This article was contributed by Louis Columbus
Enterprise software startups are capitalizing on real-time data to continually improve revenue, costs, cash flow, marketing, and sales as their business grows. The majority of software startup CEOs spoken with have designed their businesses to provide real-time data that’s immediately actionable. In addition, they’ve taken the time to design their business structure and systems to deliver the real-time data they need to scale.
The twenty metrics shared in this article are the most popular, with fifteen enterprise software startups founders, CEOs, and startup teams VentureBeat recently interviewed. A common attribute all of them share is that real-time data capture, analysis, and action is hard-wired into the DNA of their businesses from the very beginning. Startups use various analytics applications and platforms to get the real-time data they need, including Adobe Analytics, Clik Sense, Google Analytics, Looker, Microsoft Power BI, R Studio, Tableau Desktop, Zoho Analytics, and others.
Data-driven startups have a head start on growth
CEOs and founders say staying data-driven is just as challenging as keeping their prototypes, platforms, and new apps on schedule. Today, most of the startups interviewed have real-time data capture available from their finance, accounting, devops, sales, and marketing systems. However, recruiting team members with advanced analytics expertise are challenging to get the most out of their real-time data. Founders remark that the effort is worth it because real-time data brings greater visibility, control, and accountability across their businesses.
A startup’s founder concentrating on cloud-based digital asset management software says real-time data made the difference in signing one of their first larger prospects. Here’s her advice to startup CEOs on where to get started:
- Getting key financial metrics right early pays. Startup CEOs emphasize the need to know cash flows, cash burn as a percentage of revenue, Gross Contribution Margin, Operating profit, and as the business matures, Customer Acquisition Cost (CAC), and Customer Lifetime Value (CLTV).
- Resist the urge to get all metrics live immediately. Startup CEOs warn that it’s easy to allow an analysis-paralysis to set in as startup teams brainstorm on all the possible metrics and Key Performance Indicators (KPIs) they could use to run their business. Instead, startup CEOs say the best approach is to get the basic cash flow and revenue generation metrics right first. Next, prioritize metrics in marketing and sales.
- Bookings accuracy is crucial for attracting future investment. Early-stage investors consider billings a more reliable indicator of a software startup’s health versus revenue alone. Billings can sustain a SaaS startup for several quarters, reflected in stable revenue levels and slight growth. Startups say that it’s best to have bookings reported for products and services from the start. Investors look for recurring revenue streams from products first and consider services a one-time event.
The following are the top twenty most popular metrics with startup CEOs, especially those in enterprise software:
Most popular finance and cash flow metrics
- Breakeven analysis. Startups rely on breakeven analysis to stay on top of how much revenue they need to generate to stay on top of fixed and variable costs. It’s most often used as part of pricing projections and modeling to see the effects of price increases and decreases on gross contribution margins. Startups use this metric and its supporting models daily to test the effects of bundling, subscription, and maintenance pricing for their enterprise cloud apps. The U.S. Small Business Administration offers advice on how to get started with breakeven analysis, including an online calculator.
- Capital efficiency ratio. Early stage investors in enterprise software startups prioritize this metric because it immediately says how efficiently a startup uses funding rounds to drive new revenue. It’s an excellent metric to evaluate any business, especially startups, on how efficiently they’re using cash to operate, scale up, and grow. The lower the Capital Efficiency metric, the better. It’s calculated by adding Total Equity and Total Debt, then subtracting Cash, divided by Annual Recurring Revenue (ARR). Founders and Private Equity investors tell VentureBeat that a rising Capital Efficiency Rate shows cash is more constrained over time. KeyBank Capital Markets’ most recent SaaS Survey finds that it takes on average $52.1M in capital to reach a $100M ARR.
- Cash flow forecast. Getting cash flow right keeps a startup alive, and it’s one of the top three-watched metrics investors and venture capitalists use to evaluate how a startup operates. Startup CEOs say the best lesson learned on this metric is to quantify all assumptions before initially creating the forecast, so capture all possible sources and uses of cash. PwC offers practical, pragmatic advice on how to get started with a cash flow forecast, and there are many templates available online that provide the basics of how to get started creating a cash flow forecast.
