Unlocking Growth: Retention and Metrics in SaaS Fundraising with Todd Gardner

Todd Gardner (00:00)

Retention drives future growth more as you get larger. So you absolutely can’t outrun a leaky bucket and you can’t get away with 120% NRR if your gross revenue retention is 80 because NRR is just fundamentally less stable than gross revenue retention is usually driven by outlier growth in the top 10% of your customers.

Randy Wootton (00:34)

Well, hello everybody. This is Randy Wootton, I’m the CEO of Maxio, and this is our first episode of SaaS Expert Voices, the podcast that brings experts in SaaS from around the world together to help us understand where we are today and what’s happening tomorrow.

Today I’m honored to welcome Todd Gardner, the founder and CEO of SaaS Capital for 12 years, and currently the MD of SaaS Advisors. I’ve known Todd for several years. He’s an expert in SaaS, financials, valuation, pricing, and monetization, and couldn’t be more excited to have Todd join us today to talk about what’s happening in the capital markets, how people think about the key metrics for fundraising, and how to pick a lane. So Todd, welcome.

Todd Gardner (01:21) Thanks, Randy. Glad to be here on the inaugural voyage of Expert Voices.

Randy Wootton (01:27)

All right, Todd, well in the intro we talked about your background. Maybe just start with that a bit. You’ve been in this space a long time. What are the things that you are most excited about as you look to where we’re going?

Todd Gardner (01:39) Yeah, thanks. I have been in the SaaS space before it was called SaaS. It was an application service. Providers.

Randy Wootton (01:46)

Oh, I remember that.

Todd Gardner (01:47)

And, yeah. Yeah.

Randy Wootton (01:49) Yeah. We used to call it web-based ASPs.

Todd Gardner (01:51)

Yeah, the venture firm I was at, one of the very first ASPs called US Center Networking, and it was through my exposure to USI I really came up with the idea of a separate funding vehicle for SaaS companies, which was SaaS Capital and really led the whole movement of lending into SaaS companies, which is now a pretty well-established industry. But I think we’re in a really, as painful as the last 24 months have been, or 18 months, we’re in a very productive time, I think for SaaS companies. We’re really back to business. A lot of the froth has been blown off the market. If you look back at other market corrections, you can actually see that these are vintage years where a lot of amazing SaaS companies were established, where founders are being frugal and tenacious and really looking for insights and creating unique companies as opposed to just riding a fundraising wave of A to B to C to D. So again, as painful as it is, I think it’s a really productive time for very focused SaaS companies to build their product.

Randy Wootton (03:05)

Well, let’s start there. So talking about the broader market conditions, we did a great event in Austin where you talked about what was happening in the capital markets. And the thing I loved about it was you did have that long look and long view looking back over the last 10 years to talk about what’s playing out in the capital markets for public companies. And then we at Maxio produced the Maxio Institute growth report, which allowed us to triangulate in terms of what was happening in the public markets and how we saw that play out in the private. So maybe just at the high level, Todd, can you talk a little bit about what you’ve seen and contextualize it, why this time is great for early-stage companies?

Todd Gardner (03:41)

Yeah, so what we talked about in Austin and what people have focused on lately is the recent deceleration in the growth rate of SaaS companies. It’s been pretty acute in the public markets and then mirrored almost exactly through the data at the Maxio Institute, which is the smaller private SaaS company, but it’s been going on for over 10 years. So folks need to recognize this is a maturing industry. It’s not necessarily a sick industry. These companies are still growing on average above 15% but when you’re doing your capital planning, you got to understand it’s a very competitive environment out there. It’s a mature industry and it’s harder to get to the double, double, and triple kinds of growth rates that were very popular with VCs even three or four years ago. So one is just the broader context of where growth rates are on a more normalized basis and then obviously multiples. And so, that’s the great thing about the public market, it’s very easy to track the valuations of businesses. And so we did a comparison of where multiples have been versus where growth rates have been. And it’s a great study of the efficiency of the public markets because they almost exactly anticipated the slowdown of the growth of the SaaS businesses. So multiples dropped well before the growth rates in the SaaS businesses happened.

But the thing to keep in mind is while multiples have dropped dramatically from where were we near 20 times ARR at the height of the bubble in 20 and 21, we’re back to where the long-term tenure averages are. So we really have regressed to the mean in terms of SaaS valuation. So they may go up from here, but they could also go down from here, right? Interest rates, and growth rates continue to slow, so it’s easy and there was a lot of chatter at SaaStr about this to say, oh, we can’t wait until growth, until multiples get back to where they were in 2021. You just need to zoom out a little bit and recognize that that was a clear outlier. And so this is a relatively normal period in terms of SaaS valuations, both public and private. And we’ll touch on private fundraising I think a little bit later.

