Month: July 2017

An Investor’s Perspective on SaaS

John L. Connell Leave a comment

A Personal Note

One of my core responsibilities this year has been the development of an investment model to identify where Microsoft should be deploying cloud resources to maximize ROI. In an attempt to better understand the underlying fundamentals of the cloud market, there are many great articles and blogs freely available online. I found that an investor’s perspective on the industry was most helpful in refining my model. In this vein, I’m sharing a list of synthesized questions which helped me gain insight into a SaaS company’s market opportunity, competitive positioning, business health, and growth prospects. This is by no means a comprehensive list of questions to ask but may be a useful starting point.

Questions

1) Give me a sense of the market opportunity and the scale of your business within that market. Other relevant questions:

  • GMV?
  • Your company’s MRR (or CMRR, if readily available)? Trend over time?
  • ACV?

2) What need does your company address and how do you differentiate from the competition? Other relevant questions:

  • Who are your suppliers and how are they segmented?

3) What factors make up M/M change in your MRR? Other relevant questions:

  • What % is new MRR? Trend over time?
  • What % is renewal MRR? Trend over time?
  • MRR churn %? Trend over time?
    • Note: if renewal MRR % from existing customers is higher than MRR churn %, this should be a flashing green light as it indicates a sustainable business model.

4) How diversified is your customer base? Other relevant questions:

  • How is MRR segmented across your install base?
  • What are the growth rates across new MRR, renewal MRR, and MRR churn in those segments?
  • What % of revenues comes from the top five customers in each segment?

5) How valuable to your business is a customer within each segment and how much do you typically spend to acquire each type of customer? Other relevant questions:

  • LTV all up and in each segment?
  • CAC
    • Paid CAC all up and within each segment? Trend over time?
    • CAC payback period all up and for each segment?
    • CAC broken out by channel all up and for each segment? (FB vs TV?)

6) Help me understand the cash flows of your business.

  • If company is FCF negative:
    • Net monthly burn rate? Rolling 3-month average?
      • Note: may need to review revenue and expense growth to pinpoint how much runway company has until its next funding round.
  • If company is FCF positive:
    • FCF trend over time?

7) How do you plan to accelerate (or maintain) growth?

In Conclusion…

Feel free to comment on any key items I missed. If you have recommended reading on any of the material above for me, your suggestions would be much appreciated.