The Metrics that Matter, Whether You Are Raising $1m or $100m | Index Ventures Partner Molly Alter

Thank you all for joining me. Today we're going to talk a little bit about the metrics that matter for your business. And we're going to talk about it from a context of fundraising. But what's really important to remember is these metrics should actually be the underlying force in your day to day operations because they really do give you a proxy for the health of your company. So I'm going to go through four specific areas of metrics that I think are the most important to convey clearly as an entrepreneur. But we're also going to talk about why these metrics themselves are so crucial and why they really are interconnected into the entire company as a whole. But first, I want to start with a story. So a couple years ago, I met a company that had incredible metrics. The business was 10 million in ARR. They were tripling year on year. They had 150% net dollar retention, 95% gross dollar retention, and they were burning the same amount that they were adding in net new ARR during that year. We ended up passing on the business. And this is because when we questioned the team about why these metrics were so good, they came up pretty dry. It was almost like they had fallen into these amazing metrics, but they didn't have a good conception of what drove them in the underlying way. And so what the big takeaway from this presentation should be is that it's not just the metrics themselves that matter, but it's your command and your control of these metrics that will make a big difference. And it's pretty empowering because nobody will have perfect metrics, but if you understand your own ones in a granular way, you're really well positioned to fundraise, especially in today's climate. So now let's dive into some of the key areas that are most important to understand. The first is growth. And we often get the question, how fast should I be growing? I think it must be a really annoying question. But the logic and the reality here are kind of mismatched. So logically speaking, you would expect that as a company grows linearly or even exponentially, the expectation around growth should fall at a pretty similar rate. The reality is not the case. So we'll often see founders frustrated because they think, oh, at 5 million in ARR, I was expected to grow 100% and now I'm at 10 million in ARR and I'm still expected to grow 100%. Doesn't seem to make that much sense. And that's why it's really hard to do benchmarks around growth because investors have different expectations and the growth rate is really taken in conjunction with the broader picture of the company. All that being said, there are a couple things that can help guide. So from one year after launch to get to 1 million in ARR would be considered very, very good. Nine months is excellent. This is from launch, not after incorporation. And then after that, triple, triple, double, double, double is considered best in class. But again, I want to emphasize that all of this should be taken in conjunction with the broader picture on metrics. And it's important to emphasize net new arrangements. And this is what differentiates a company that's growing linearly from a company that's accelerating. So for instance, if you're adding 5 million in net new ARR every year, you're going from 15 million to 20 million to 25 million. That's a really linear growth trajectory. If your net new ARR is accelerating and you went from 5 to 10 to 20, that company is going to have a J curve. And so you can set yourself apart as a really metrics driven and thoughtful investor, an entrepreneur, by showing this net new ARR number when you're trying to fundraise and you're trying to convey your own growth, even at very small stages. So if you added 100k in net new ARR last quarter and then you added 300k the next quarter, it's really helpful to show that acceleration and it will get investors very excited about your growth trajectory. Now the rest of these metrics are a lot more benchmarkable than growth. And so for the rest of the slides, we're actually going to see a pretty clear framework on what the expectation should be if you're selling into SMB businesses and if you're selling into large enterprises, oh, that's a good echo. So in today's day and age, burn is becoming more important than ever. And I think one of the most interesting metrics to track with burn is, is just your net new ARR divided by your burn. And some people do it the other way around. They do your burn over your net new ARR, generally speaking around one is considered very good. So if you added 500k of ARR in a given year and you burned 500k, that would be excellent. And at later stages, let's say you added 15 million of net new ARR and you burned 12 million, that would be very, very good. Hyper technical products are held to different burn standards. And so if you're an entrepreneur and you have a really interesting reason why your burn is so high. You should absolutely convey that. So at least there's understanding for why the Burn metrics might be slightly different. And then on Cash Runway, this is something that's changed a lot in the last couple of months. So in 2021, it was grow at all costs. You know, party season, super fun. And we were typically advising companies to have about 12 months of cash Runway on hand. Fundraising environment was very different than what it is right now. So we've adjusted at Index our own guidance around this to extend Runway as much as possible, ideally to 24 months, which should give everyone enough time to ride out different market fluctuations and continue to grow and optimize other metrics as well. But when it comes to burn, what you really