Randy Wootton (06:14)

Yeah, just building on that, I think that’s what we saw in the Maxio Institute growth report is an anonymous collection of the $15 billion of billion and invoicing data going across our system of about 2300 customers. And what we saw very specifically in Q1 of 2022 was a growth rate of about 30%, and in Q1 of 2023 that had dropped to 13%. And in Q2, just in this past Q2, it popped to 15%. And so I think we’re all wondering what’s going to happen at the end of Q3, and we’ll be sure to publish some information there. But I think to your point, Todd, it really is about what’s happening with the growth rate and the valuations being recognition of future growth potential as well, right? It’s not just what your current growth rate is. Is the market growing? Do you have the ability to grow into that?

So maybe shift the conversation a little bit. Okay. So the fundraising environment, as you’ve done a bunch of evaluations of companies both in your role as founder and CEO of SaaS Capital and then as in your recent role as your MD of SaaS Advisors, so you’ve been advising a bunch of companies. What are kind of the three key metrics that investors are looking at to determine whether they’re going to invest and at what multiple?

Todd Gardner (07:30)

Yeah, happy to. And the one thing I would say before we jump to the metrics is as gloomy as it might’ve sounded on the valuation multiples in the public market, there’s a distinct lack of quality SaaS companies going to market right now. And this is from a bunch of survey data from the PE firms and the venture firms, and there’s some good data from Carta and others that valuation in the private markets is actually picking up. Some of that is selection bias because just good companies are going to market, but if you have strong metrics across the areas that we’re going to talk about in a second, it is not at all a bad time to go to market because there’s not a lot of competition for the private capital that’s out there. In terms of the metrics themselves, everybody’s very aligned around growth, profitability slash efficiency, and retention. So none of those should be a big surprise and different firm’s focus will rank those differently, but all three of them are very important and in other periods, just one or two of them may have been important. And I would say every PE and VC or strategic buyer that I’ve chatted with lately, all three of those are very important.

Randy Wootton (08:54)

Which one right now do you think is most important? Which one, if you had to rank it?

Todd Gardner (09:00)

 I think it very much-

Randy Wootton (09:00) I know you love all your children.

Todd Gardner (09:02)

Yeah, I think it depends on the stage, but I would say growth was always number one among those three. And now even in some survey data I’ve seen, and this is consistent with your backers, that Battery retention seems to come to the top as the first thing that they dig into. And when they dig into retention, it’s like you just have to have your ducks in a row on this. And I am still amazed at some relatively large SaaS companies who haven’t done the really hard work to nail down retention, but it should be cohort-based and you need to calculate it on both a net and gross basis. Gross takes out the effects of cross-selling and price increases and even some usage-based increases. And gross is believed to be, and I think is a more pure measurement of the stickiness of the revenue stream. It’s not clouded by some of the things that can be included in net retention.

Randy Wootton (10:09)

I think it’s a great point, especially around contextualizing around stage. So if you’re an early-stage seed series A, you’re not worried about gross retention, but when you start to get into that series B or series C investment, you have product market fit, you’re starting to build a reputable sales model, now you’re starting to really think about, I got a group of customers, I got to keep them. And so I think that gross retention starts to become more important and the investors at that stage start to look at that at almost the line. I mean, not line in the sand, but if anything’s below 90%, they won’t do it. And what they’re looking for is like 92% is what I’ve heard for them [inaudible 00:10:45] just to pass and say, okay, the business model’s pretty good, now let’s go look other places. But if you don’t, to your point, if you’re not able to retain those customers, you have that leaky bucket and it’s super hard to outgrow that with new logos as your install base gets bigger.

Todd Gardner (10:58)

That’s exactly right. So retention drives future growth more as you get larger. So you absolutely can’t outrun a leaky bucket and you can’t get away with 120% NRR if your gross revenue retention is 80 because NRR is just fundamentally less stable, then gross revenue retention is usually driven by outlier growth in the top 10% of your customers.

Randy Wootton (11:30)

I do also think what you didn’t mention, but I know you’re a huge fan of is in that cohort analysis is looking at logo retention and thinking about what’s true at your different size. So you may have a different type of retention logo and dollar at your small, your SMB mid-market versus enterprise customers and deeply understanding what’s happening there, the overall profitability of those different segments, and what the retention profile is going to be because they’re different.

