SaaS Investment Criteria

April 30, 2019

by a professional from San Jose State University in Redwood City, CA, USA

For those looking to acquire an early-stage, SaaS company, what's your acquisition criteria?

What are your Minimum Requirements?
Monthly re-occurring revenues (MRR)
Number of Customers / Accounts
EBITDA

How would you arrive at your offer price?

Minimal sales team
Able to close most deals via marketing automation and sales Zoom demo
Solid Intellectual Property
Automation built into the DNA of the operations: Sales, Marketing, Accounting / AR
Tracking sales data and dashboards in real-time
Well-architected APIs to connect to other large enterprise platforms
Lean start-up. Minimal engineering headcount.
Close to break-even. They can become cash flow positive without outside investors.
Low debt / startup costs
Growing MRR
Reasonable customer acquisition cost
Low customer churn rate
Below market sales, marketing and s/w engineering costs
Very stylish UI / UX

Reply by a searcher
from Northwestern University in Minneapolis, MN, USA

Revenue churn is one of (if not the most!) critical metrics to look at. It’s essential important to look at churn by customer cohort and/or by customer segment. You want to know if the different cohorts have similar churn rates or if later cohorts are churning less because the product has gotten better. If you find a business with net negative churn because it has expansion revenue from existing customers, then great! https://tomtunguz.com/negative-churn/

Profitwell is one of the best tools for tracking SaaS metrics: https://www.profitwell.com. They also have lots of articles and guides on the SaaS business model. I’d highly recommend poking around their site.

Also, the SaaS CFO site has a lot of great insight into SaaS metrics: https://www.thesaascfo.com

Reply by a professional
from Harvard University in Boston, MA, USA

Hi Pete, in addition to traditional GAAP financial metrics, pay close attention to the target's subscription metrics. Most early stage SaaS firms won't have a subscription billing metrics tool in place so you're going to need to invest some time in using their data to produce these metrics. Net new ARR (annual recurring revenue) is among the most important, but LTV (customer lifetime value) and CAC (customer acquisition cost) are also critical to understanding the firm's unit economics. Here's an article I wrote that touches on some of these topics: https://www.driveninsights.com/small-business-finance-blog/financial-metrics-for-saas-companies-during-the-product-market-fit-phase.

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