Ep. 355: Despite the global pandemic, seed investing remains hyperactive amongst VCs. Satya Patel of Homebrew shares his expert advice on how to raise seed capital in 2020.
This episode is sponsored by Lightmatter.
SaaStr’s Founder’s Favorites Series features one of SaaStr’s best of the best sessions that you might have missed.
This episode is an excerpt from Satya’s session at SaaStr Summit: The New New in Venture. You can see the full video here, and read the podcast transcript below.
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The transcript for this episode is below:
I’m here to talk to you today about raising capital in today’s environment, particularly at the seed stage, so we’ll touch on the Series A stage as well.
I wanted to start by just talking a little bit about something that all of you have been hearing about, which is PPP loans, the SBA program for getting capital to companies in need. The reality is is that if you’re a startup just getting off the ground, PPP isn’t a legitimate option for you. So, I’m here to tell you exactly what you need, what PPP really means for you, and the difference between raising money in today’s environment versus not being able to do it. So, with that, let’s jump right in.
The world has certainly changed, there’s no question about that. Sheltering-in-place is just the most obvious impact; how people interact with each other, when and if customers buy, whether the rebound is a V-shape or a W-shape or a loop-de-loop, there’s definitely a lot of change in today’s world, and that’s the only thing that we know for certain.
The other thing that we know is that there’s a ton of confusion about what’s going on and how long this is going to persist. We don’t know very much about the virus, we don’t know the right way to approach fighting it, and we certainly don’t know how the economy is going to perform over the coming months. So, don’t count on anyone, I mean anyone, to give you the answers.
And you certainly shouldn’t expect answers from The Midas List or VCs that you know and respect. We’re just living in unprecedented times. Anyone who pretends to know how this is going to play out is doing just that, they’re pretending. As much as VCs spend time evaluating the markets, evaluating businesses, trying to predict the future, we don’t know any more than any of you in relation to what’s going to happen here over the next 12, 18, 24 months.
So, for you, as founders and entrepreneurs, the key is to focus on the things you can control, and one of the things you can control is how you tell your story to VCs. But, to do that effectively, you need to get in their heads, no matter how scary a place that might be. So, what are VCs busy doing right now? That’s a good place to start, to understand the actual landscape in which you are trying to raise capital.
First, they’re focused on their current portfolios. Which companies are in a world of hurt? Which companies are benefiting from accelerating trends and new dynamics? Which just need to bide their time? Any VC worth his or her salt is focused on helping the founders and CEOs that they work with take care of the physical and mental wellbeing of their teams, stabilizing their businesses, and planning for the uncertainty over the next 18-24 months. So, getting their attention right now for anything new is really tough and that’s something that you should just accept and know, going into any potential fundraising process.
The other thing that VCs are doing is one very important part of their jobs, and that’s meeting companies and studying markets to figure out where they might want to invest eventually. You’ve all probably gotten a cold email from a VC associate or partner asking about your business or wanting to understand your market. Expect more of those because VCs trade on data and they all have the time available to them right now to spend hours talking to folks like you about what’s going on in the world and collecting that data. But that’s only the beginning for them, collecting data is the thing that they can do right now. Unfortunately, the reality is most of them are just waiting and sitting on their hands.
The thing that most people don’t realize about venture capital is that VCs are always thinking about capacity, and most venture partners at Series A and later firms only make one to two investments per year, and so the opportunity cost of making an investment now, versus thinking about an investment later, is a real cost to them because it’s a cost of their time, not to mention what might be happening from a broader market perspective.
And, from that standpoint, there’s a huge disconnect between the public markets, unemployment rates, and what startups are experiencing on the ground right now with customers. Until there’s more stability in those areas, you can expect that most VCs will be waiting for a time where they have more comfort with valuations, with customer behavior, and with knowing that there’s going to be another set of VCs down the road who are going to be willing to write a check to support their companies on an ongoing basis. So, most investors, no matter what they say, are taking a wait-and-see approach. If an investor is telling you that they’re active or open for business, they probably are, in the sense that they’re busy collecting data, but that doesn’t necessarily mean they’re in a position to write checks.
The good news for all of you is that seed is very different. I don’t want to be a complete downer, so this is hopefully a bright spot. There is a ton of capital committed to the seed asset class, and because we’re investing at the earliest stages of the market, there’s only so much price compression that investors can expect. As a result, what’s happening in the public markets isn’t necessarily impacting the very early stage of the private markets.
