Know Where Your Company Stands – a Session with Sage Intacct & KeyBanc Capital Markets
As the newly designed virtual Modern SaaS Finance Summit moved into its second week, Marc Linden, GM & EVP, Medium Segment Native Cloud Solutions (MSNCS) at Sage, co-led a session with David Spitz, Managing Director at KeyBanc Capital Markets. They discussed how SaaS companies should measure their position in light of today’s volatile business environment. You can access the video and register for the summit here.
Here are highlights from the session and the three tips they shared, based on data from the annual KeyBanc Capital Markets SaaS Survey
Tip 1: Choose the metrics that best guide your business
David Spitz started by giving an overview of the top metrics investors want to see (in the image below). The focus now is on churn, cost structure, and capital consumption. Cash is what every board is asking about now.
- How much runway of cash do you have?
- What access to further capital do you have?
- What revenues can you depend upon, either customer by customer, or product by product, or cohort by cohort, depending on your billing model?
Looking ahead, once you’ve stabilized the business, ask yourself where you can get more efficient in your cost structure and your CAC. Below is a benchmark on cost structure to see where you stand. This can be the basis for clear and direct discussions with your business leaders about what they want vs. what they need.
According to David, it’s also critical to look at your CAC ratio and Payback Period, “That's where the rubber meets the road. The CAC ratio is the cost to acquire a customer, and it’s particularly intuitive to think about how much time, in terms of subscription dollars and gross margins, it takes to payback the acquisition cost.” In this time of deep analysis on what is critical, it creates the opportunity to talk with Marketing about what’s been most efficient and how to tighten the experiments to either find or focus on your ideal client profile to improve CAC.
Tip 2: Know where you can and should improve
David shared, “As we look at the operating expenses where you have a little bit more leeway, how much are you going to spend on sales and marketing? How much are you going to spend on R&D and G&A as you start to pivot, at least temporarily pivot.” It’s also important to drill down on subscription gross margin. Most SaaS companies who participated in the KeyBanc SaaS Survey include support costs in that number, but there isn’t a standard way to compute that.
Marc weighed in on that and the importance of paying attention to operating costs and cost of service, especially for early-stage companies that can have a negative gross margin: “If you can perfect that, it gives you huge leverage in the rest of your business and the affordability of other things . . . . even a couple of points gives you massive leverage in both the operating profitability and cashflow. I think in these times it's absolutely worth a revisit.”
In this challenging down market, it’s imperative to take a deep dive into sales and marketing expenses. According to David, “What's particularly relevant, again in this environment, is that we're talking about situations where there's only so much you can grow given the headwinds, whether it's churn or whether it's people just not interested in buying, at least for some products. You're going to be on the left side of this chart [below] for some time in this environment . . . . This chart provides a roadmap into where you might be cutting down your sales and marketing expense. You may have been spending 40 to 50-percent of revenues . . . . And you may be looking now at just not being able to grow that quickly and needing to move to the left side of this chart and spend less.”
Tip 3: Strategically communicate where you stand
Given the current climate, a company needs to be ready to go to the board and identify where the company stands, even as there are shifts in their typical benchmarks. Each company will have specific levers that impact the business. But David gave a great piece of advice—look at how comparable companies have succeeded in a difficult environment.
He pointed out, “There are some guides from [the] 2008-2009 crisis of companies that have weathered the storm. And you have to be sensitive to the market that you're in, sensitive to the customer base that you're serving, but ultimately you can look to precedents from that timeframe.” He also suggests that more conservative companies can provide perspective: “Even when times were good, if you were growing at a lower rate or maybe not growing at all, determine where you're going to be and what you can change and what you can't.”
While we face the near-term challenges, both David and Marc emphasized the importance of having a strategy for the future. Marc shared, “We all have to be thinking about what happens when it ends, because it will . . . . Keep in mind that long-term opportunity for the business and how do you come out of it.” David expanded on that point, “You need to be able to pivot when things come back. And things will come back . . . . If you have the flexibility, don't cut so far into the strategies of growth that ultimately provide the fuel.”
We hope these tips help you. Please check-out the recording for a deeper dive into SaaS metrics, the fundamentals of capital consumption and other essentials to help you develop a path forward.
The virtual Modern SaaS Finance Summit continues every Tuesday and Thursday at 11am PT/2pm ET through April 28, 2020. Registration for other sessions, recordings and accompanying blogs are available here.
David Appel is the Head of Software & SaaS at Sage Intacct, and is passionate about creating great B2B SAAS companies. Over time he has developed a series of SMB, Mid-Market, and Enterprise customer-lifecycle playbooks that focus on creating value for customers, increasing return for shareholders, and building great teams, that have generated over $1.1B in market capitalization for his clients.