- Customer acquisition cost (CAC). Customer acquisition cost (CAC) is the total sales and marketing spending to turn a lead into a new customer. It’s a useful metric for measuring all customer acquisition activities’ total return on investment (ROI). Early-stage investors evaluate the performance of startups they fund by CAC, and it’s one of the most used by company leaders to evaluate marketing effectiveness and revenue contributions. HubSpot has a free Customer Acquisition Cost Calculator and Ultimate Guide to CAC that provides insightful guidance and actionable steps.
- Customer lifetime value (CLTV). Defines a customer’s lifetime worth to a business in revenue, and for SaaS-based enterprise software startups, it’s considered a reliable measure of the “stickiness” of a given application or platform. It’s a favorite metric for early-stage investors and boards to evaluate how a startup performs. Enterprise software startup founders say the planned app and platform extensions they’re working on aim to increase CLTV by 30% or more in the next eighteen months. Likewise, startup CEOs say this metric is invaluable for tracking relative levels of customer lifetime value by market segment, distribution channels, and customer segments. When used across multiple quarters, it’s a reliable measure of how customer churn impacts financial performance. David Skok has an excellent post on the true CLTV for your SaaS business that’s worth a read.
- Gross profit margin. How a startup allocates and classifies its costs within Cost of Goods Sold (COGS) will directly affect its gross contribution margin (GCM). The equation for GCM is Net Revenue – COGS/Net Revenue. That’s why it’s important to have real-time financial data and assign costs accurately. When presenting GCM to early-stage and potential investors, it; ‘s always a good idea to identify what’s included in COGS to alleviate any concerns that COGS costs have been reported as operational costs instead. Gross margins have a major impact on valuations. Given how active mergers, acquisitions, and private equity investment are, it’s a good idea to have a solid base of cost allocations supporting COGS.
- Monthly cash burn rate. A crucial metric for tracking how many months a startup has before cash runs out. The monthly cash burn rate is often used to estimate short and long-term financing needs and look for new ways to reduce costs. Cash Burn Rate is calculated by taking the following: (Starting Cash – Ending Cash) / Number of Months = Monthly Burn Rate.
Most popular startup revenue and selling metrics
- Annual recurring revenue (ARR). ARR is defined as the amount of revenue generated every year over the life of contracts and subscriptions. It’s a useful metric for tracking the momentum a startup is generating with new sales, upsells, and renewals. ARR will fluctuate from one year to the next based on three factors. These include incremental, new ARR, churned ARR, customers who canceled their contracts, expansion ARR, or customers who added new services. Taking all three into account defines the Net ARR for a software company.
- Average contract value (ACV). Calculated by summing up all active contracts’ value and dividing by the number of proposals generated (total of all contract’s value/number of proposals generated), ACV provides a useful benchmark for measuring sales effectiveness. Startups who regularly run sales promotions and pricing discounts need ACV to gain greater insights into how to upsell and cross-sell strategies drive incremental contract revenue.
- Average monthly quote volume by sales rep. Knowing how many quotes are going out and how it impacts the sales pipeline and revenue forecast is where real-time data pays off. Most startups are running lean today, especially in sales, where there’s a talent shortage and a fair amount of sales rep churn. A startup CEO told VentureBeat that she could drill down from quote activity to the sales pipeline than to the revenue forecast in five clicks or less to know exactly what’s going on in every opportunity – and its revenue potential for the month and quarter.
- Customer churn rate percentage. The proportion of a company’s customer base that no longer purchases their services and has opted out of their subscriptions or contracts. Startup founders say that it’s common to see wide fluctuations in churn as their companies have grown, and they fine-tune up-sell, cross-sell, and product line extension strategies. Annual gross dollar churn as a function of contract length is 12.6%, trending higher the shorter the contract length.
- Percent of Opportunities Quoted (POQ). POQ is calculated by taking the number of quoted opportunities and dividing them by the number of prospect opportunities (number of quoted opportunities/ number of all opportunities). The POQ is a leading indicator that identifies at-risk deals in the pipeline and their impact on sales. Startup CEOs use this and several other sales metrics to measure sales rep, sales team, and selling channel productivity. In addition, real-time data from CRM systems also help to improve sales teams’ forecast accuracy and measure sales effectiveness by stage of the selling lifecycle.