The other thing that’s important is that there are many types of investors at the seed stage. There are angel investors, super angels, pre-seed funds, microfunds, institutional microfunds. The reality of their businesses, our business, is that we can’t afford to miss the next great company. We only get one bite at the apple, we are seed-stage investors. Unlike firms that are later, Series A and later, oftentimes those funds will invest at Series A and Series B, or Series B and Series C, so they have the opportunity to revisit companies that they may have missed. Not the case to the seed stage.
And, as a result, seed-stage investors are active in the market at this very moment. The other thing is that most seed investors tend to do more volume of investing than investors at the later stage, so the opportunity cost of investing in something right now isn’t the same as it might be for a later-stage investor. And so, for all of those reasons, seed right now is a very different beast than Series A and later-stage investing.
It’s definitely an active market at the seed stage. Homebrew is only one data point, but we’ve made five investments since shelter-in-place started, and every one of those investments was a competitive situation, so there are many firms that are trying to write checks into some of the best companies, hopefully. We’ve spoken to many of our peer funds and most of them have made at least one, and mostly more than one, investment during shelter-in-place. And probably the even better news for all of you, is that, given competition, valuations at the seed stage haven’t declined dramatically, maybe 10-20% at the seed stage, and maybe up to 20 or 30% at the pre-seed stage, but given the world we live in, there are some realities about seed-stage investing and the amount of capital that’s being committed to the asset class. That means that the amount of activity and the opportunity for you to go tell your story and raise capital is as strong as ever.
That said, there are some differences about the world we’re living in now. Obviously, as we’re seeing now, the most important one and probably the biggest difference is you’re going to be pitching over Zoom. And no matter what a VC says, they prefer to meet people in-person. So, it remains true that lots of VCs still haven’t figured out if they can get comfortable making investments without having met someone in person. For you, the thing to do is ask the question: are they willing to and have they made an investment over Zoom? And then determine whether you want to continue the conversation.
It’s going to be tough to be the first investment that a partner at any VC firm makes without having met you in person. There’s so much subtle communication that gets lost over video, you need to make it up with energy. You might feel like you’re exaggerating your expression or tone, but it’s going to be more effective. You really need to put your best foot forward and exude that passion and energy that maybe you take a step back from when you’re in the room, but over a video, there’s nothing more important than convincing people and demonstrating to them that you have the energy and the commitment to whatever idea that you’re pursuing.
A very tactical piece of advice: invest in good lighting. Do it now, before you pitch. Both subconsciously and consciously, it has an effect on whoever’s going to watch you. Ideally, another piece of advice is that you’re setting the camera on the video at eye level. No one’s going to get a sense for who you are by looking at your chin or the top of your head, certainly if you’re going to have a glare off the top of your head, like I do, in many cases. So, invest in good lighting, set up your camera well, and exude energy if you’re going to be pitching over Zoom, which is the reality of how the next 12-18 months is likely to look like for founders and entrepreneurs who are trying to meet with VCs.
Another major difference is that you can expect that investors are going to want to do many more references than they might have in the past, both customer references and professional references. Have those ready. Prep anyone you’ve asked to be a reference with the things that you want them to highlight, and make sure that they have the two or three questions in mind that they’re likely to be asked by any potential investors. Definitely have at least one person that you’ve worked with, recently, on the list. Nothing’s more frustrating for a potential investor than getting a set of references where the most recent reference is from two jobs ago.
And if you don’t have any mutual contacts with the investor, where they can do backchannel referencing on you, you’re going to need to go the extra mile in terms of that communication style that we talked about over video, and also the proof of your commitment to what you’re building, and maybe even evidence of product market fit. But, backchannel referencing and on-sheet referencing are critical at this moment, and being prepared to handle those requests well is going to be the difference between success and failure in your fundraising process.
Expect that investors are going to want more time with you. Because you’re not getting those soft cues that you get from meeting people in person, investors are going to want to have more time over Zoom with you and your team, and you should want that, too; after all, you’re choosing an investor and making a commitment for the life of your company, and so take the time to get to know those investors over Zoom cocktails or virtual working sessions or whatever is going to give you a better sense of what it might be like to work with them and give them a better sense of what it might be to work with you. Deal processes may take more time overall, but if you make yourself available, and you probably have some time, you’ll help speed things along. But know that there’s going to be a greater time commitment, more meetings, more conversations, to get over the bar and over the hump for closing your seed financing, or any financing in this environment.
So, despite some of these changes, which are subtle in some ways, fundraising is mostly the same at the seed stage. Seed investors are betting on a market that’s two to four years from now, and sometimes even longer, so they can’t afford to take a wait-and-see approach and wait until the economy straightens itself out or the government gives better advice around how we’re going to deal with all of this, they have to be investing now for the future. And given the number of investors and the amount of capital that’s in the market, remember that it only takes one yes, that’s all you’re trying to get to, and that one yes will automatically create scarcity for you and get others to say yes, so put your best foot forward and try to get to that one yes.
