36. SaaS Startup Investing (Mamoon Hamid)

The Full Ratchet Podcast on iTunesNick Moran Angel List

Mamoon Hamid of The Social+Capital Partnership joins Nick to cover SaaS Startup Investing. We will address questions including:

  • Hamid SaaS Startup InvestingIn your words, can you describe what a SaaS startup is and the key elements that define a SaaS company?
  • Can you give an example of what is and what is not SaaS?
  • Can you provide an overview of the SaaS segment and a brief history of its evolution and growth?
  • How does a SaaS company evolve its business model to increase revenue per customer and move from a freemium model to strong revenue, per-seat, model?
  • What are some of the traditional metrics that SaaS companies measure and manage and directionally, what level or amount are you looking to see for each?
  • What additional or new metric(s) do you look at and why?
  • What advice would you have for founders of SaaS companies regarding the way they structure and present their material?
  • How do you evaluate very early-stage companies that don’t have much historical revenue data or traction to produce these metrics?

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Before we kick-off today’s episode, we’re going to start with a little trivia.  To preface this, I am planning on attending the PreMoney Conference, out in San Francisco, hosted by the folks at 500 Startups.  The conference is on June 12 this year and I was chatting with the organizers of the event.  They were kind enough to offer a free ticket to a Full Ratchet listener.  I’ve already purchased my own ticket for $500, I think it’s gone up since then.  So I’d suspect that the value is around $700 or more.  This will be my first year attending, but I hear it’s a fantastic gathering with some of the best speakers in the Angel Investing and early-VC world.  One of which is Naval Ravikant, founder of AngelList.  Naval and I have recently been trading emails about a variety of specifics related to the mechanics of startup investing, and so the trivia question I’m going to ask will be related to that.   And if you listened to the recent Episode 32 of the Full Ratchet, you probably have some good insight and can figure it out.  So, if you’re interested in attending the PreMoney conference and you’d like a free ticket, just e-mail me, nick@fullratchet.net, with your answer to the following question.  I will randomly select a winner from those who were correct and will reveal the winner and the detailed answer next week.
 
So here it is…
 
An LP invests $100k in a Venture Fund and another $100k in a Syndicate.  The Venture Fund is a standard 2/20 structure.  The Syndicate lead takes a 15% carry and AngelList takes their 5% carry.
  • Both the fund and the syndicate invest in the same 10 companies at the same terms
  • Both the fund and syndicate invest at the same time in each company
  • The fund invests the same amount in each company
  • The syndicate invests the same amount in each company
  • Out of the 10 investments made, five fail completely
  • Two of 10 return at ~1x
  • Two return at ~3x
  • And one company has an out-sized return, yielding a total portfolio return of 5x on invested cash, for both the fund and the syndicate.
So the question is…  Does the LP make a larger return on the $100k invested in the fund or the $100k invested in the Syndicate?
 
Shoot me an email nick at fullratchet dot net and let me know what you think.  Is the better returner the fund or the syndicate?  And if you can explain why, great, but I don’t require an explanation for you to be eligible for the free ticket to Pre-Money.  I will announce the winner next week.

 

Answer:  Economics of Syndicate vs Venture Fund 

Guest Links:

Key Takeaways:

 1- What is SaaS?

SaaS started out as companies referred to as ASP’s, Application Service Providers. This was software that was one version, with a single configuration, that scaled across large numbers of customers. And on the business model-side the key factor that makes for a SaaS company, is that the software can be used in exchange for a recurring fee, similar to rent. It is not available for purchase nor is there some sort of performance dollars, revenue share or advertising fees. As long as a user pays for the recurring fee for their seat, they have the right to use the software.

2- The success and growth of Software as a Service

Why did SaaS companies get traction and disrupt traditional enterprise software? Mamoon discussed two main reasons. 1- By paying per seat per month, a company’s TCO, total cost of ownership, was much more palatable and scalable with use. They could roll out a SaaS program to select group for peanuts instead of adopting an Enterprise solution, with mass installation requirements, for hundreds of millions of dollars. Essentially, it is a way to reduce significant risk and time-wasted while, in parallel, assessing the value that a tool contributes to your business before making a big bet on it. And, in particular, for small companies, this was a great way to scale their usage of the software commensurate the growth of their business. 2- The second main reason that was cited for the success of SaaS businesses had to do with user adoption. In some cases, SaaS companies have used a bottoms-up approach, instead of a top-down. What’s meant by this is that the individual user adopts and incorporates the SaaS software into their daily work-flow before the business leadership has made any decision or potentially even before the leadership is even aware that the platform exists. Through a freemium model that encourages a user to get other users to adopt, the SaaS platform can form a large user base, within a company, and become embedded. It is at this point, once a critical mass of employees is dependent on the SaaS program, that the enterprise must make a decision on how to move forward. And, in order to unlock more features, enhanced efficiency or greater usage from the SaaS program, then the enterprise starts to pay a per seat license fee.

