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5 Key Metrics VCs Look for in SaaS Startups

Are you a SaaS founder looking for funding opportunities? Discover the 5 key metrics VCs evaluate before investing in startups like yours. Get prepared and boost your chances of securing that crucial investment.

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  • Written by Clara M.
  • August 23, 2024
  • 3 min read
Listen this article - 3 mins

Are you a SaaS founder looking for funding opportunities? Discover the 5 essential metrics VCs evaluate before investing in startups like yours. Get prepared and boost your chances of securing that crucial investment.

The Strategic Value of VCs: Beyond Just Funding

In the journey of every startup, partnering with venture capitalists (VCs) often becomes crucial—not just for securing essential funding, but also for leveraging the synergy, motivation, and invaluable experience that VCs bring to the table. Beyond the financial injection, VCs contribute to the discipline and structure within a startup, often guiding founders to track key operational and financial metrics that are vital for sustainable growth. To not only attract potential VC investment but also to maintain independent control over their financial health, operational efficiency, and effective cash management, SaaS startups need to focus on five key metrics: burn rate,cash balance, runway, revenue (including MRR and ARR), and user growth.

Burn Rate: Monitoring Your Startup's Financial Pace

What is Burn Rate?
Burn rate is a critical metric that measures how quickly a startup is spending its cash reserves. It reflects the net cash outflow over a certain period, typically on a monthly basis. For SaaS startups, understanding and managing burn rate is essential to ensure that the company doesn't run out of cash before achieving profitability or securing additional funding. While a high burn rate can be a red flag for investors, it’s also a natural part of a startup’s early phases. What truly matters is where the burn is coming from—if it’s driven by investment in growth, such as R&D and customer acquisition, it can be seen as a positive sign of aggressive scaling rather than reckless spending.
How to calculate Burn Rate?
Subtract the ending cash balance from the starting cash balance over a month. If you want to calculate the average monthly burn rate over a given period, divide the total burn by the number of months.
Formula for Burn Rate

Cash Balance: The Backbone of Your Financial Health

What is Cash?
Cash balance refers to the total amount of cash a startup has on hand at any given time. It’s a straightforward yet powerful indicator of the company's financial health and liquidity. For SaaS startups, maintaining an adequate cash balance is vital for meeting short-term obligations, managing unforeseen expenses, and ensuring the company can continue to invest in growth initiatives.
How to calculate Cash
Add up the ending cash balances from your bank statements at a specific point in time. This will give you a snapshot of the cash available to your startup.
Formula for Cash Balance

Runway: How Long Can Your Startup Survive?

What is Runway?
Runway is the amount of time a startup can continue to operate before it runs out of cash, assuming no additional funding or revenue. It is crucial not only for sustaining operations and making strategic decisions but also for forecasting when your startup will need additional funding. Having a longer runway provides startups with the breathing room needed to either adjust their strategy if things aren’t going as planned or to raise additional funds to continue their growth trajectory.
How to calculate Runway
Divide the current cash balance by the burn rate. This will give you the number of months your startup can continue to operate before running out of cash.
Formula for Runway

Runway is the amount of time a startup can continue to operate before it runs out of cash, assuming no additional funding or revenue.

Revenue: The Ultimate Measure of Your Market Success

What is Revenue?
Revenue is the total income generated from the sale of goods or services to customers. For SaaS startups, revenue is a key indicator of market acceptance and business viability. It's not just about how much revenue is being generated, but also about the consistency and growth of that revenue over time. Investors closely scrutinize revenue trends, looking for steady increases that signal strong product-market fit and the potential for scalability.
How to calculate Revenue?
Multiply the price of the service by the number of subscriptions sold. For recurring revenue models, the focus might be on Monthly Recurring Revenue (MRR) or Annual Recurring Revenue (ARR).
Formula for Revenue

User Growth: The Lifeline of a SaaS Business

What is User Growth?
User growth refers to the rate at which a startup is acquiring new users or customers. For SaaS companies, a growing user base is often a leading indicator of success, as it directly impacts revenue and market share. VCs pay close attention to this metric because it reflects both the startup’s ability to attract and retain customers and its overall growth trajectory.
How to calculate User Growth?
Measure the percentage increase in the number of users over a specific period. This could be monthly or annually, depending on the business cycle.
Formula for User Growth

Partner with Smart Clerk for Effortless Growth

In the fast-paced world of startups, maintaining a clear and organized financial overview is not just a best practice—it's a necessity. From the earliest stages, clean books can make all the difference in your journey, ensuring you're always ready for that next investment round or potential exit. With Smart Clerk, you can streamline your financial management from day one, without the hassle of setup. Our AI-powered bookkeeping assistant handles the tedious tasks, allowing you to focus on growing your business. Stay prepared and confident with a financial foundation that investors trust.

Ready to take control of your startup's finances? Try Smart Clerk for free today and experience the ease of having your financials expertly managed from the start.

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