After weeks or months of meeting, conducting due diligence, finally you have made an investment in a venture. Now you can’t sit back and relax as the investment monitoring phase begins. One of the key success factors for a successful exit is to effectively monitor the progress of your portfolio companies periodically.
There are numerous metrics out there which can help you in your monitoring process but it is essential to select the relevant ones. The relevant metrics for SaaS (Software as a Service) companies will be different for a pharmaceutical company. In this post, I will talk about which metrics are important and for which industries and how you can effectively track them.
Gross Merchandise Value (GMV)- For marketing place startups, the GMV indicates the gross value of transacted goods.
GMV = Average value of an order x Number of transactions
However, one of the caveats associated with GMV is that it doesn’t take into consideration the value of discounts, returns, cancellations and it is not an indicator of revenue. Below is a chart depicting the GMV of Alibaba from FY 2014- FY 2019. The GMV of Alibaba in FY 2019 is approximately CNY 5727 billion while at the same time the revenue for entire Alibaba group stood at CNY 376.8 billion.
Take rate or Rake- The take rate is the percentage of sales and commission a company earns on its sales. For instance, Airbnb charges 3% from the hosts and a variable service fee from the guests which is somewhere around 11% but it decreases as the cost of booking goes up. Similarly this metric is important for payment processing companies as well.
The figure below shows the rake of some major e-commerce marketplaces:
SaaS Companies (B2B)
Product market fit
The first step to measuring performance of a B2B SaaS company is to assess the product market fit, which can be done by looking at the Annual Recurring Revenue or ARR and the cash burn rate. If a SaaS startup doesn’t have a product market fit then it will be burning more cash than its ARR. In such cases, the company is spending too much on acquiring new customers who are in turn leaving the product. This is why the ARR is low. Lack of product market fit is an indicator of unsustainable growth prospects.
In the most simple way, ARR = Monthly Recurring Revenue (MRR) x 12
However, the customer must sign up for a yearly subscription contract.Below I am mentioning some more cases to calculate ARR
Case I – A customer signs a 4 year contract worth $ 64,000 and pays $7500 for onboarding.
Case II- A customer signs up for a 16 month contract paying $ 160,000.
Case III- A customer signs up for one year paying a total of $240,000 across 3 different products.
After looking at product market fit, the next avenue to evaluate is the growth prospects. Typically for B2B SaaS companies one of the growth benchmarks is T2D3 which translates to Triple, Triple, Double, Double, Double. This means that SaaS companies in Series A-B phase must show at least 3x growth year over year for three consecutive years and then show at least 2x growth.
The figure below shows T2D3 path of some prominent SaaS companies:
One of the most popular metrics to measure sales efficiency of SaaS companies is to look at CAC (Customer Acquisition Cost) payback period. The CAC payback period shows the amount of time it takes for a company to recover the cost it paid to acquire a customer.
SaaS Companies (B2C)
Now for SaaS B2C companies, the top metrics to look at are mentioned below-
Customer Churn Rate– It measures the number of customers a company has lost over a specified period of time.
Revenue Churn Rate- It is important to calculate the revenue churn rate because different customers can have different revenue weightage. For example- Losing five customers who pay $5000 per year is less disastrous than losing a single customer that pays $45,000 per year.
Customer Lifetime Value (CLV)- It denotes the average amount of money a customer pays during the whole engagement period with your company. It can be calculated by first calculating the customer lifetime rate followed by average revenue per account.
In addition to the metrics mentioned above, Customer Acquisition Cost (CAC), CAC payback period and CLV to CAC ratio are also important.
Leads to Customer Rate- Simply, it depicts the percentage of leads that were converted to customers.
As I said earlier, different industries will require different metrics to assess the performance. To provide a contrast, I am going to discuss some key metrics for the pharmaceutical industry.
Molecules- To show a strong standing the company must show a large number of discovered molecules and a significant number undergoing clinical trials.
R&D Spending- This metric can be calculated by looking at the total amount of funds that is spent on R&D initiatives and comparing it with the amount spent on completing the development of products in the end cycle. A small R&D spending is an indicator of lack of innovation and reluctance to adopt new technology.
Investment to IP ratio- A higher number of IPs is indicative of the fact that the company is successfully utilizing its R&D efforts to get more Intellectual Property (IP).
Partnerships- A significant number of partnerships with other pharma companies shows growth and credibility.
Team Structure- Typically the team should have the following structure- 33% biochemistry specialists, 33% AI specialists and 33% investor relations and business development. As a best practice, the number of biochemistry specialists should not be less than 10.
How to track all these metrics?
I have talked about some of the important metrics in this post.
However, there are countless metrics out there. But now the question is, how do you keep track of all the relevant metrics of your portfolio companies? Kushim Management Suite fetches you the most user friendly solution.
Clean, Precise and User Friendly
The Companies section of Kushim’s Management Suite illustrates all companies in your portfolio in a precise and user friendly way with a quick search option.
One size CAN fit all
With a click you can open the company page which contains details about the company along with the section for captable and the topic of this post- The Metrics. By default you have 60 different metrics which are categorised into- Financial performance, HR, Market, Marketing, Operational Performance and Company.
You can select the metrics which are relevant to you and also create new metrics.
The Management Suite gives you the provision to grant access to your portfolio company’s page to the officials of that particular company. With a click you can send an email to the company representatives to ask them to update their metrics. You can also export company details including the metrics to PDF using the Export button.
That’s all for this post! We have compiled a list of more than 200 metrics for SaaS, Pharmaceutical, Social Impact, Real Estate and many more industries. Click here to download the free list of metrics
Not just the metrics, the Kushim Management Suite can do a lot more of the heavy lifting for you. Want to know how it can help you measure the performance of your entire fund or funds?