3- Advice for SaaS founders and early-stage SaaS investors…

We discussed how many early-stage startups will not have a long enough track record to present meaningful metrics. But even if a startup doesn’t have the traction and numbers-to-date, they absolutely can frame their forecasts and their projections through the appropriate ratios and demonstrate to investors that they understand how to manage this type of business. What comps and similar SaaS businesses are you basing your model on? When is your Series A fundraise projected to occur and does your forecast reflect a fundable SaaS company at that time? And, it’s not just about the fundraising process. More importantly, these metrics reveal the strengths and weaknesses of a business. If a founder is managing the business to these metrics and their Quick Ratio is two, instead of Mamoon’s preferred four or greater, what’s the source of the low quick ratio. First they can ask if it’s a growth issue or a churn issue. Then if, for instance, it’s a churn issue, is it lost customers or retraction of dollars per customer? This can allow better outcome-focused management and reveal the source of challenge areas and allow them to be assessed and counter-measured.

Tip of the Week:   SaaS Metrics to Measure & Manage

”HIDE/SHOW
Below is the 'Tip of the Week' transcript from the Podcast Ep36: SaaS Startup Investing (Mamoon Hamid) On today's show we talked about a lot of different SaaS metrics and I wanted to take this week's tip to define each, review how they work and talk about the preferred level for these metrics. And remember that this only includes those that we reviewed today. There are limitless other metrics that one can evaluate but we covered a lot of critical ones, so that's what I'll review. First, we'll start with... (more…)Read More...

