We evaluate a lot of SaaS companies. And, we evaluated our own SaaS company for years. But how we evaluate growth-stage companies at the top level is specifically designed to help everyone quickly focus on strengths and weaknesses to make improvements that accelerate growth. In Beacon9, that SaaS business evaluation is the first part of our consultative process, but the methodology is just as applicable to DIY, so I thought I’d share some of that today.

Please note that this evaluation is designed to identify rather than fix. It’s about finding things that can be investigated further to leverage or improve. And, it’s important to note that this is not a technology evaluation, it’s a business evaluation.

SaaS Business Evaluation Framework

There’s a set of key metrics that define a SaaS business. Different people put varying levels of importance on these metrics, define their ranges differently, and sprinkle in their secondary numbers. But ultimately, there’s a pretty small set of kingpin numbers that tell the story.

In my experience, that story is told in the relationship between and among the metrics. At Beacon9, we produce a snapshot analysis (shown below) that gives us our key metrics. More importantly, it puts them together in a way that helps us see the relationships between the numbers and get some insight into potential strengths and weaknesses driving overall performance.

It doesn’t take any especially hard-to-come-by data to see your SaaS business through these metrics. And, the truth is, if you don’t have the data that is required, you’ve already had a huge learning moment. Your marching orders are to have a machine behind the business that allows you to monitor and extract key business data. So let’s assume that you have access to the numbers behind a snapshot like this.

Behind the SaaS Evaluation Snapshot

There are ten worksheets bubbling up into our snapshot. These worksheets are the numbers that describe the addressable market; revenue and churn; sales and marketing; customers; R&D; culture; P&L; and balance sheet. Then there are a couple more that are qualitative.

Within each worksheet, we also have sub-metric analyses that illustrate performance, despite the fact that those don’t rise to the snapshot level. Sales and marketing are especially fertile for sub-metrics that help identify opportunities.

Bare minimum inputs are revenue (split by type); customer and revenue churn; sales expense; marketing expense; new contract value (split by revenue type); headcount; and P&L COGS and EBITDA.

SaaS Evaluation Periods

I like to look at quarters. And in most cases, I like to have enough of a history that I can see trends. So you’ll see that this particular snapshot covers seven quarters. It’s up to you how much context you want or need, and how granular that should be. The closer you are to the startup stage, the more likely you’ll want to see things monthly. Even in growth stage, you’ll likely switch to monthly once you dig deeper beyond the top-level evaluation.

About the SaaS Business Evaluation Snapshot

Market and Scale

We like to understand scale because it provides a frame of reference for stage and our expectations of the other metrics. Then we like market penetration over time because it shows how the business is performing relative to market size. Are you growing faster or slower than the rising tide?

Revenue and Mix

Revenue growth over time shows growth, trends, and momentum. It’s also an easy way to see lumpiness which goes to predictability (and executional risk/valuation). The reason we look at recurring revenue versus all revenue is to...