Todd Gardner (11:57)

Yeah. In fact, the best independent variable if you’re comparing revenue retention across companies is your ACV. So the size of your contracts, and if you’re selling into the SMB, it’s a bit of a double-edged sword. A lot of times you can like, look, I’m never going to get to 95% gross revenue retention selling into the SMB. Those companies go out of business at a greater rate than that, and that’s absolutely true. So you get some structural churn, the lower your AC. The flip side of that is that’s just a negative in your business model, that you’re not keeping those customers. So it’s not necessarily a great excuse. You can be outperforming your peers in that area, but the fact of the matter is you’re still churning those customers on a regular basis, and so you need to acquire them efficiently, which is the third leg to the stool.

And some investors look at this differently than others. Some are like, hey, in this environment, you need to be profitable or we won’t look at your company. Others, it’s just more around capital efficiency, and the most popular metric right now, and I think this is a great metric, is your burn ratio, which is basically how much you grow ARR compared to how much money you consume on a net company-wide basis. So it’s like a CAC ratio, but it includes all of your spending. If you’re not burning money, that’s not a relevant metric and you’re really looking more at your profitability on a net basis, so your operating merchant or whatever, or free cash flow, however you want to measure it. But these are the efficiency metrics that folks are focused on. And I still think on a unit economic basis, folks are digging into CAC payback, which is how quickly you get your sales and marketing investment payback from your customers. Because that’s an indication of, hey, if we lean into sales and marketing, how efficiently can we grow the business? So it’s a unit economics efficiency metric in addition to some of these more macro ones.

Randy Wootton (14:10)

Yeah, I think that whole idea about burn ratio if you’re unprofitable is wicked important. One of my favorite articles you wrote was it was something about the porpoise move where every once in a while you want to try to get EBITDA positive just to show that you can do it, and then you’d be deliberate about where you make your investments after that. And so if you go EBITDA negative cashflow negative and that burn ratio starts going in the other direction, you’re just much more in control of it than if you’re fighting to get profitable and the burn ratio is out of whack and then it’s like, oh God, I got to get more capital. Do I do that from debt? Do I take it down round? Et cetera. And so I think really having your hands as CEO or CFO on the levers of and being able to show that you can get profitable. To that point, the other article that you just posted, which I thought was really interesting was this idea about picking a lane. And so to your point, there are really two different profiles of companies that are fundable, and then there’s this great middle, which is you don’t want to be caught in the middle, the Death Valley. So can you talk a little bit about how those different profiles have evolved and what you really need to be solving for in terms of your company profile to be able to continue to get funded and to be able to drive up that valuation over time?

Todd Gardner (15:24)

Sure. I think I wrote this because we’re coming off this really unusual whipsaw period where essentially for SaaS businesses, money was virtually free for a while and then almost overnight there was no capital available at all. So everybody was using the same playbook, which is you’ve got to reduce the burn. And everybody went through those exercises. And then coming out of that, some lucky few companies really cut down on their burn, their growth rate continued to go, and that’s a wonderful combination of growth and profitability, but for many others, they reduced their burn and growth slowed. And so now they’re in this period of relatively modest or low growth and modest profitability or losing money, and that was okay for a little while people are trying to get their footing and say, hey, what’s next? But it’s not okay anymore. The whipsaw of the capital markets is over. We’re in a relatively normalized period even though growth rates are shrinking and it’s very dangerous to be in this low-growth, low profitability area. And so it’s really a call to management teams and investors to become very intentional about where you’re going next. Do you have, and in the article I outlined, what are the steps that it takes to return to growth, right? Is it data-driven? Is it objective? Is it fully funded? I mean, is there really an honest to God return to growth for this particular business, which is incredibly hard to do? It’s really hard to re-energize growth in a SaaS company, but you can do it and it might even be a new product or a new market, but it needs to be very intentional. And if not, you need to pick the profitability lane and not break even but really make some money. And Randy, you helped me build on this, which is there are ways to create value through making money. That’s how most companies do it. And in the SaaS world, it can drive, if you’re at scale, that can easily drive an m and a strategy, which is very interesting to private equity firms. And then even if you’re not at scale, what it does is it moves you from a really crappy multiple of revenue because you lack growth to a reasonable valuation based on an EBITDA multiple. And this is getting profitability into the 15, 20, 25% operating margin. So it’s very important to get out of the middle, the Death Valley as you put it, or the dead zone, and get intentional about one direction or the other. And that was the gist of that blog post.