FULL TRANSCRIPT
*Please excuse any errors in the below transcript
 Nick: Today, Mamoon Hamid joins us from Palo Alto. He’s a general partner at the Social+Capital Partnership, VC firm based out in the Bay Area. And Mamoon has invest in iconic SAS companies such as Box, Yammer, Slack, Greenhouse, Intercom, Castlight Health, Act-On software, and dozens of others. Mamoon, thanks so much for the time, and for joining us today.Mamoon: Thank you, Nick!Nick: So, can you walk us through your background and how you got into venture?Mamoon: Sure, yeah. So I moved to the Bay Area in 1997 right out of college. I had studies electrical engineering at Purdue, so naturally the place to go was Silicon Valley in 1997, when all the rage was chips and SGI at Intel, so I came out here to work for a Silicon Valley based, Semiconductor Company called Xilinx and joined as an engineer. Did that for…three years, and got to learn and go right through the first internet boom more on the sidelines as a guy who built chips for the networking and telecomm industry. So I got to see that really play out over the course of a few years.
And then I knew I didn’t want to be an engineer forever, so I started to think about my next steps and got recruited to a team that was tasked to find new growth areas for the company right as the bubble was bursting. And for my company, most of our revenue was from the telecomm and networking space, so we had to quickly find a way to get out of that, or at least find new areas to grow from. And so I was part of this new startup within a larger company, which is kind of my taste of a startup being when things weren’t so great. So actually got some pretty awesome responsibility to go after consumer and automotive for our company and grew that to be a real business—became a hundred million dollar business over the course of three years that I was responsible for. Kind of an amazing leap to make from engineer to like starting a little business and taking leadership of that business and growing that into a real revenue stream for our company.Nick: Sure.Mamoon: Yeah, so—and that was sort of like my operational career as an engineer and operator in the Valley. And I was fairly young at the time still. I graduated college when I was nineteen so by that time, I was like twenty—twenty-three/twenty-four when I started thinking about sort of my next thing. And one of the things I’d been doing at that company was also helping evaluate some investments out of our corporate venture fund. So we had this seventy-five million dollar corporate venture fund that was investing in semiconductor startups but also like ETA start-ups, and networking startups, and so got a little taste by helping them evaluate a number of companies and that was sort of my first foray into venture investing.
And that was in the back of my mind as I was thinking about sort of the next thing I could think about doing in my career, which led me to thinking about going to business school. Less so about the learning, and more about having time to be away from the valley for a couple years. So applied to one school, got into that one school, moved to Boston to go to Harvard for a couple of years to think out of the valley echo chamber, knowing that I’d want to come back to the valley and do something in technology. And really, in venture capital, that came to be. So I had my eye set on venture capital for, I guess, a long time, and made sure I spent that summer between first and second year of business school in venture capital.
So I find myself an internship at a small VC firm in the valley. Got a chance to look at some interesting companies during that summer, and really sink my teeth into what it means to evaluate companies and what it meant to due diligence and what it meant to be at a VC firm. I liked it enough to really consider it as a full time thing post-business school, and set my sights on finding a job at a business school inside of venture capital. And that lead me to US Venture Partners, which at the time was probably close to a thirty-year-old firm that had done a lot of semiconductor investing over the course of the twenty years prior. And some of the best semiconductors in the business were actually at USAP, so what better place to join as a guy who had a semiconductor background to join USAP and learn from some of the best in the industry? And that’s what lead me to USAP and sort of lead me to my first venture capital job.Nick: As a student out in Boston, did you get a sense for the venture environment out there and the mindset and how it was different from the Valley?Mamoon: You know, at the time, Boston was still very relevant in the venture world, and since 2003/04/05, when I was there…and I frankly didn’t spend much time thinking about staying in Boston, and it was—it already had changed over what networking and telecomm really did have a bust, and the next generation of Boston companies were really not starting in Boston anymore. We really were moving to—this is like, you know, Mark was starting Facebook, and that was in ’04. I think he actually tried to raise money in Boston based firms and I don’t think he got too far and he moved out to the Valley.
So at the time, in Boston ‘04/’05, things were not very techcentric at all. In fact most of my classmates didn’t want to have to do anything with tech. and I was among the very few who come from tech, who definitely wanted to go back into tech. so tech was definitely not hot. And to sort of give you a sense of timing, this was when Google was going public, and the people who were going to Google at the time, at the ninety-seven dollar—people were like “You guys are kind of silly” for going to this company that’s fully priced at a public company. And that’s obviously had a 10x since then. One lesson there is, uh, business school students…placards when it comes to—in fact they’re a leading indicator of what’s potentially to go down. [both laugh] Myself probably included.Nick: Did you have exposure to Mark? I’m curious if you had an opportunity to invest—you know, one of my special investor questions I ask a lot of folks is why I passed and I can only dream about talking to a Boston VC that passed on Facebook.Mamoon: Yeah, so I was at Harvard when Facebook got started, but I was at the Business school where it wasn’t really a thing. So when I did my summer in ’04 here in the Bay Area, one of my—the partner I worked for, his kids were at Stanford. And they started using it. And he told me “Hey, this Facebook thing is blowing