So, how do you do that? My point of view would be there’s still only one way to get to yes at the seed stage. You’ve got to make them believe. Investing at the seed stage is an irrational act. There’s no amount of data that is available about your company and about you, at the seed stage, that’s going to convince somebody based on cold, hard facts. Think about it: all there is is a few people and an idea, and that idea has all the odds in the world stacked against it, yet investors have to decide to give you hundreds of thousands or millions of dollars, despite all of that. And that’s why your goal is not to win the argument with data, it’s to generate emotional resonance so that the investor irrationally believes in what it is that you’re pursuing and in you. And that’s where we get to what we believe PPP really means in today’s environment and in any environment when you’re raising capital at the seed stage.
This PPP doesn’t come from the SBA or any government entity, this PPP comes from the story that you weave when you deliver your pitch. It starts with you and the other people on your team. VCs want to surround themselves with people who they can learn from and who they want to enjoy spending time with and working with. They want to support founders who deeply believe in something that should exist in the world, in founders who they feel deserve tremendous success, and who they want to see succeed.
Belief might spring from any number of things related to your team, any number of characteristics, including the founding story, the chemistry of your team, the unique insights that you have into the problem that you’re solving, but it’s important that you get across something special about your team. Because this is an emotional decision more than a rational one, it’s very true when VCs say that they invest in people first. It’s the emotional connection to those people that leads to the investment because no rational thinking leads to saying yes at the seed stage when it’s an idea and a team and not much more. So, focus on the people and communicating what’s special about you and your team.
The second way of building an emotional connection is about the potential of your business. The potential of your business might be captured by the mission or the market or the product, but somehow you need to leave the VC feeling that he or she absolutely wants the problem that you have identified to be solved, and the thing that you’re building to exist in the world, and that what you’re building is going to be enormous in scale and scope. This is why VCs have a hard time investing in things that aren’t targeted towards them; if something’s not relatable, it’s hard to see the potential of it, but your job is to communicate the potential of it, whether it’s through the market opportunity or the product or the mission of the business. It’s the promise of the early-stage startup that can make VCs take that emotional leap and ignore the difficult reality of what it means to start a company that’s most likely to fail.
And the final P in the PPP that really matters is proof. Unfortunately, accept that you don’t have it at the seed stage. Most companies don’t end up where they start and, if that’s the case, then the early signs of what you see as product market fit aren’t real, for the most part, because the use case you’re addressing probably isn’t consistent across all the customers you have, the customers who are adopting don’t share enough common characteristics for you to have identified a singular customer type, long-term engagement isn’t proven, early customer acquisition costs are misleading, so there’s a bunch of reasons that the proof you think you have is probably not proof in the investor’s mind. So, the thing to remember about that last P, proof, is that you can’t count on it at the seed stage. Nothing kills a good story like data. For most VCs, it’s easier to bet on the promise then the reality, especially at the seed stage, so you’re better off playing on emotion, and, again, people and potential are the emotional keys that you want to cue off of and drive your story around.
So, now that you know the keys to raising seed capital with PPP, it’s time to think about the A, and while the seed is all about emotion, the A is completely different, it’s about risk, and so we’re going to talk a little bit about how to think about risk in the context of your seed-stage company that’s in pursuit of a Series A.
The dirty little secret of investing, of a business which is predicated on people who take risks, is that VCs actually don’t like risk very much, they’re afraid of it, and that’s why the bar for Series A rounds and later keeps rising, and investors are generally willing to overpay for clear momentum as opposed to take early risk when they could be getting a better price because, at the end of the day, most VCs don’t want to take dramatic risk. And they’re only willing to take risk when they know that the risk that they’re taking is less than what the prior investors took and, hence, the higher price. And so that’s the thing to keep in mind is you’re always being evaluated from a risk perspective, and VCs are trying to evaluate very specific areas of risk when it comes to your business.
We categorize the types of risks that investors are looking at into five buckets. The first is product, and that includes everything from technical risk, timing risk, those kinds of things related to establishing product market fit. The second major risk is team risk. Are you missing some key skillsets that are going to be critical to execute the plan that you have or to deliver against the mission that you’re pursuing? Sometimes, that could be somebody from a sales perspective, somebody from a design perspective. Many founding teams have people who can build products, but they’re missing some other key areas that could be critical to reducing the perceived risk or executing against the potential of the company.
