In the world of SaaS (Software as a Service) funding, there are always new metrics to consider. While total addressable market (TAM) and revenue growth used to be the go-to indicators for securing funding, the landscape has shifted. In today’s funding environment, investors are looking for sustainable growth and scalability.
SaaS companies seeking funding in 2024 need to focus on metrics that demonstrate sustainable growth and scalability. Metrics like ARR per employee and the Rule of 40 can be critical in attracting investors. These metrics provide insights into the efficiency of the business and its ability to achieve profitability. Understanding the fine print of unit economics and go-to-market efficiency is also important for due diligence.
The Importance of Sustainable Growth
Sustainable growth is more than just a single metric, it’s a movement. Startups need to demonstrate that they can grow and scale their business in a way that is financially sustainable. This is particularly crucial for SaaS companies, where scalability is measured through various metrics.
One key metric is annual recurring revenue (ARR) per employee. This metric provides insights into the efficiency of the business and the impact of each new employee. SaaS companies with high ARR per employee ratios, such as Ramp, which reached over $100 million ARR with just 50 employees, demonstrate the potential and expectations for growth in the industry.
Another important metric is the Rule of 40 (R40). The R40 is a predictor of a startup’s success and ability to raise funds. Startups that have profit margins and growth rates that sum to more than 40% are seen as high-performing and attractive to investors. While some startups may have experienced a decline in growth velocity, many have also improved their efficiency and margins, making them more appealing for funding.
Focusing on Metrics and Business Environments
It’s important to note that not all metrics apply to every SaaS company. There will always be exceptions, especially for disruptive technologies with significant cash burn. However, for most SaaS companies, metrics like ARR per employee and the Rule of 40 are essential for increased fundability.
Investors are now paying closer attention to the fine print of unit economics and go-to-market (GTM) efficiency. Gross and net margins are important, but understanding the efficiency of how the company brings its product to market is crucial for due diligence.