up. You know about this? You’re at Harvard, you should know about it.” And…that’s the first time I actually heard about it, was from my partner’s kids. And I got onto it, and there was like no one from the business school on it. There’s a couple people I think I connected with as friends, who were not my real friends, but they were at Yale, and Penn, and a couple other places. So…it’s not until after we graduated from Harvard did the Harvard Business School students get on Facebook. [both laugh]Nick: Laggards.Mamoon: Again, like I said, not early adopters of great stuff.Nick: That’s awesome. So I’m a Hoosier myself, and I’m pretty glad I didn’t tell you that when I asked you for the interview or you might have passed on that. So—Mamoon: Well, I’m sorry for you.Nick: Yeah, it’s a tough basketball year. But I’m curious, how does one graduate college at nineteen?Mamoon: Okay, so, the way it works is, you skip a bunch of grades. So I grew up in Frankfurt, Germany, and I started my academics in German school, actually. First grade was German school, and sort of the end of first grade, my parents decided “Wouldn’t it be great for you to go to an English speaking school instead? Because who knows if we’ll continue living in Germany.” My dad’s job was in Germany, but there was always this thing in the back of their head, sort of x spots in Germany, that we may move. We may go to another country, and it’s better to have English speaking education than to have a German speaking education so it’s more transferable.
And so, I interviewed at a couple of American speaking—English speaking schools, and I don’t know. This thought crossed my mind, and my parents’ mind, like “Hey, why don’t you just skip second grade and go to third grade” only because it seemed so easy. The curriculum and the second grade curriculum I was testing through seemed so straight forward and easy. So…I just skipped second grade by switching schools. And ended up in third grade. And then we actually ended up moving when I was in fifth grade, and we moved to Pakistan, where school starts off a cycle every six months. So instead of moving from fifth grade to fifth grade, I moved to sixth grade. Gained a year.
Then we moved back to Germany later in life, and instead of going to ninth grade, which I should’ve gone to, I went to tenth grade. So I got two half years, that got me another year, and then I skipped a year in college because I test out a bunch of AP courses in high school. So that’s how you get three years.Nick: Wow. I’ve never heard that before, but that’s pretty incredible. So alright, sorry for getting into the weeds, today the topic is SAS. I was thrilled to come across your slide share content that you put together. It was robust and so thoughtful. So very pleased to have you on the show today to help us walk through this topic. But we’ve talked about it before on a number of shows, and I wanted to get in your words the definition of SAS, and if you could give us an example of what is and what is not SAS?Mamoon: So, SAS is software that is delivered for rent and paid for monthly, or annually, without installing any software behind your own firewall. So, it’s not a license, it’s not the professional services that go along with installing something or getting something deployed, it’s purely software that you pay for and you get some direct benefit from as a service. So Box is SAS. What their SAS solution offers is storage as a service, with an application around that storage. Yammer is a SAS company, it offers enterprise social networking to every single employee in a company, rather than deploying it behind a firewall with something like Jive, which wasn’t SAS for many years. This was SAS—Yammer was SAS.
What’s not SAS, for example, is—are companies that take a percentage of revenue, they’re delivering software, like Stripe, but they take a percentage of that gross transaction value as their revenue. That’s not SAS to me. A company that has advertising or leech-end revenue, is not SAS. So technically Zenefits today is not a SAS company because the revenue that they generate is from health insurance brokerage fees. So they are the broker of record, for even a company like ours. And the revenue that they generate comes not from the companies like ours, but it comes from health insurers that write them a check for getting them customers for their health insurance. So those are not SAS companies to me. But that gets into the technicality of the revenue that companies generate.
So for me it’s pretty clear when we look at a SAS company, what the kind of metrics and what the kind of revenue quality we’re looking for to call it a SAS company—and there’s a lot of SAS companies. There’s lots and lots of SAS companies. Last count, there’s probably like, I don’t know, ten thousand SAS companies?Nick: Yeah. Plenty of SAS companies out there. It sounds like the way that you look at it is sort of an intersection between the fundamental offering, the technology, as well as the business model, or monetization.Mamoon: Correct.Nick: So can you give us an overview of the SAS segment? And you talked about how many SAS companies there are, can you talk about what the constituents are within that greater SAS segment, and a brief history of its evolution and growth.Mamoon: Sure. So, maybe I’ll start with the—technically what a SAS company requires you to be in ordered to be classified a SAS company. But there—what predates me is a SAS company used to be called an ASP—an application service provider—and there’s all kinds of lingo that was used in the earlier 2000s to classify SAS companies, and one of the key requirements was always this notion of a multitenant architecture. Which essentially meant you had a version of your software running somewhere in the cloud that could scale infinitely to the number of customers. So you didn’t have to install another version to satisfy the needs of anther customer. It was one version with a single configuration that scaled across lots and lots of customers. And that was sort of what defined—defines a SAS company.
