Blake Bartlett

OpenView Venture Partners

@blakebartlett

Why the Most Important

Success Metric in SaaS

Is Misleading

Featuring the stars of the new Vince Vaughn movie –

Unfinished Business (and other celebrities)

What’s the first metric VCs hunt for in your pitch deck?

That’s easy..

Committed Monthly Recurring Revenue

“[CMRR] is the single most important

metric for a Cloud business to monitor,

as the change in CMRR provides the

clearest visibility into the health of any

Cloud business.”

Bessemer Venture Partners

Laws of Cloud Computing

Ask anyone.

This is the foundational metric that everyone scours the pitch deck to find.

But is CMRR growth everything?

Two Companies / Same CMRR Trajectory

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

Total CMRR Over Time

Company ABC Company XYZ

Which company is more interesting?

It’s not a trick question.

How does a VC decide which of these two companies to invest in?

Contrary to popular opinion, it is (a little) more scientific than a blindfolded dart-throwing contest.

First things first…let’s look at the next level of detail beneath total CMRR growth trajectory

Gross New CMRR Added per MonthSince each month can be viewed as a new customer cohort (upsells are excluded),

this tells you the size of each new cohort you’re adding (in $). This is basically your

new customer sales.

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

New Customer CMRR Per Month

Company ABC Company XYZ

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

New Customer CMRR Per Month

Company ABC Company XYZ

Now which company is interesting?

Clearly, ABC.

I MEAN…

THAT GROWTH

THO!

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

New Customer CMRR Per Month

Company ABC Company XYZ

ABC has grown the new cohort size (aka sales) by 2.4x in 2 years. ABC

clearly knows how to scale! XYZ is so boring. They’ve been adding $10K

of new CMRR every month for two years. WOMP WOMP. No thanks XYZ.

THAT

GROWTH

THOUGH!Wait one second…

Aren’t these two charts both examining

the same two companies?

Identical on one chart

Completely different on other

Huh?

Solving for end-of-month CMRR (1st

Chart) is pretty simple arithmetic.

End-of-Month CMRR =

Beginning-of-month CMRR + New Customer

CMRR + Upsell CMRR - Downgrade CMRR -

Churned CMRR.

Let’s look at the inputs:

1. Beginning-of-month CMRR: more of an input than a

variable here, ignore

2. New Customer CMRR: we know this from Chart 2.

Again, XYZ is growing and ABC is flat

3. Upsell CMRR

4. Downgrade CMRR

5. Churned CMRR

These are all sub-elements of retention

We can

conclude…Company

ABC has a churn issue.

What’s the best way to measure churn and

benchmark against other SaaS

companies?

Net dollar retention.

If I acquire $1 of CMRR today, what is that

$1 worth over time?

I’ve seen a lot of companies recently with strong CMRR growth

But weak net dollar retention – with $1 of CMRR shrinking to 40-50¢ within 12 months

People call this a leaky

bucket

But…

The best companies are seeing that $1

grow (not shrink) over time.

Welcome to net negative churn.

I know I’m not the Christopher Columbus

of negative churn.

But it’s important

It can be easy to

ignore a leaky bucket

early on

These guys are good

They’re growing!

Go-to-market is scaling!

But in comparison

This equation measures CMRR in Month X as a % of CMRR in Month 1

0%

20%

40%

60%

80%

100%

120%

140%

CMRR in Month X as a % of CMRR in Month 1

Company ABC Company XYZ

Let’s look at the net dollar retention curves of Company ABC

and XYZ to understand what’s going on…

Wow. This is dramatic.

And the rose-colored glasses

come off

Let’s assume XYZ is able to scale its go-to-market like ABC.

Which will give us a true apples-to-apples comparison

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

New Customer MRR Per Month

Company ABC Company XYZ

+

=

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

Total CMRR Over Time

Company XYZ

Compared to ABC…

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

Total CMRR Over Time

Company ABC Company XYZ

XYZ pulls away from ABC.

XYZ is now ~58% bigger than ABC.

All thanks to superior net dollar retention.

Which makes VCs

say…

Let’s invest in XYZ!

What you need to remember

1. Improving net dollar retention gives you much

more leverage on the go-to-market front.

2. The 1-2 punch of accelerating customer

acquisition and healthy retention is the magic

formula for exponential growth and lots of VC

love.

Blake Bartlett

OpenView Venture Partners

@blakebartlett

You can find more content on

expansion-stage growth at

www.openviewpartners.com

Thanks!