want to think about is the end state business that you're building. So it's one thing to look at the burn metrics on a given quarter or on a given year, but many investors, particularly at later stages, want to see a line of sight to 20 to 30% free cash flow margins. And that may seem like a really far off milestone, but it's about understanding the business model itself and making sure that that business model has the potential to someday be very profitable. Now, a couple of bootstrapped businesses have shown really good, clear, good examples of how to grow really fast while not consuming a lot of capital. I'm going to give two examples of businesses that do the same thing and have had different ways to grow in a bootstrapped way. So one is here in Barcelona, type form. They make survey software. And Typeform was bootstrapped for a really long time before we at Index invested in them. And their unfair advantage, their reason that they were able to grow so profitably was in many ways due to the product design itself. So Typeform is really beautiful. If you've taken a Typeform survey, you might think, oh, this is pretty nice, I'm going to send this to somebody else. And that's exactly what happened. They had a lot of organic virality and so they were able to self fund with their revenue for many years. There's another company in the United States called Qualtrics. They do the exact same thing as Typeform. It's really modern survey software. Qualtrics took a different approach to growing while bootstrapped. They gave out their software for free to university students. And university students would use that to do a psychology study or any kind of survey they were running on campus. And then those university students would graduate and they would go off into McKinsey or Procter and Gamble and they already knew how to use Qualtrics themselves. So two companies doing the same thing, using very different strategies, very different unfair advantages in order to manage burn while growing rapidly. And that's one of the main messages from today is find your own unfair advantage across any of these metrics that you can exploit and you can convey clearly to investors when they ask you, why is this metric so good? What have you done? Right? But the last point about burn that I'll make is that if someone tells you to grow faster while burning less money, I think you're completely within your right to give them this face. So you have your customers, you're growing as a whole. But the holy trinity of these retention metrics is the most important part of, one of the most important parts of, of an investor's analysis into the health of your business. And I call this the holy trinity, because I don't think any of these metrics on their own individually are particularly interesting at all. They exist together. And we often see entrepreneurs and founders not even cite metrics like gross dollar retention, which I think is really selling themselves short. So logo retention, of course, is the most basic measure of retention. How many customers do I have today relative to where I started, the year, or the quarter, or however you measure it? Gross dollar retention is the same thing, but it's with the dollars spent, the total revenue versus the number of logos themselves. And these two together are really interesting. So, for example, let's say you have gross dollar retention that's higher than your logo retention. So your gross dollar retention is 85% and your logo retention is 70%. So not amazing. What this can tell an investor is actually that your larger ACV contracts, your bigger dollar contracts are sticking around more than your smaller ones. More logos have churned, but you're still retaining that revenue. And that's really important to know and actually can be really helpful in giving a lot more confidence into the business you're building. On the flip side, gross retention and net dollar retention together can also be really interesting. So let's say you have incredible net dollar retention. You have 160% NDR, and then your gross retention is 60%, 70%. What that tells an investor is that some of your customers are doing exceptionally well with your software. They're upselling in a massive way, but others are not having product market fit at all, and they're falling off. This is really good to know. It's a proxy for product market fit. It's a proxy for market size even, because it tells you that only a certain subset of customers really are finding use in your product. So these three metrics exist all together and they're really, really important to convey when you're talking to investors and when you're managing your business as a whole. And actually, Tomas Tungash did a really interesting study on net dollar retention which I found fascinating where he looked at a company and held everything else equal besides net dollar retention. And he just changed NDR from 160 to 120. And when the NDR was 160% versus 120%, the company grew 4.2 times over a five year period. So it shows the power of net dollar retention. But what I would say is don't forget about gross dollar retention because it's really important as well. The last point on this is we sometimes get the question when should we show cohort retention? And it can be a little bit confusing because these three measures are all measured on a trailing twelve month basis. And then some people go off and show the cohorts and I understand why it might be uncertain when to use which. For enterprise software businesses, I recommend that you show cohort retention, cohort based retention, if you've had time stamped changes. So for instance, let's say you made a big change to your product in September of 2020 and after that change, you've