And so the evolution…really if you go back the last fifteen years, if I look at the first SAS company, this again predates my experience, I look back at companies like Concur and Salesforce and SuccessFactors as among the sort of first SAS companies. Companies that started out in the late nineties, maybe like ‘99/2000 era. And they were the ones to first exploit this notion of have one version of the code in a cloud based service, or in a public data warehouse, where you could offer it to lots and lots of customers. And so, if I can recall, Salesforce started in 1999. I think Concur was maybe before that. But those really I think are the first generation of SAS companies. And then the next generation of SAS companies really fell into this camp of almost like consumerization enterprise, and that’s when I think about Box and Yammer and Zendesk. I call it sort of the consumerized SAS companies where the application doesn’t look like your NetGear router screens and it looks more like consumer software they now use inside of the enterprise.
The next generation as I see now is like the third generation, the things we’re kind of investing in right now, or the last few years, we have are the likes of Slack and Greenhouse Intercom, they’re almost like the—even more so focused on the daily use case of the office worker, the knowledge worker, more than anything before that. If you look at even the transition, across the first and second and third, they start to look more and more like consumer companies than enterprise companies in terms of the product look and feel. So if you look at the sort—overarching, then if the software industry worldwide is four hundred billion dollars, SAS is only still like close to twenty billion dollars today, plus or minus. So that’s like five percent of the overall software revenue in the world are still only SAS. Which, obviously, we see as a lot of opportunity for our companies and for ourselves.Nick: Right. So, it’s transitioned over time for more infrastructure and security to a lot more consumer offerings.Mamoon: Yeah, I would say kinda the nuts and bolts of running large companies. You know, when—let’s say you looked at the Siebel deployment and you’re a small company and you have to spend two million dollars for your fifty person company to deploy Siebel, you’re scratching your head like “What the ROI of this? Am I ever gonna use it?” and that’s why Salesforce came to be. It’s like “Well, I can offer it to you for a hundred dollars a set per month per salesperson.” So you have twenty sales people, okay. That’ll be two thousand dollars a month. Twenty-four thousand dollars a year instead of the two million probably that you would’ve spent for licenses and deployment and all kinds of other crap that didn’t make any sense and by the time you deployed it, the features might be obsolete. And a lot of enterprise software, license software became obsolete by the time it was deployed.
So SAS really allowed, you know—and this is completely amplified now—is that those who couldn’t really afford it, the TCO, the total cost of ownership, made so much more sense for smaller companies to go this SAS way by paying by the seat by the month, rather than buying the license for your whole company. So what happened was a lot of the basic stuff like Human Capital Management or HR Software, Financial Planning Software, Expense Management software, Sales Flow Automation, CRM—that’s the kind of stuff that was the first generation that really when the way of SAS. And, you know, we got a number of ten plus billion dollar companies that come out of it including Workday and Concur, sold for eight-point-something billion, and we all know how much Salesforce is worth. And there’s a couple of companies at SuccessFactors which got acquired for about three something billion. I’m sure it would’ve been a much bigger company today—or even Omniture which was the first sort of SAS based analytics company that got acquired for…not a number, relatively speaking, in the couple billion dollar range, would be worth a lot more in 2015. But a lot of consolidation did happen towards the end of the last decade where a lot of the first movers either consolidated—and some are still standing alone—are standalone companies.Nick: As I’m thinking about it here, I imagine—I used to run product for a…about a hundred and seventy million dollar vision of a conglomerate, and I’m thinking about how easily adaptable SAS would be as opposed to some of our offerings. We had a mix of software and hardware, of course, but the authority required and, to your point, the ROI required to justify that expense decision, or that capital expenditure, is a huge hurdle and makes for really long sales cycles. But if you can ramp up on a per seat basis for a monthly fee, and always pull back if it’s not delivering any ROI, I imagine it’s a much better option.Mamoon: Yeah, and that’s the point about—we’ve moved from a world of top down to bottoms up. Where it used to be the CIO would sanction the adoption of a particular application, like Box, if it’s storage for every single employee, it would be a CIO decision, but what happened was instead you had individuals inside of marketing adopting it because it made their life easier as they were working with their marketing agency, their ad agency, and then they started to share with them and also share with their colleagues internally. And then it spread from marketing to product, and the whole business unit adopted it. And then, instead of just the business unit, you had people from other business units starting using it with the people from the initial business unit, and then the whole company adopted it. And that’s the kind of success that companies like Box had, was this bottoms up adoption, where people could just—you know, the premium just worked to get lots and lots of people into their funnel and then they converted by using their own credit cards, eventually leading to paying on their credit card even for their department. And over time, someone on the IT side actually getting involved to do a whole company wide deployment.