- Sales Rep Efficiency. How efficient the sales force is at converting leads into sales is a core metric that startups and investors watch closely. The goal is to recruit and grow sales teams to deliver solid ARR growth year over year. As of 2020, the median sales rep efficiency is $561K in organizations with 26 fully ramped sales reps. Startups whose reps are reaching this level of efficiency are most often from direct selling organizations with longer sales cycles, based on the insights provided by KeyBanc Capital Markets’ 2021 SaaS Survey Results.
Most popular startup marketing metrics
- Content Consumption Metrics. Knowing which types of content and topics generate the most activity is invaluable to marketing in any business. Moreover, it’s essential for running a marketing team in a startup. Identifying which e-books, blog posts, and evergreen content drive the most engagement and activity is a must-have for any startup CMO and their team. Many marketing automation platforms provide content consumption metrics as a standard feature. Startup CMOs revisit these metrics weekly, and if a specific piece of content is performing exceptionally well, they’ll often look to repurpose its core messaging into webinars, more blog posts, and events.
- Marketing Qualified Lead (MQLs) Yield by Program. Knowing which e-mail, social media, and event-based programs yield the most MQLs and why they are core to marketing’s role in any business. Startups need to dedicate the most time and resources to programs that deliver MQLs ready for sales to qualify and start nurturing into sales. Startups rely on lead scoring from HubSpot, Salesforce, and other cloud-based CRM applications to automate each lead stage into MQL status.
- Percentage of Customers Marketing Originated. Knowing how effective marketing is at delivering new customers is an invaluable metric for any CMO to have, and in startups, it’s essential for tracking marketing’s contribution to new sales. Salesforce, Zoho, and other CRM systems can identify how a customer first learned about a company, tracing it back to market campaigns, events, or word-of-mouth. For a startup with an inside sales team supported by lead generation from Marketing, the percent of customers marketing originated can be as high as 40-80%.
- The ratio of MQL/SAL/SQL Lead Progression. Startups need to have a steady stream of Marketing Qualified Leads (MQLs) that are nurtured with a continual series of programs eventually becoming Sales Accepted Leaders (SALs) and finally, Sales Qualified Leads (SQLs). Using CRM and marketing automation platforms to define the perimeters for each of these lead classifications saves valuable time and provides sales and marketing an opportunity to define benchmarks jointly. First, CMOs and Chief Revenue Officers (CROs) need to agree on the definition of each lead category for this approach to managing a lead and sales pipeline to work. Then, CMOs at startups team up with the CRO to define these and revisit how marketing and selling strategies are helping to drive a faster rate of lead progression.
- Real-time website analytics. Table stakes for any business, real-time website analytics provide insights into how effective a website attracts new prospects by solving their most urgent challenges and problems. While there are many metrics any business can track with website analytics, startups often begin with 12 core engagement metrics. In addition, CMOs leading startup marketing teams are often highly skilled in using advanced web analytics to fine-tune Search Engine Optimization (SEO) and marketing’s contribution to revenue via digital channels.
- Social Media/Digital Engagement Metrics. Startups often have tight marketing budgets, making Instagram, LinkedIn, Twitter, and other social media accounts especially valuable for increasing their reach and top-of-mind awareness. All startups are tracking how effective their social media efforts are at promoting videos, marketing events including webinars and online conferences, and especially new evergreen content aimed at customers’ highest priority interests.
The future of startups
When startups struggle to scale their real-time data, they often run into growth roadblocks faster than those adept at turning data into results. The most severe roadblocks come from cash flow, revenue generation, and devops problems that take longer to solve because the data behind them aren’t as accessible. Starting with a small baseline of cash flow and revenue generation metrics is the best place to start based on advice from startup founders and CEOs. From there, it’s best to branch out with a minimal set of metrics for devops, sales, and marketing. Real-time data provides startups with the insights they need to stay focused on customer satisfaction while continually improving financial, profit, and product quality performance.
Louis Columbus is a contributor for VentureBeat and business professor at Webster University.
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