The third risk is market risk, which includes everything from size of the market, regulatory risk, geopolitical risk, all those kinds of risk that fall under the category of market. The fourth major risk that investors are evaluating is go-to-market risk. Is there a clear definition of an ideal customer? Is there a repeatable, scalable sales model? Is there somebody beyond the founder who’s been able to sell on a repeatable basis? Those are the types of questions that are asking in the category of go-to-market risk. And then, finally, fifth is financial risk. Can the capital be managed until the next financing? Can the company manage cash until the key milestones have been achieved or the risks have been addressed? And will the business be attractive to future financers and future investors based on what it’s able to accomplish? So, those are the five risks that you need to think about because these are the risks that are in the heads of any investors that you’re going to be talking to.
Your job with seed capital is to reduce or eliminate those risks, but it’s unrealistic to tackle of five of them. Pick the three that are the most significant and focus on those, and then tell the Series A investor why you chose those, what have you done to mitigate those risks, and why should they bet on you being able to eliminate the other risks in the business? Oftentimes, at the seed stage, the most common risk to focus on are product risk, market risk, and go-to-market risk, but it’s going to really depend on the investor that you’re talking to and, more importantly, on your specific business. So, with your seed investors, get on the same page in terms of what are the most critical risks to address, and then pick the three that you’re going to try to tackle during that seed phase of your company.
Finally, in addition to addressing the risks, you need to achieve some level of scale. The Series A investor is trying to bet on less risk, but also there’s clear scale to demonstrate that this can be a large and viable company. Whether it’s customers or revenue or some reasonable trajectory of growth, or some absolute level of customer attraction or revenue traction, you’re going to have a hard time demonstrating that you’ve eliminated or reduced risks if you haven’t achieved some level of scale. And so combine reducing three risks with scale and you can unlock your Series A.
So, if you’re going to remember three things from today, start with the very first, which is don’t fear the world that we’re living in. Things have certainly changed, but more is the same than is different in the world of venture financing, especially at the seed stage. Second, the only PPP you need to keep in mind are the ones that will help you make them believe: people, potential, and proof. Importantly, people and potential are the ones that you can control, proof is unlikely to amount to much, but it’s important for you to know that as you’re going into your seed fundraise process. And then, finally, after your seed, pick the three risks to tackle and you’ll be set up for a successful Series A.
How to Write a Subscription Cancellation Email for SaaS
Saying goodbye sucks.
This is especially true when you’re bidding farewell to paying customers you thought would be around for the long haul.
The reality, though? Just because a customer cancels doesn’t mean they’re gone for good.
That is, if you know how to write a subscription cancellation email that gets to the root of why they’re walking away (and encourages them to stay).
Listen: cancellations are inevitable in SaaS. Rather than send canceled customers an autoresponder that says “see ya,” your messages should be designed to reduce churn and leave a positive impression on them.
In this guide, we’ll break down how to write a solid subscription cancellation email from scratch.
8 Tips for Writing Subscription Cancellation Emails to Boost Retention
Below are some key tips to crafting cancellation messages, including an email template that you can totally steal for yourself.
1. Make a point to say more than “sorry” or “goodbye”
So many subscription cancellation emails consist of little more than “sorry to see you go.”
Here’s the reality, though: cancellations aren’t the time to be all woe-is-me.
As a result of thumb, here are four things any subscription cancellation email should accomplish (hint: it’s more than saying “sorry”):
- Thank them for doing business with you
- Confirm that their cancellation is being processed
- Reassure them that the door is always open to do business again
- Ask for feedback to determine why they’ve decided to cancel
This four-part formula is standard for most SaaS companies, and based on it, we can put together a quick subscription cancellation email template below:
Hi [customer name],
First of all, we appreciate you being part of the [company name] community.
As per your request, your subscription has been canceled. The good news is that your account will be active until [date] and you can still access [feature] in the meantime.
We’d like to learn the reason behind your cancellation so we can better serve our customers (and hopefully you!) in the future [+link to survey, form, etc].
The goal here is to suggest some sort of next step with your customers rather than just wave goodbye or apologize.
Proactive, actionable messages signal that you’re still open to working with customers and actually value their opinions. This is obviously preferable to slamming the door on your cancellations by sending a lifeless autoresponder.
2. Figure out why your customers canceled in the first place
This is a big one.
Before you get into the nitty gritty of writing a subscription cancellation email, you should first figure out why cancellations are happening at all.
Because as noted in our guide to churn analysis, your cancellations are a treasure trove of insight.
Think about it. You were able to gain someone’s trust and ultimately their business, right? When you lose that, it’s probably not “just because.” There’s a reason behind it.
