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

He coined the metric quick ratio at the first Saster 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 Mamun Hamid, gentle 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 SAS 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 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. 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 and 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. But let's break it down into some of the parts, which is the new revenue, the expansion revenue, the churned 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 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 looky 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 two 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 a dollar of revenue 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 ratio. And a bunch of data suggests that a quick ratio of four is quite desirable. Four or above. And so that red line indicates this quick ratio of 4. And it looks like our not so fictional company stays above that ratio of four, which is really good. So then let's look at the next thing, which I think all of us look at, which is churning. 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, 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 gone from zero to a million in revenue. Pretty good. It's mostly organic growth, probably 0 or maybe 1 salespeople or you as a founder or the salesperson, it's got this quick ratio that's hovering around 4, which is pretty good. And then you've got negative churn. So check, check, check, check, check. Series A. Likelihood greater than 90%. Very scientific. So now let's play this out. Let's go to year one through three. And so we just, we've charted the first 12 months on a three year scale and you already saw these numbers. Now let's plot out year two and three for this company. Not so fictional. And whoa, look at this. Wow, that's nice. That's the dream. 9% growth for the next two 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 going to 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 four and down to close to two. 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 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, the negative net churn territory. So to recap, this not so fictional SaaS company has gone from a million in revenue to nine, 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, 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 a million dollars a month to achieve this type of growth. And the million dollars a month comes from 20 salespeople, lots of engineers. The gross margin on 9 million of revenue, you net it all out and you're at about a 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 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 fail to do is actually look at the product market fit of our our service. We haven't really gotten down to why people 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 we should be looking at something very different. 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 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 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 not a fictional company, it's a real company. And it has this daily active use that hovers between 45 and 50%. And then it's got these big troughs, big valleys. And we'll talk about 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 five years. But just to compare apples to apples of the first five years of actually three years of this other company with a choppy dau to MAU, I provided sort of a leveling of 55%. Can anyone guess what this company is? You're right. No mystery here. 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. And 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 also a SaaS company originally out of France. Founders 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. 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 50, 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 files previewed or files downloaded or 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 doesn't tell you about the value that you're delivering. Good ones are things like Dau MAU messages sent 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 if you were in the product for 16 days out of 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 Number of customer interactions clearslide pitches viewed Greenhouse recruiting software hires made one login 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 northstar metric over time because what may be relevant to Slack three years ago as the deux, maybe actually 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 is to it to being a behemoth and maybe 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 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 three years, really great. But then let's start looking at what happened after that. This is what happened. 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. Insurance 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 gross churn is around 1 to 2% and the net churn is between 0 and 1%. But that's because the denominator, which is the total error, makes those numbers seem pretty small. So that's why 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 one. What that means is for every dollar of revenue, you're losing a dollar of revenue, you're pretty much in a treadmill. You've 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 not going to be able to raise money. You're going to make sacrifices, which means that you're not going to 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.