here. And for those of you who don't remember what the quick ratio is, I'll quickly define it. But what this really means is that for every $4 of revenue that we're adding, we're losing about $1 of revenue in that, in that given month. So just to define the quick ratio again, it's brand new revenue from new customers. You add to that expansion revenue from existing customers, and you divide that by customers that you've lost or customers that have contracted. Quick is the Quick Ratio. And a bunch of data suggests that a Quick Ratio of 4 is quite desirable. Quick— 4 or above. And so that red line indicates this Quick Ratio of 4, and it looks like, you know, our not-so-fictional company stays above that ratio of 4, which is really good. So then let's look at the next thing, which I think all of us look at, which is churn. And here we see that this company, you know, has some choppy churn up in the beginning. The, the blue is the gross churn, the orange is the net churn, and we want— we like companies that have negative net churn, which is what this company still has. So, but you know, I wouldn't read into it too much. It's early days and churn really doesn't show up until later. Maybe some warning signs. So let's recap this company. It's, it's gone from zero to a million in revenue. Pretty good. It's mostly organic growth, probably zero or maybe one salespeople, or the— you as a founder are the salesperson. It's got this quick ratio that's hovering around 4, which is pretty, pretty good. And then you've got negative churn. So check, check, check, check, check. Series A likelihood greater than 90%. It's very scientific. So now let's play this out. Let's go to year 1 through 3. And so we just— we've charted your— the first 12 months on a 3-year scale. And here you already saw these numbers. Now let's plot out year 2 and 3 for this company, not so fictional. And whoa, look at this. Wow, that's nice. That's the dream. 9% growth for the next 2 years and parabolic exponential. Beautiful. Looks great. We're on fire. You're ready to go raise your Series B. You can count the money in the bank, the $25 million Series B you're gonna raise from Byron at Bessemer. Right? No? Hey, Byron. And then let's break it down further. It— we start to see a lot of yellow. It's churn, churn showing up. It's customers who don't like our product, they don't find use in it, something. It's a lot of yellow there, but still there's a lot of blue and a lot of orange. And so looking at this chart, I think that things are pretty good. But if we start to look at the quick ratio, It's starting to hover all the way down below that 4 and down to close to 2. That's trouble. That's real trouble. That indicates that for every $2 of revenue that you're adding, you're losing a dollar. That's a lot of work that you're doing to just offset the churn from your customers. So, so early signs of trouble. So let's look at at churn, and churn indicates again, you know, gross churn is going up and we're no longer in this negative net churn territory. So to recap, this not-so-fictional SaaS company has gone from $1 million in revenue to $9 million, which is spectacular, right? Like, all of us would want that. We would fund it if you showed us these numbers. But it also took you 20 salespeople, a lot of work. You had to hire them, like half of them didn't work out and they didn't attain to their quotas. But it took about 20 salespeople to get to this $20 million of revenue. Then you had this expansion revenue, which was offset by all those— the yellow, the churned revenue. So a bunch of customers who weren't all that happy with your product, or they just didn't find value in it, and Something happened and that's not good. And you saw that because of that, the quick ratio started hovering close to 2, which is problematic. And we saw the churn charts started to trend in a place where they don't look that good. And worst of all, we're burning about $1 million a month to achieve this type of growth. And the $1 million a month, you know, comes from 20 salespeople, lots of engineers, and the gross margin on $9 million of revenue, you, you net it all out and you're at about $1 million a month of burn. The top line would indicate very fundable company, but the bottom line and the actual underlying metrics suggest that we have a problem. We have a, a leaky bucket problem. We're losing more customers faster than we're able to add customers on the top. And the only reason why we're able to just survive is because we have some customers who are expanding as well. So how do we make sense of this? How do we actually get down to the bottom of the root cause of what's going on in this not-so-fictional company? What we've failed to do is actually look at the product-market fit of the— our our service. We haven't really gotten down to why people use what— use the product that we're selling to them. So we have to look at churn expansion and contraction of MRR is actually just a lagging indicator of success or failure. And it's— we should be looking at something very different. What— why are people using the product we're selling to them? We have to find the leading indicator of success or failure. And for that reason, we all have to think about this. You have to find your North Star. Your North Star is something that is underlying to the product and the, the service that you're delivering. And it's really important to get to that North Star. And we'll talk about some of the things that you could find in your product that are your North Star and I'll provide some examples in just a minute. So MRR, the thing that we dwell on so much, is the price that your customer pays. And the North Star is the value that they get. It's a measure of the value that you deliver. And so think hard about what your North Star is, even just now. Just start thinking about that North Star. And many of you may already have something in mind that measures true value from your service. So maybe I'll go into some examples. So this is a particular North Star for a particular company that exists out there today. It's, it's daily active use to monthly active use, the ratio between the two. So for how many users