Perhaps it was pricing. Maybe a customer was underwhelmed by your premium features.
Either way, tracking the reasons behind individual cancellations empowers you to reduce churn and better service all of your subscribers in the future.
And no, you don’t need to do any Jedi mind tricks to figure out why someone has canceled.
Instead, just ask.
Below is a solid subscription cancellation email example from WP Stagecoach. Not only is it packed with personality, but also directly asks for feedback from customers via a cancellation survey.
Upon clicking through, customers are prompted to explain why they’ve canceled and provide additional feedback to the company.
Don’t be shy about asking customers for their opinions. People are more than happy to sound off when they’re happy. Even if their criticism seems harsh, it’s better to hear it privately from a single source instead of a mob of angry customers.
The trick to gathering feedback from customers is making the process as quick and painless as possible on their part.
This is actually where a tool like Baremetrics is a game-changer.
For example, our Cancellation Insights feature follows up automatically with canceled customers and prompts them about their reasoning.
The takeaway here? Learn what’s going on with your customers before letting them slip away.
3. Don’t assume the worst of your canceled customers
Again, cancellation doesn’t mean the end of your relationship with a customer.
Not by a long shot.
This again speaks to why your subscription cancellation emails should be about clarification, not defeat.
Because unless you’ve really screwed something up (think: your service drained someone’s bank account or broke their site), chances are there’s an opportunity to win your customers back.
For example, let’s say someone canceled because of a billing error or misunderstanding about a specific feature. In these cases, it makes perfect sense to reach back out and try to make the situation right.
This is again where Baremetrics can help. In short, you can set up different autoresponders based on your customers’ cancellation feedback. Here’s how the setup looks:
You can also set up time-triggered follow-ups (think: a week or month later) to canceled customers to serve as a sort of “second chance” to win them over again.
For every subscription cancellation email you send, follow-ups and confirmations should follow. Many SaaS companies unfortunately fail to do so, leaving plenty of money on the table as a result.
4. Follow-up personally with VIP customers who’ve canceled
As a side note, not all cancellations should be treated equally.
For example, consider what happens when your most loyal or highest-spending customers cancel their service. Should they receive a generic, one-size-fits-all message?
Obviously not. Make a point to monitor and flag your VIP accounts to ensure that you can follow-up personally via email or phone in case of a cancellation.
Sure, you should strive to put your subscription cancellation email campaigns on autopilot. Even so, long-term and loyal customers deserve to be nurtured beyond an autoresponder.
If you use Baremetrics, you can set up daily emails or even real time Slack notifications whenever customers cancel. Keep an eye out for any long-term or high-value customers and follow-up with them immediately.
5. Send your emails from a personal account
Just like with onboarding and winback emails, sending a subscription cancellation email from an individual account (think: [name]@[company.com] versus a generic business address [requests]@[company.com]) is a subtle yet significant way to make your messages stand out.
Not only does it grab your customers’ attention in their inbox, but makes the process of asking for feedback seem a bit more personal. Here’s an awesome example from Pat Walls of Pigeon.
Here’s another example from ContentKing:
This approach makes your messages feel like they were written by individuals, not part of a company-wide blast.
Likewise, this encourages you to curate more authentic, off-the-cuff feedback that you might not get from a cancellation survey.
6. Be straightforward with your subject line
Subject lines are a barrier to entry with any sort of SaaS emails, and cancellation messages are no exception.
However, cancellations are a rare occasion where creativity might not do you many favors.
Sure, subject lines like “Oh no! We’re sorry to see you go!” or “Is this really goodbye? :-(“ are all the rage in ecommerce to make connections with lapsed customers.
These types of headlines might seem a bit cynical to SaaS customers, though. If you’re shelling out your hard-earned money for a tool, chances are you’re more interested in your cancellation being confirmed versus cute, branded messages.
If nothing else, vague subject lines could also leave customers with the impression that their cancellation isn’t being processed which would likely result in confusion or anger.
Below are some examples of simple, straightforward subject lines for cancellation emails that work:
- “Your [company] account has been canceled”
- “Confirm your cancellation request”
This isn’t to say you can’t inject some personality into your cancellation subject lines.
Heck, doing so might make sense for your brand (ex: “[Customer name], your subscription is ending” or “Following up on your cancellation, [customer name]”).
The takeaway here is that your subject lines shouldn’t leave customers second-guessing
7. Keep your messages short and sweet (~50 words)
The common thread between pretty much every subscription cancellation email we’ve covered so far?
They’re short. Like, really short.
As noted earlier, you only need about four sentences to say what you need to say to your customers when they cancel. Rather than hit them with a wall of text, be economical with your words.
