3 metrics that matter when evaluating early-stage SaaS startups

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2018 is shaping up to be one of the biggest years ever for venture capital, with over US$84 billion already invested with a full quarter yet to go. News reports of US$100 million venture rounds are seemingly commonplace.

Yet, data indicates that a large percentage of early-stage startups raising money this year will ultimately fail. And most of the remaining ones will pivot in order to survive and hopefully thrive.

This begs the question: What exactly are investors and lenders looking at when determining which companies are “financeable?”

This post is meant to provide a simplistic view for how to assess early-stage SaaS companies. It assumes that a lot of other things are in place such as having a compelling team, technology, investors, market opportunity, etc.

But given these prerequisites, here are a few of the most important metrics for early-stage SaaS companies to focus on based on their life cycle:

1. Growth (seed/series A)

If a startup is growing fast, it means that the company is solving a problem in the marketplace. Or, at least, the company may be addressing a gap in the market, which leads customers to sign up.

The meaning of “fast growth” depends on a company’s life stage, but for the early stage (seed or series A), growing 100 percent year-on-year is typically pretty solid.

Paul Graham famously looks for 5 to 7 percent weekly growth for companies at Y Combinator. His rationale is pretty simple:

A company that grows at 1 percent a week will grow 1.7x a year, whereas a company that grows at 5 percent a week will grow 12.6x.

When you consider the compounding effects of this growth, it means a company starting with US$1,000 in revenue and growing at 1 percent will be at US$7,900 per month four years later. A company growing 5 percent per week will be bringing in more than US$25 million per month.

As Graham also references, focusing on growth as the key metric also keeps a business nimble and constantly adjusting to meet customer needs. This helps explain how YouTube evolved out of a dating site or how Instagram started as a Foursquare competitor.

2. Churn (series A/B)

If you’re growing fast but constantly churning customers (e.g. people are cancelling or not renewing), then it means your sales pitch addressed a need, but your product or service didn’t deliver. Or more simply, your product-market fit wasn’t right.

3. Gross margins (series B and later)

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