One of the metrics I like when thinking about SaaS company efficiency is annual recurring revenue (ARR) being greater than or equal to cash burned all time. Successful SaaS startups suffer from the J-curve where things start out with steep losses while revenue begins to ramp up and eventually revenue grows much faster than losses (hopefully!).
Here are a few thoughts on ARR being greater that cash burned:
- If the cost of customer acquisition is less than or equal to first year’s revenue (see the SaaS Magic Number) it portends that the layering of recurring revenue will ensure revenue growth is greater than losses
- Scaling a B2B SaaS Startup is Expensive, but not growing fast is also expensive (see When Growth Stalls)
- Startups going after Triple, Triple, Double, Double, Double aren’t likely to have ARR pass cash burned until after they’ve gone public
When considering a SaaS startup’s capital efficiency, look and see if the annual recurring revenue is greater than cash burned. If so, and there’s a good growth rate, it’s likely a sign of a potential successful outcome.
What else? What are some more thoughts on ARR being greater than cash burned for SaaS startups?
David Cummings on Startups 