This cancellation email from Enchancv is a great example of how to be brief while still being proactive and positive.
See how that works?
8. Show customers you actually care with empathetic language
Of course, just because your messages should be brief doesn’t mean they have to be cold.
For example, this automated cancellation email from invoicely gets the job done but could benefit from more of a personal touch.
So, how do you find a balance between brevity and personality?
For starters, using “you” and “we” is an easy way to make your customers feel like they’re talking to a human versus a robot.
Ex: “We value your feedback and want to do everything in our power to help customers such as yourself.”
Also, make a point to emphasize that there are no hard feelings. There’s nothing to be gained by guilting your customers: a little bit of empathy goes a long way.
Ex: “We don’t want to see you go, but totally understand that cancellations happen. Just know that your account and settings are saved so the door is always open to get going with [company name] again!”
Last, always say thanks! This might seem like a no-brainer, but anything you can do to leave a positive impression on your customers is a plus.
Ex: “We want to thank you for being part of the [company name] community.”
How much thought goes into your subscription cancellation emails?
Cancellations happen. No secrets there.
But it’s how you respond to those canceled customers that ultimately determines whether or not they churn.
By paying attention to the fine details of your cancellations and giving your confirmation messages some much-needed personalization, you can keep more subscribers around long-term.
Doing so starts by rethinking your subscription cancellation emails. With the tips above and insights from tools like Baremetrics, you can take a more proactive, positive approach to handling customers who cancel.
How to Improve Your MRR Growth Rate (without new customers)
Contrary to what you might see in some case studies, MRR growth is not always linear.
Through working with various SaaS companies, talking to founders and even looking at our journey here at Baremetrics, I’ve seen firsthand how startups can experience periods of flat or even negative growth.
And when it happens, so many companies default to “how do we get more customers?”
There’s a common misconception that the only way to improve MRR growth is by getting more customers. Not only is this untrue, but that mindset can dig you into a hole that’s hard to get out of. I’ll explain why later.
Don’t get me wrong. Getting more users to pay you is a good thing. But MRR growth is about more than just getting new customers.
In this article, I’ll break down what MRR growth is, how to calculate it and how to improve it without only relying on new customers.
How to calculate MRR growth
I know a lot of you are probably going to jump right past this part. But stick with me for a second.
In order to understand how to improve your MRR growth rate, you need to understand how to calculate the metric.
MRR growth is the change in your MRR over a period of time.
The start and end numbers are helpful, but what a lot of companies (and investors) want to see is your MRR growth rate.
MRR growth rate is your MRR growth expressed as a percentage.
Here’s the formula to calculate your monthly MRR growth rate:
[(Second Month Revenue) – (First Month Revenue)] / (First Month Revenue)
And here’s what a MRR growth rate chart looks like in Baremetrics. You’ll notice it pretty much mirrors the screenshot of our actual MRR above.
Your MRR growth rate is important because it shows how much you’re growing (or not growing) over time. If your growth rate is slow, or even declining for an extended period of time, it could be a red flag.
And according to Tim Schumacher, founder of SaaS.group, MRR growth plays an important role in your company’s valuation if you plan on selling.
Founder @ SaaS.Group
From an Angel or VC investor point of view, slow or no MRR growth is definitely a red flag, since all investors look for high-growth companies. For a strategic or financial buyer, it’s a different story. Of course, MRR growth is always better than slow or no growth, but at the end of the day, it merely affects the multiple which is paid for a company.
For a high-growth company (5%+ monthly growth), a seller might be able to get twice the revenue (or profit) multiple compared to the same company which is flat.
Here’s the thing. Your MRR growth rate is just an output.
In order to improve it, you need to focus on the inputs (i.e. the numbers that go into calculating your MRR growth).
As you saw, the formula for calculating your MRR growth is pretty simple on the surface. You just need to know your starting MRR and your ending MRR. But in order to take action on the number, you need to focus on the period in between.
Here’s a graphic to illustrate what I’m talking about.
All of the points on the graph are events that caused your MRR to go up or down. Those are the “inputs” that determine your MRR growth rate. They include things like:
- New customers
- Expansion revenue
- Pricing changes you might’ve made
By manipulating these different inputs, you directly impact your company’s MRR growth.
For example, if you see a drop in your MRR growth, it could be that churn is outpacing new customer acquisition. If you’re flat, it could be a sign that your product isn’t priced for growth. There are any number of possibilities.
Our goal is to optimize all these different inputs so we can see a positive impact on the output (MRR growth). But just getting more customers isn’t always the answer.
