There are eight key metrics that VC investors typically evaluate for their B2B SaaS portfolio companies. Each VC fund may have their own variations on these metrics, or they may prioritize other metrics over these ones.
Recurring revenues measure the revenues recognized from the sale of software products or subscriptions. These are recurring revenues as they're received on an ongoing basis. A great example of this is a streaming subscription. In contrast, non-recurring revenues are revenues generated from one time service type fees. VC fund investors value more highly companies where the majority of revenues are recurring product or subscription revenues, because they have a higher margin and their revenues tend to be more scalable.
Annual recurring revenue or ARR or monthly recurring revenue MRR are both calculated as a percentage change monthly or annually in recurring revenues, both exclude one time or non-recurring revenues. It is important to estimate the churn rate when forecasting the ARR.
A common mistake when measuring recurring revenues is to use bookings and revenues interchangeably. Bookings is the value of the contract a customer agrees to pay, but they're not yet revenues.
Revenues are recognized on the income statement only at the time that the product or subscription is provided. For example, a customer reserving stay in a hotel would be a booking, but the revenue could only be recorded once that stay has been completed. Some VC funds are also gonna evaluate the IRR per customer to determine if it is flat or growing. Ideally, it is growing, which implies that the customer has been paying for additional upselling or cross-selling opportunities.
While recurring revenues is a key metric for early stage companies, bookings are the better proxy for long-term growth and for the business viability of a B2B SaaS company.
Some VC investors will focus equally on bookings and recurring revenues because they believe that bookings are a better proxy for the growth of new customers and new business. A B2B SaaS company could show stable recurring revenues for a long time just by working off its bookings backlog, which would make The business seem healthier than it might be otherwise.
Gross profit margin measures how profitable the revenue stream of a company is before SG&A costs. In other words, it relates to the profit margin before any sales general or administrative costs. If possible, calculating gross profit margin per unit or per product is useful in evaluating the different components that are included in cost of sales.
Total contract value or TCV measures the total value of a customer contract and includes the value from one-time charges and other professional service fees, as well as the recurring charges.
Annual contract value or ACV measures the value of the contract over a 12 month period, but it excludes any one-time or non-recurring fees.
VC funds tend to focus on whether ACV is growing or shrinking. Ideally, a company's ACV is growing, which indicates that customers are paying more on average for the product or subscription over time. This implies that either the product or subscription is charging more for new features and capabilities, or it is delivering more value to customers, so they're willing to pay an increased price.
In an inflationary environment, ACV would be expected to grow at least in line with inflation.
