The problem with SaaS financial performance

Original author: Matt Fates
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Many SaaS startups will ultimately be acquired by larger companies. Unfortunately, most of these companies do not recognize the SaaS financial scorecard. In this article, Matt Fates of Ascent Venture Partners explains that if a purchasing company cannot calculate the true value of a SaaS project, then negotiations can be deadlocked at an early stage.



As a venture investor and a member of the board of directors, I always look for companies that set complex goals and then achieve them. The CEO of a company from my portfolio likes to use the term “consciously competent”, which means achieving success precisely through achievement, not luck. Most startups strive for this (although luck is good too!), But this way requires a fairly accurate measurement of the performance of the business model. In recent years, those of us who have worked with or within SaaS companies have become accustomed to changes in indicators such as total monthly income (CMRR), customer acquisition cost (CAC), current value of future income (LTV), and so on.

But there is one problem. Many of these companies will one day be acquired, and most potential buyers do not use the SaaS financial scorecard; they use generally accepted accounting principles. This creates a gap between the two sides, which greatly complicates the process of negotiating. But a little preliminary planning will help to solve this problem.

Last month I had the pleasure of hosting a seminar organized by MassTLC . This seminar was devoted to the study of various SaaS indicators and their impact on business models and solutions. One of the key topics addressed by us was the mismatch of financial performance systems between startups and their potential buyers.

As Tyler Sloat , CFO at Zuora, explained during the seminar, the traditional financial system is slightly behind the needs of SaaS companies, which charge much less for their services than traditional companies. Tyler noted two big problems with traditional income declarations.

First, income declarations are a thing of the past. They measure revenue based on how much money the company earned over the last reporting period. Secondly, they do not share one-time and recurring income and expenses. These factors are unfavorable for companies selling, for example, an annual or multi-year subscription to their service. And when it comes to selling the company, buyers are looking at traditional financial statements, not about SaaS indicators.

“From the very beginning of their Saas operations, companies should identify and closely monitor indicators of interest to potential buyers,” says Jim Pluntze ), CFO of Navisite (which was recently acquired by Time Warner). “There are many indicators, such as EBITDA (earnings before interest, taxes, depreciation and amortization). When evaluating the company's SaaS, I compare the total costs of attracting customers with the income they bring and the average term of using the service. ” Slot said that it sees only three adequate indicators of the company's SaaS value: recurring profit, retention rate and degree of efficiency growth.

If you are not going to sell the shares of your startup on the stock exchange, your options for exit are quite limited, provided that potential buyers do not recognize your system of financial indicators. Of course, the founders of SaaS companies should clearly monitor indicators that reflect the success of their business, but if they expect to sell their company someday, they also need to keep track of those traditional indicators that potential buyers pay the most attention to.

Do you agree with Matt Fates?

By the way, this topic will be actively discussed at our forum Clouds NN 2012 .