Why customer acquisition isn’t always the key to MRR growth
Like I mentioned in the intro, when you see your MRR growth stall or even decline, it’s natural to assume you just need more customers.
And while that can help, here’s why I suggest putting just as much (if not more) effort into the other inputs.
It can get expensive
If you’ve ever worked for a SaaS company that was primarily focused on customer acquisition as a growth strategy, I’m sure you’ve seen how expensive it can get.
The “get new customers at all costs” approach is particularly popular with highly funded companies. When you have millions of dollars to spend, it’s super tempting to throw it at ads and other marketing channels to get more users.
But if the rest of your customer journey is lacking, you could be wasting a lot of money.
Until you’ve built a solid retention strategy that reduces churn and improves LTV, it doesn’t make a ton of sense to focus on getting more people in the door. Assuming you’re not a new company that just needs users of course.
It limits you
Another issue with focusing primarily on customer acquisition, is it limits your potential MRR growth. I’ll dive into the specifics in the next section, but one of the keys behind our MRR growth at Baremetrics was our focus on expansion revenue.
- Upsell our existing customers (which also improves LTV)
- Reach a new pool of people who might not have bought our flagship product, but are interested in our other products
When all you’re thinking about is “how can I get new customers?”, you completely miss out on other opportunities that can dramatically improve your MRR growth.
Acquiring new customers might not be the problem
Lastly, sometimes the reason you can’t grow just doesn’t have anything to do with your ability to acquire new customers.
Even if your number of active customers is growing each month, that doesn’t mean your MRR growth rate is too.
You could be experiencing massive MRR churn if your new customers are paying less than the people that churned. Your average revenue per user might be too low. You could be experiencing a lot of contraction from people downgrading their accounts.
The point is, you should never just assume your MRR growth isn’t trending upwards because you’re not getting enough new customers.
Now that we’ve established that, let’s talk about some other ways to improve your MRR growth rate besides getting new customers.
3 Ways to improve your MRR growth (besides getting more customers)
Now that you know the what and why, let’s talk about the “how”. Just knowing your MRR growth rate is fine. But ultimately, your goal should be to improve it.
Like most things in business, data can be your best friend here. Let’s take a look at some practical ways to boost your MRR growth.
1. Reduce churn
If you can’t control your churn, acquiring new customers isn’t going to fix your MRR growth problems. It’s like trying to work out to compensate for your poor diet. You might get some short term results, but eventually you’re going to plateau.
When you have a balance of low churn plus an effective customer acquisition strategy, you’re in a position for real growth. Let’s talk about how to start chipping away at your churn.
Obviously, you want to decrease your churn overall. But that’s a big mountain to climb.
Instead, let’s break it down into a series of “hills”. That way, you’ll be able to get some smaller wins on your way up the mountain.
First, we’ll need to identify where most of your churn is coming from. That means tracking the cancellation reasons that are costing you the most money.
Once you start gathering responses, you’ll be able to see exactly which cancellation reasons are resulting in the most MRR loss.
Now, instead of asking “how do we decrease churn?” you have specific action items you can build a plan around.
Whether it’s the lack of a specific feature, bad onboarding or whatever the main cause, you know exactly why people are churning and can work towards fixing it.
Even if your customer acquisition stays flat (meaning you’re acquiring the same number of customers each month), if you can decrease your monthly churn you’ll see an improvement in your MRR growth because you’re losing less MRR.
Here’s an example of this in action from our own company.
You can see here that as our churn rate has gone down over the past six months, our MRR growth has increased.
While some of the improvement in our MRR growth rate is from our increase in expansion revenue (from our add-on products), decreasing churn plays a major role.
Our churn over the past six months
Our MRR growth rate over the past six months
The main point I’m trying to illustrate is that “more customers” isn’t the only (or even best) way to improve your MRR growth rate.
If you can lose fewer customers each month, while keeping your acquisition and expansion revenue at least steady, you can still see growth. If you want more ideas on how to reduce churn, check out these articles:
2. Expansion revenue
Sometimes, increasing revenue doesn’t mean getting new customers. Why not sell to your existing customers who already use and like your product?
Expansion revenue is revenue you get from existing customers through:
- Add-ons: Additional add-on products outside of your customer’s subscription (like Cancellation Insights and Recover 😉)
- Upsells: Upgrading to a higher priced plan
- Cross-selling: Revenue from additional products to give customers a more complete solution (ex. Product training, setup fee)
And the companies in the $15M+ ARR club tend to do even more.
An added benefit of expansion revenue is it costs less to upsell and expand your existing customers than to acquire new ones.