That’s the case with lots of Fortune 500 companies, where adoption sort of happened through this bottoms up mechanism. And that’s been the beauty of SAS is the ability to also grow with your customers, and also grow the complexity of a product with your customers. A company like Box probably couldn’t have closed Proctor and Gamble in its first year of existence, but by the time there were ten thousand users on Box from Proctor and Gamble, we had all the features necessary to appease the need of an IT buyer from a security and control standpoint. That’s been the other beauty of it. The ability to grow with your customer base over time, and that’s sort of something that doesn’t get talked about a lot. But you just can’t, on day one, close these massive, long sales cycle customers just because they have different ways of making decisions than individuals do.Nick: It’s like real virility instead of faux virility, right.Mamoon: Yeah, yeah.Nick: More like a productivity pill that permeates the organization.Mamoon: Yeah that’s something we think about a lot, is rather than selling shelfware and making lots of money off of no used of a product and zero ROI—our intent even as investors, and I’m sure people who build the products, is “How do I build a product that people will actually use and love and get value from?” And that’s really a determining factor in how we make our investments, is we think about daily active use products. The tools that employees at companies use on a daily basis, it’s the first thing they open up, just like with the email in the browser window when they get their day started. It’s the last thing they close down. What is that tool if you’re a product person, a marketing person, a sale person, a customer support person—whatever your role might be? What is that one tool, or two tools? And so that’s what we’re looking for when we invest in these things—in these companies.Nick: This company—I do consulting for a variety of companies, and one of which that I have a large engagement with right now, is using Slack. And I’ve seen this thing just proliferate throughout the organization. Everyone’s on it now and it’s kind of a necessary tool.Mamoon: Yeah. I mean, that’s just an unprecedented growth story. I’d be happy to talk it, but yeah—it’s, uh—I’ve never seen anything like it.Nick: I’m curious, I don’t want to get too far off the script, but this is good stuff. So, when you invest in a SAS company, and you’re advising them, looking for their sort of hockey stick growth, are you also looking for them to sort of build out that offering and upsell and exploit adjacent opportunities around that core offering, in order to move the needle on the monthly per seat dollar amount that they can capture?Mamoon: Yep. So, yeah, I would say the way it typically works out, if it’s a freeman business, if it’s a free version of a product, and that’s the case with Box and Yammer and Slack. They all had free versions of the product. And the paid version, in the case of Box, more storage. With the case of Yammer, you got some more security and control. In the case of Slack, you get search integrations. So that’s the next layer up, and then, the layer up from there is like typically enterprise grade features. Certain certifications, things that make the CIO and CIS feel good about deploying software. And so that’s sort of the very linear way of ratcheting up pricing per seat, and it works pretty well. And I don’t encourage my companies to sort of fan out too much from there. Because there’s enough market size to service 1.5 billion knowledge workers with a content management solution, what Box does. Or if you want to deliver enterprise message and collaboration tools via slack to 1.5 billion—there’s enough market size there. So yes, lots of features get built in over time, but there’s quite tangential as opposed to orthogonal to what they’re already working on.
So focus as you know is a core thing to any successful startup and you can get pretty massive just off of one thing, and as Salesforce has proven, you can be pretty big as just a CRM company. And obviously they’ve done a lot of things that are outside of the CRM, but that’s because they wanted to continue to grow thirty to forty percent year over year, and you can’t just grow that fast at multibillion dollar scale at just CRM.Nick: Yep. Sometime down the line, it’d be nice to have a reflective conversation about sort of where we end up with—I know I’m using Google Drive, and Oscona, and Slack, and Salesforce, and email of course, Trello—you know, there’s all these tools and they are complimentary and they all fit in the ecosystem in a good way, but it becomes a bit hard to manage everything when you’re working in such a wide landscape of different platforms. But Mamoon, can we talk about some of the metric for SAS? You touched on earlier how a business may look like a SAS company, but the business model is a fundamental component. And I imagine that’s important because as a venture investor, you’re able to analyze in a more repeatable and structured way. So can we talk about some of the metrics that SAS companies need to manages and optimize and also what you guys as the venture capitalists look for in terms of what the metrics are and where they need to be?Mamoon: Yeah. So, given that we’re sort of fifteen years into the world of SAS, there’s a lot of data now around what’s best in class and what are the right metrics to track, and there’s terms that have been coined like “the magic number” and I came up with this thing called the “quick ratio.” So there’s a lot of precedent for numbers and metrics now, but I’ll distill it down to the ones I think are super important for the companies I look at, especially at the early stage we look at them.
The number one thing is what’s your monthly MRR growth—or in a given month, what’s your monthly recurring revenue look like? And typically, the month recurring revenue is decomposed into “What are the new logos you signed up that month?” “What are the existing logos that signed up for more seats or went to a higher plan so they expanded?” Subtract that by the number of existing logos that actually either decided to downgrade or go down in their plan. And then subtract finally by logos that completely churned and went away. So to add all that up and you get your net new monthly MRR. And I think every single company should maniacally track that on the monthly basis, and look at it month. If it increases, that’s great. If it’s decreasing as a startup, it may be because your sale cycles are longer and it’s a bit lumpier of a business than a transactional business where things should kind of continue to grow up into the right—because presumably you’re in a space that’s sort of untapped and you are continually getting better at marketing yourself and increasing the top of the funnel which should mean that you’re getting more qualified leads, and you’re adding more sales people to close those leads.
So your net new MRR should always increase. If it’s not increasing on the month to month, it should definitely be increasing on a quarter basis. And that’s sort of the one thing that I definitely look for. A key metric, net new monthly MRR growth.Nick: And, Mamoon, MRR itself is typically an absolute dollar? Units in dollars, is this metric also in dollars or are you looking at it in like a percentage or a delta?