seen cohorts perform at a much higher level than earlier ones. Give yourself credit for that improvement and show on a cohort basis how those cohorts have stacked and improved over time. If you haven't had major changes, your trailing twelve month retention and your twelve month cohort retention are probably going to look very, very similar. So there's no need to show both. So I want to talk about sales efficiencies, but first I want to tell you about a bathing suit that I recently bought. So I had seen this bathing suit on my Instagram, I think like 11 months ago and it was really cute. I liked it. I saw it again on my Twitter a couple months later and then I saw it again on my Instagram and I logged into Facebook. For some reason I saw it there. Months and months go by. It was winter in London, I wasn't buying a bathing suit. And finally this May, I sucked it up and I bought it. I got it on a bit of a discount. I'm probably never going to shop at the brand again. And this is a really good example of terrible sales efficiencies. The amount this brand spent to acquire me as a customer was probably in the hundreds of dollars. And yet I bought a $50, bathing suit, and I'm probably never going to buy from them ever again. Now, the same goes for sales efficiencies in enterprise software businesses. You want to make sure you're really understanding the LTV of your customer and the cost that it takes to acquire them. Now, there are a lot of metrics around sales efficiencies and sometimes it can be like Alphabet sound soup. The two most important ones are CAC payback period in months and 3 year LTV to CAC. And I argue this is the case because for CAC payback period in months, you get a really clear understanding of how quickly it takes to pay back the cost of acquisition and therefore how quickly you can acquire many customers at scale. But CAC payback period in months is only one part of the equation because when you're saying, okay, it took me 12 months to recoup the cost of acquiring that customer, you're not really seeing what that customer does after you've already reacquired that cost. So let's say it takes 12 months to acquire a logo, but then in the next two years they upsell and they upsell again, and they upsell again. You want to show the 3 year LTV to CAC or even the 5 year LTV to CAC in order to give yourself credit for the amount of LTV that's generated after you've already paid back that customer. So I think it's really important to show both of these metrics. And there are a couple examples of businesses that have really optimized their sales efficiencies metrics by again, utilizing unfair advantages. So I'll give you two. One is a business called Paycom. And Paycom sells human capital management software. Not the sexiest product, lots of companies doing that, and really hard to make those sales. So what they did was pretty inventive. They took their sales reps, they took their sales rep model and threw it out the window. And instead of hiring experienced reps from other companies who had sold that kind of software before, which you think would be pretty rational, they instead decided to hire people with no sales experience whatsoever. They took these people, they gave them a really strong training playbook, and then when they opened up new geographies, they would put little SWAT teams of these people in the new GEOs. And this worked fantastically well for Paycom. They were able to scale their sales organization in a very efficient way. And their CAC payback period in months is still among best in class. When you look at publicly traded companies, a very different Unfair advantage is a company called Viva. So Viva sells software to the lifecycle sciences and biotech company. They sell compliance and CRM software. And their unfair advantage, their reason why they were able to achieve such strong sales efficiencies was in many ways because of the vertical market they were in. And this is one of the advantages of vertical SaaS businesses in general, they have a really defined sales universe where people talk. So they got a couple of key logos using their platform and then all of those businesses went and told all their other friends in the life sciences world how great Veeva was and they optimized on expansion in order to optimize their sales efficiency. So their LTV for these customers was massive when they layered on additional products and continued to upsell them over time. So two very different routes to getting strong sales efficiencies, but both very effective. And then finally, what about everything else? So these four areas, growth, burn, retention, sales efficiencies are what I think are the most important to clearly convey. But there are plenty of other metrics that are really important to show as well. So first of all, company specific metrics are fascinating to investors. What your North Star metric is is something that we always want to see and how you're managing to that metric over time. But also things like gross margin, nps, acbs, and particularly with things like gross margin and nps, it's really helpful to benchmark for your own market. So if you're selling customer support software, which has historically really low NPS, but you're crushing it and your NPS of 10 is way higher than everyone else's negative NPS, show that and give yourself credit for that strength. Gross margin is another one that's really interesting. When we invested in Revolut, they had a negative gross margin and it was something that we saw the founder be really attentive to over time and he made decisions over the over the recurring years that helped push this margin up to the place where it sits today. So improvement is possible for any metric if the