Think about it. You’re essentially selling to people who’ve already shown they’re willing to buy from you, versus trying to convince new people that your product is worth paying for.
Expansion revenue has also been a big part of our growth here at Baremetrics. Here’s a look at MRR from our current active customers using two of our add-on products.
And if you take a look at our MRR over the past six months, you’ll notice that our expansion revenue is greater than our MRR from new customers most months.
Expansion revenue is also key to MRR growth for companies that charge on a per-user basis. For example, take a look at Hubstaff.
Their monthly pricing plans are pretty low (most users are on their Basic or Premium plans).
But take a look at where their MRR comes from. A good chunk of it is expansion revenue from upgrades and additional users.
For comparison, look at a company like Proofhub. They charge a flat rate for unlimited users.
In order for them to get positive MRR growth, they’re almost completely dependent on how many new customers they’re able to acquire each month, minus churn and contractions.
That’s a more challenging situation for growth.
Expansion revenue gives you another lever you can pull on to improve your MRR growth. Whether it’s through upgrades, charging per user, or additional products, think of ways you can expand beyond your current plans and offerings.
3. Experiment with your pricing
Pricing your SaaS product is one of the biggest struggles startups run into.
Are you charging too much? Not enough? What happens if you raise your prices and customers start to churn?
I won’t dive into the specifics of how to price your product in this article, because our Head of Growth already wrote a super in-depth guide to SaaS pricing here. But here’s a good way to experiment with your pricing and improve your MRR growth.
Use your data!
Some companies like to use surveys using Van Westendorp’s Price Sensitivity Meter to determine how much users would be willing to pay. But if you already have paying customers, why not use that data instead?
Start by identifying which pricing plans have the lowest churn rates. If you have Baremetrics, you can find this data under Metrics > User Churn. Sort the table by churn rate.
Lower churn (and longer time to churn) is an indicator that users under these price plans are getting enough value from your product to justify keeping it long term. But it could also mean that you’re priced too low.
The plans with low churn and a long time to churn are the ones that you can experiment with first.
Slightly increase the pricing on one of these plans (for new customers only) and monitor:
- Signups: Are more or fewer people signing up for this plan now that the price is higher?
- Churn: Are customers who’ve signed up with this higher price plan churning at a higher rate than the original priced plan?
If the number of signups you’re getting each month stays consistent, it means people aren’t being put off by your slightly higher pricing. And if your churn rate stays relatively unchanged, then your value:price ratio is in a good spot.
Even if you keep all your current customer’s pricing unchanged, you’ll be able to boost your MRR growth going forward if your changes work.
Keep an eye on your MRR growth rate
Your MRR growth rate is a vital SaaS metric that gives you an indication of how your business is doing over time.
You don’t have to obsess over the number on a daily basis. Check it month to month to see how you’re trending. Then use the insights to create action items for the next few months.
You could focus on churn for one quarter, then do some pricing experiments another quarter. But at least you’ll have a plan. And since you have metrics in place, it’s easy to measure what works and what doesn’t.
If you’re curious about what your MRR growth rate is, or want to put the tactics we went over to use, take the first step by grabbing a free trial of Baremetrics.
Public SaaS Companies Are Now Worth $1 Trillion
Microsoft, Google, Apple and Amazon have made the headlines for a while for crossing $1 trillion in market cap each. That’s crazy growth — almost all fueled by the crazy growth of the Cloud.
No SaaS company is yet worth $1 trillion, through perhaps that is coming. What has happened though is the Top 30 SaaS companies together are now worth $1 Trillion.. That’s up from $800 billion just a little while back when we took a look at Cloud Decacorns.
That’s $1 Trillion in market cap from the SaaS leaders.
These are the best of times in SaaS indeed:
Given the incredible IPOs in the pipeline, we could be at $2 Trillion in the next 24 months. We’ll see.
A few other things we can learn from this analysis:
- Power Laws are here, too. The Top 10 SaaS companies have 70% of the market cap and value. A $2 billion market cap is amazing. But $20 billion is now becoming “common”, if that term can be used.
- Shopify is the crazy one. From $8 billion in market cap in 2017 to $117 billion today!
- Go long. Most of these names were worth a fraction of their current market cap at IPO. Zendesk IPO’d at $1 billion. Today, ti’s worth $11 billion.
- You Can Grow Your TAM. Almost all the leaders here started off doing something “smaller”. Salesforce just did SFA. Slack was a single org self-service app. Veeva added an entire, larger second product. Twilio expanded into contact center and email and more. Shopify added a wildly successful enterprise offering. RingCentral went from SMB to enterprise-grade contact center. Zoom used to be a B2B app 🙂
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