Mamoon: typically—yeah, I look for dollars. There’s two ways to look at it, is customers—like number of customers—or dollars. The better thing to look at is dollars, rather than number of customers.

Nick: Got it. And I’m sure that that scale changes sort of as the startup progresses from seed to A to B.

Mamoon: Yeah, so I would say a seed stage company, like just completely ball parking it just to give a sense to the audience, is—a seed stage company’s probably batting anywhere from 5 to 10k a month, or in that 5k a month range. A Series A company’s batting 10/20k a month of recurring. So annualize that, right, you’re adding 10k a month of MRR, that means you’re adding 120k a month of annual recurring revenue, and if you added that every month for the whole year, you’d be adding 1.44 million of annual recurring revenue. So…if you did that just on a flat basis and you didn’t even grow, at the end of a year, you’d be at one half million of revenue. So Series A companies start to add more of that a year, and then you scale that all up. And I would say we’re seeing companies add anywhere from—I’d say our Series A companies are adding that 10/20/30k a month, and we’ve got some companies that are adding 500k a month.

Nick: Wow!

Mamoon: Yeah. So, a lot of MRR being added.

Nick: Good bet there, Mamoon.

Mamoon: Yeah!

Nick: So, this last metric, it sounds like it’s a bit of a hybrid between the MRR churn and some of these other things to really arrive at a metric that’s very useful for you guys. Before we get into the quick ration, can you talk about some of the other traditional metrics that a lot of VCs will look at and a lot of SAS companies will measure and manage?

Mamoon: Yeah, so for me the net new MRR number, it really encapsulates everything about a business. It encapsulates how you’re able to enclose new deals, how you’re able to manage your existing deals, and how happy your customers are or unhappy they are because they’re churning away completely. So it encapsulates the whole essence of a company into one metric. And that’s why I like it so much.
And so, other things you can look at, and they’re great things to track, are growth churn and net churn. Growth churn sort of varies by the type of end customer you’re selling to. If you’re large enterprise company, your growth churn is typically much lower because typically you’re earning annual deals and in your first year you may not have any churn, and the second and third year, the sale cycle is longer, and it’s harder to get in, but it’s also harder to get out. So the growth churn on enterprise deals is lower. But if you’re selling to SMBs, it’s easy to get in, it’s just as easy to get out of the software, the churn gets to be higher.
And when you look at this thing—net churn, everybody’s looking for a negative net churn. Which means that for every dollar that I’m generating today for my customer, then next year I’m generating more than a dollar. I’m actually—my cohorts are expanding their revenue over time. And that’s something that ever good SAS Company has, negative net churn. And again, it’s something we always look for in a company that is able to show net churn. Because in an early stage company, if you’re a one year old company, it’s really hard to show expansion of your MRR from your existing customers because most have only been with you for months. So it only makes sense if you’re looking at year two three and four of a company. But it’s certainly something that you want to track.
Other things that you track are average deal size. You know, average ACB—average contract value. We’ll look at price per seat per month. Then I start tracking things like sales efficiency. So how many reps do you have? How much quota does each rep carry? You multiply those two and you get your quarter capacity. Then you find out how much of that quota was attained by them, and that’s the percentage of sales efficiency. As companies get more mature, we start looking at things like LTV and KAK. But I’m not a huge fan because LTV and KAK typically assume a lot of things. And you can start to show a lot of really attractive things with LTV and KAK, but really there’s so much embedded into those numbers that a lot of times you really lose sight of where things are. So I try not to focus on those two things.

Nick: I feel like I’m reading David Scope’s blog all of a sudden. [Both laugh] Alright, can we talk about the quick ratio, and/or the new and additional metrics that you guys look at?

Mamoon: So yeah, the quick ratio is just—whenever I eyeball a company’s net new MRR chart, but eyes just kind of go straight to this bar that has what’s above the line and what’s below the line. And it’s just like a simple heuristic to figure out “Hey this is working, or it’s not working.” And because it’s such a quick thing to do, I call it the quick ratio, and it really is more relevant to companies that have, again, a below the line that’s significant because they’re having real customer churn or they’re seeing customers contract more so than expand. So it become more relevant in you 2+ and beyond really.

Nick: And is it a true ratio? Is the additional MRR over the less MRR or?

Mamoon: It’s a true number. Essentially, you take what’s the new logo MRR and the expansion of that existing customer MRR, so that’s abode the line. And you divide that by what’s below the line, that contraction MRR from existing customers. And you had to the churned customers who completely cancelled. So let’s just say in a given month, a Series A company got a 15k of new customers, and then you had existing customers, add 5k, that’s a totally of 20k above the line. And existing customers lose 2k, and then you had come existing customers who completely cancelled—let’s say that’s another 3k. So below the line you’re got 5k and above the line you’ve got 20k. So the quick ration on that is twenty divided by five, so four. And that’s actually a completely okay quick ratio.

Nick: Got it. So it’s—it’s kind of similar to the original new expansion MRR, it’s just framed as that ratio?