that come to your service monthly actually use the product on a daily basis. And here's a company. It's, it's not a fictional company. It's a real company, and it has this daily active use that, you know, hovers between 45 and 50%, and then he's got these big troughs, big valleys, and we'll talk about why, why this company has valleys. And to give you some perspective, here's a company that we all know about. It's worth about $400 billion that has a DAU to MAU of used to have a DAU to MAU of 55% up until 2012, and now it's actually jumped up to 65% in the last 5 years. But just to compare apples to apples, of the first 5 years of— actually, 3 years of this other company with the choppy DAU to MAU, I provided sort of a leveling of 55%. Can anyone guess what this company is? Huh, you're right. No mystery here. So, and the reason why there's valleys is because there's the holidays and people don't work during the holidays, and it clearly shows up in the Slack data. And wait a second, I actually have another company I want to put up here. Here's a company that has another— also has a DAU to MAU metric that it uses as its North Star. And any guesses here what this could be? Any guesses? It's a— it's also SaaS company originally out of France. Founder is here. Will be here talking later today. It's a company called Front, and it's a shared inbox app that brings all external messages— so email, text, Twitter, Messenger— into one unified inbox where your colleagues can triage those messages, assign them to each other, respond to those messages. And because it's email and it's messages, it's a daily active use product. It's— people use this product to get their job done. They use it every day. To be productive, to solve customer issues, solve external issues. So if Slack is for internal communication, then we look at Front as being the service for external communication. And so here you look and it's got this off-the-chart DAU to MAU jumped up after the holidays hovering around 60% and 65%, and Slack not too shabby at 55%. So two pretty spectacular DAU to MAU, but this doesn't have to apply to your company. You may not have a DAO/MAO business. You may have a, you know, files previewed or files downloaded, or, you know, you're a security company, you have some other North Star metric. But that's how to think about your North Star. It's the value that your product is delivering. So what's a good North Star? Bad ones are MRR and paid seats. That's just— it's, it's not— doesn't tell you about the value that you're delivering. Good ones are things like DAU, MAU, messages sent, and but they're really bulk metrics. Better ones are beyond that, are even that even test your product-market fit in even a better way. So the number of messages sent within 30 messages of signup, or an L28 chart that shows that If you were in the product for 16 days out of the, the 28 days. So here's some examples of some other North Star metrics of other companies that are in the social capital portfolio. Box, you all know Box, number of file actions. Intercom, a lot of you probably know about this company, a number of customer interactions. ClearSlide, pitches viewed. Greenhouse, recruiting software, hires made. OneLogin, single sign-on. Number of apps signed into per DAU. And Netscope, security company, number of apps monitored per service per user. So again, you can vary your North Star obviously based on the business that you have, but you can also evolve your North Star metric over time because what may be relevant to Slack, you know, 3 years ago as the DAU or MAU, maybe actually a a much more different metric that's important to them now because they've checked that box. Now it might be a much more refined view on what's important to Slack today to grow from the big company that it is to being a behemoth and it may be a different North Star actually. So to recap, the North Star is all about the value that you're delivering and making sure that it's greater than the, the price that your customer pays. And so focus on that, and that's how you will find your North Star. So let's go back to our fictional, not so fictional SaaS company, and let's see what happened over time. So we saw this chart, $0 to $1 million, pretty awesome, up to $10 million in 3 years, really great. But then let's start looking at what happened after that. This is what happened. It's— it grew, but then it plateaued. It added MRR, but then it also lost a bunch, and we can see that in this next chart where this yellow just started to dominate. Yellow and gray, like contraction and churn revenue, started to dominate, which showed up here in the churn. But this churn is kind of deceiving. If you look at it, it's really the, the gross churn is around 1 to 2% and the net churn is between 0 and 1%. So, but that's because the denominator, which is the total ARR, makes those numbers seem pretty small. So that's why, like, later in life this churn can be quite deceiving. You might say, hey, our churn, monthly churn, is 1.5%, but that's really at this stage of a company, not that relevant. What is relevant though is looking at the quick ratio. And here you see that the quick ratio is very quickly coming down to 1. What that means is for every dollar revenue, you're losing a dollar revenue. You're pretty much in a treadmill. You've got— you've like fully fulfilled that leaky bucket promise that we talked about and fulfilled that dream that turned into a nightmare. And so what does this mean? So your new revenue is barely making up for your churn revenue, which means that you're, you're not gonna be able to raise money. You're going to make sacrifices, which means that you're not gonna build the product you need to stay competitive. And less competitive product means more churn, and people will leave your company. They'll go to the next best SaaS company, and you enter this vicious cycle. And this is the problem that we see a lot of companies facing, is that you get to this point and you're at the vicious cycle because you forgot where you came from, which is like you led with product, you led with the North Star. So don't become one of these companies. So, and instead, do this. Thank you.