founder or the team has a command and control and visibility into what those metrics look like. And then ACVs. Just a quick note on this. There's a common misconception that 30k ACVs are the valley of death and that no big businesses have been built with 30k ACVs. I think this is absolutely wrong and we have plenty of examples now. Avalara or even like one trust being examples. And so there's no right answer with ACVs, but showing that progression again, what whether you're moving up market or whether you're moving down market and have a really good reason for moving down market, that can be really important. And then finally, investors are used to receiving data in relatively similar ways. And so it's helpful to avoid things like cumulative data, which are not normal for us or not typical for us to read, and try to just demonstrate your metrics in the most clear and concise way as possible. A couple of key takeaways from today. One is that strong metrics typically reflect some sort of unfair advantage. Whatever your unfair advantage is, understand it and convey it well. And there's no right unfair advantage. It depends a lot on what others in your market are doing. The second is that all metrics are interconnected and some can supercharge more than others. So many investors, typically at later stages, will end up building a model based off of the metrics that you provide. And this model is really just putting everything into one unified data format and then playing with different assumptions. And in these models, you can see really clearly how the metrics all work together. And some, like I would argue gross dollar retention, which is my favorite metric, can really supercharge your business more than others. And finally, nobody has perfect metrics. And so there's no expectation that every number on the page is going to look a certain way. But what you can do is have a thoughtful action plan around how to improve certain metrics, and you can have a command and control over your own organization through your metrics. Sometimes I think that being a founder seems really daunting. Investors seem to have all these expectations. You have to grow quickly, but don't burn too much money. You need to have really strong net dollar retention, but don't have too long of a CAC payback period. There's a lot going on, but what we've seen time and time again are entrepreneurs who embrace this uncertainty, embrace this chaos, and they manage to get a command and control over the metrics in their organization. And there are tools that can help with this. So, first of all, there are tons of blog posts about SAS Metrics, many of which I consulted for this presentation. There are also dedicated SaaS management vendors that help you integrate all of your data and show it in a really nice, clean way. I think one thing that's even more challenging than just wrangling your data or putting it on a slide, though, is building an organization that's oriented and aligned around metrics. It's really a cultural problem at the end of the day. And so for that, there are companies like gtm, Hub in our portfolio, which is OKR management, that gives everyone on the team a metric that they're accountable to and shows across the entire team how these metrics can sit together. And also just provides the visibility for upper management into how the team is tracking towards the various metrics that will end up driving the health of the business. So with that, I want to open it up to a couple minutes of questions, but thank you so much for the time and attention and I'll be here afterwards if you want to chat more. Yeah, so the question is, why is gross dollar retention my favorite metric? So if you look at the logo retention on a given year, let's say you start the year with 100 logos and then you end the year with 92, you'd have 92% logo retention. But it doesn't tell you anything about those logos themselves. I don't know if I lost 8 self service customers that were barely paying anything, they could have been paying $1 apiece. I'd have no idea. If I only saw the logo retention. If I see the gross dollar retention, you're saying at the beginning of the year you had $100, at the end of the year you had $50. Jesus Christ. You know, there's a lot of big customers that are leaving my platform. And so when you have them together, you have a really nuanced understanding. And if you have both of those metrics, you can see, okay, I lost a certain amount of logos, but looks like they were pretty small and I still retained most of my dollars. Or maybe it's the opposite. Maybe I have still a 98% of my logos, but that one logo I lost was 40% of my revenue. And so having these two together is absolutely crucial in my opinion, and it's criminally underrated. You would be really, really surprised how few people ever cite this metric when I think it's one of the key underlying drivers of business health. Hello there. There's a mic.

Oh, yeah, no worries. Yad here from Penny Software. First of all, thank you Molly, for the presentation. Straight to the point. I have two questions about acv. The first question is in an enterprise business, we. I mean, it's typically we look at ARR, but in enterprise software, ACV is very important. Right. So my question is, if we consider acv, ARR plus customization and implementation fees, if we look at the cohort, like a cohort of a year, what is the healthy ratio of AR to acv, like say a company that has an ACV of a million dollar for, for the year, 800,000 of it is ARR and 200,000 is other fees. So 80% of the ACV is ARR. How would we benchmark that to the standard of the market from the eyes of the investors? My second question is about TCV. Is TCV a real metric or a BS metric?