Mamoon: Yes, exactly. It’s—that one chart, like I said, it kind of says a lot of stuff. And one of the outgrowths of that chart is the quick ratio.

Nick: Awesome. I love when you can boil down all these competing metrics and various ways to capture the true value and attempt to put those into something that makes sense in a singular metric. Cool—okay, what advice would you have for founders of SAS companies regarding the way they should structure and present their material to a venture capitalist?

Mamoon: Given that there’s so much data now on SAS companies, including their own, and there’s so much public data on public companies now, it’s pretty important to be up on the numbers. Like you want to track every number, you want to present every number. If it makes sense to your business-whatever like, you know, you have to contextualize it to your company. If you’re selling to large enterprise, you may want to include how much time it takes to close a deal because you may not have a lot of sales data and the number of customers may not be that high but the ACV’s relevant, and the ACV growth over time may be relevant because your first like five deals may have been sweetheart deals, and their sixth, seventh, and eighth deal actually may be more representative. It all varies based on your business but—it’s incumbent on you to figure out what to present, but all the basic metrics of a SAS company, that’s like table sticks. And even if it’s not presented in the main deck of a company, it should be part of an appendix in case someone cares.

Nick: At the very early stage when companies are either at idea or maybe they’re got some traction, how do you make sense on these metrics and how do you advise them on making sense of the metrics when you don’t really have a whole lot of historical data to work from?

Mamoon: Yeah, I mean, if you have like five customers, it’s pretty hard to draw any conclusion from even ACV or price per seat. It’s just gonna be all over the map. And that’s why when we’re looking at a seed stage company, we’re really making a bet on the team in the market, and we don’t do any of those but when we do, it’s because of that. At the Series A, we’re expecting to see dozens of customers if not hundreds of customers and MRR that’s approaching 100k of MRR, so there—let’s say your month per customer is a thousand dollars that’s a hundred customer. That’s a lot of customers to actually see what their adoption is like of your product, how many users are actually inside using your product on a daily basis. There’s a lot of things you can eke out from a hundred customers, and that’s again on the entrepreneurs to tell us—paint the best picture why, or the realistic picture why their product is so great and why people love it so much is because it’s used.
And so it’s important again to go back to what you think is the right metrics to present as opposed to us—we’ll ask the same questions—“What’s your MRR? What’s your gross churn, net churn, ACV, price per seat?” and you might just like “Well it’s kind of all over the place right now because we’re just figuring out our pricing plant” or “The best comp to us is Box or Zendesk, and that’s how we’re gonna price it and we’re modeling ourselves after” a comp that already exists out there.

Nick: Mamoon, I’ve heard about this Social+Capital Partnership as this partnership of philanthropists, technologists, venture capitalists—can you talk a little bit about the firm and what you’re focused on?

Mamoon: Yeah, we’ve got a core focus as a firm on addressing multitrillion dollar industries that haven’t been transformed by technology. We do a lot of investing throughout healthcare, education, and financial services, because we think that technology plays a huge role in all of these, and that’s our core focus. So those three area. And then also enterprise, which is where I spend a lot of my time, as you know. And between those, these are all very deep—like we’re fishing in really deep waters, solving big problems. Therese are companies that can be multibillion dollar—ten, twenty, thirty, if not hundred billion dollar—companies, especially some of the companies that we back in the financial services and the healthcare space, like in diabetes for example, can be massive massive companies. So we feel good about investing in companies that truly transform society, and that sort of is kind of embodied in our name a little bit, with the social capital. And we think that the most capital value, enterprise value, can be generated by touching the most humans possible. And so that’s the social part of it, touching lots of people in society. And that’s sort of our mission.

Nick: If there’s any topic in venture that you would like to hear addressed, what would that topic be and who would you like to hear speak about it?

Mamoon: Wow…that’s a good question—let’s see… I think you got me on that one. I’ve heard from a lot of people—I’m a student of the venture business—actually, you know, it’d be great to hear from someone who are operating in the venture business in the ‘70s and ‘80s. Like Don Valentine or Peter Lamont. Like how’s it different from back them? I think actually Peter Lamont is pretty active still. It’d be great to have Peter Lamont tell us about how things are different.

Nick: Alright, Mamoon, what’s the best way for listeners to connect with you?

Mamoon: Twitter, email.

Nick: We will link up Mamoon’s Twitter and email in the show notes—Mamoon, thanks so much for joining us. I feel like I’ve learned more today than I have in months. So appreciate the time and al your insights.

Mamoon: Thanks, Nick!