Very good questions. On the first, I'd say 80% plus would be a good, good benchmark. Anything below that, there should be a really clear reason or a really clear understanding for why that is the case. TCV is a very good question. I would say don't overemphasize TCVs. Investors have, have began to take this with a grain of salt, particularly in today's market. Nothing is for sure. And so if you have, you know, a 5 million dollar, 5 year TCV, you can also just refer to that as a 1 million ARR contract. And you know, of course, giving yourself credit for that, that TCV and mentioning it as well, but not necessarily building your entire future business off of these contracts which may or may not break over the coming years. And having a real humility and clarity in that is something that will really impress investors because they're probably thinking it. And if you as a founder say it's a 3 year, 3 million TCB contract, we're acting like it's a 1 year 1 million ARR contract with some upside. They're going to say this person's got a great head on their shoulders.

Hi, this is working up. Yeah, hi. We're actually an index company. My name is, I have two questions actually. One is when you talk about new ARR, are you referring to new customers or new ARR from upsells as well? And then my second question is, as in our case at Talent Desk, we have two sources of revenue. One is SaaS licenses. But we also, because we do payments, we have a transaction fee that we charge and it's actually 50, 50 right now. So big debate in the company is do we treat, you know, benchmark metrics, the total revenue or do we strip out just, you know, the license revenue, which is tricky because from the customer's perspective it really is coming out of the same budget. So we're debating whether we should just benchmark on pure SaaS revenue or bundle it all together. And so. Well, we do both actually. But I'd like to hear your opinion, what you would advise.

Yeah, really, really good question. So when it comes to net new ARR, the calculation that investors will make is new plus upsell minus down, sell and churn. So it's inclusive of all of the movements, all of the revenue movements of that given time period, that given quarter or that given year. And so that's why it's a really helpful metric that kind of cuts through all of the noise and says, well, what did we add? What did we lose? This is where we're at. And then when it comes to your second question. So there's a lot of nuance around companies that have kind of dual business models like yours. And sometimes we see things like reoccurring revenue cited in a pitch deck or, you know, gross revenue run rate and things like that, things that aren't necessarily ARR. And ARR is the most easily benchmarkable one. My advice, if your business model is a little bit more complex and has multiple components, is just to show it exactly as it is. So if you're showing a graph and half of that volume, half of that run rate, revenue run rate is from true ARR and half of it is from payments volume. Split that out so that there's nothing left for the investor to discover or find out in diligence. And. And there's no wrong answer. You know, I don't think anymore that investors are so myopic that they're only valuing companies based off of ARR. You will get credit for those alternative streams of revenue as well. But it's important to clearly label it and not try to make it into ARR when it's not actually ARR. And the good thing is you don't have to. I mean, we're seeing payments businesses being valued at extraordinary levels. Maybe not as much recently, but, you know, we're seeing payments revenue have a moment in the sun. So there's no need to force everything into an ARR framework if it's not really ARR. And I think maybe I have time for one more if there's another question.

Thank you for the great presentation. It doesn't matter too much, but I wonder if you have any best practices in tools or how you want to track these metrics.

Yeah, it's a great question. I like SaaS Optics. SaaS Optics I think is pretty good. There was another one. And then on the OKR side, I am completely biased because it's one of our investments. But GTM Hub is amazing. It basically makes it so that everyone in the organization has a metric. The management decides what metrics are important, and then the individual also decides what metrics are important. They have kind of like a checklist for how they can get to that metric. And then if you're the management team. You can see across your entire organization for every functional area how those metrics are faring and how each individual person is faring in their quest to achieve XYZ metric. So I think they're amazing. We did a lot of big survey of the market and found them to be the strongest. But there are also some really good Excel templates that you can find online. If you're looking for something a little bit lower cost, especially for like bringing your raw MRR data into a more readable format, there are some pretty interesting Excel templates for that, and there are also some lower cost providers that are just kind of more bare bones getting you to that pitch deck. Sam.