Randy Wootton (18:21)

And so just kind of putting some numbers around it, I think high growth being, I think we talked a little bit about, and it used to be you had to grow at 40%, 30 is the new 40, but if you’re in that 30% sustainable growth CAGR over time, you have a little bit more flexibility to continue to invest in growth. And I think your plan, the thing I really liked about it was just this, as a management team, you got to be clear-eyed about the path to growth. What are the investments you’re making in either product segments, regions, or if you have access to capital m and a, that’s going to help you drive that growth? And it’s almost like not just when you’re a series A, series B, you’re trying to get the replicable sales model down so I can get a bunch of deals. And then as you get into series C and series D, you need a replicable growth model. What does that look like to drive that high-end? I think on the other point, if you’re in that 10 to 20%, you’re still viable SaaS. And to your point now you’re taking the profits. I think of it like you have a cash engine that then you decide to invest in your growth engine. That growth engine could be behind the plan that you described. It could be putting money away to do m and a. It could be just putting money away to see how this thing’s going to play out. But if you’re down at like 0% growth as a SaaS company, that’s a whole other problem to solve

Todd Gardner (19:38)

No, I was just saying I think single digits on either one of those, so like marginally profitable or marginally unprofitable, and then the growth rate and also in single digits, you just need to get on a direction. The idea of hanging around the hoop and seeing if something interesting is going to happen isn’t viable in this particular economy.

Randy Wootton (19:59)

Yeah, I think that’s really when you get to the pivot, right? The pivot, what are you going to do? One of the things I heard from an investor, Sequoia, when I was at another company was it is really hard to do a pivot in a high-growth SaaS business where there’s been an enormous amount of capital invested in future potential. So a pivot in that case turns into a recap. No investor wants to recap, but if you are looking at the reality of under single digit growth and not being able to get profitable and running out of cash, it’s a come to Jesus moment.

Todd Gardner (20:34)

And by the way, a recap is also another way to create value. If you say, all right, we’re going to drive 20% operating profits or 25 or 30% operating profits, it’s not the home run everybody was hoping for, but you can certainly operate in that dynamic for a period of time and generate real returns for investors and the management team.

Randy Wootton (20:59)

Yeah, that’s great. So I think we’re kind of wrapping this up. I think we’ve talked a bit about the broader capital market, and what’s happening, it’s a blip, but we’re going back to the norm. We’ve talked about the private marketplace where we’ve seen it fall, the public markets. We’re seeing broadly across our 2300 customers, which skew SMB to mid-market under a hundred million growth rates in Q2 being about 15%, but with a little tick up. So we’ll see what happens in Q3. We talked about fundraising, the several metrics that investors are looking at, and really the key insight in terms of picking a lane, are you solving for profit? Are you solving for growth? Todd, is there anything else you’d like to leave our listeners with at the end of this?

Todd Gardner (21:42)

I would say, one thing you forgot to mention, or I think we talked about on the fundraising front is don’t be afraid to test the market right now. I do think the capital overhang and all the dry powders absolutely real, and a lot of folks just aren’t going to market either on an M&A basis or a capital raising. So you need to have your ducks in a row and you need to be driving and performing reasonably well in all three of those metrics. But it’s not as bad a time to raise capital, I think as a lot of CEOs and management teams think.

Randy Wootton (22:19)

Yeah, to that point, I was just at a conference with the other Battery CEOs that are part of this growth equity majority-owned fund, and someone mentioned it was something like a trillion dollars out there in terms of capital ready to be deployed. At the same time, one of my GPs, Chelsea Stoner, who’s wicked smart and has been in the space a long time, incredibly successful, has said when she looked at our growth index report, she said, yeah, they’re still seeing winners that are doing T2D3, right? Tripling in the first two years and doubling the three years after that. And so there are people who have good business models that are getting funded, but for Battery, for example, they see over 5,000 deals a year, of which they only invest in 20. So I do think to your point, you can test the market, but you have to clean things up and be picking one of those two lanes and being super clear about your value creation plan, not just your growth, but your next two to three years, and how are you going to create value based on the market, the size of the market, the TAM, your specific unique capability, the differentiation you have and your replicable sales model and your replicable growth model.

Todd Gardner (23:30)

Yeah, well said. I think it’s haves and have-nots to some degree in the fundraising market right now, but there is capital out there.

Randy Wootton (23:38)

Amen. All right. Well, Todd, it’s always a pleasure chatting. I appreciate you taking the time. Look forward to continuing the conversation and on LinkedIn where people can find you on LinkedIn. Is there someplace else that you would like to advertise for people to track you down?

Todd Gardner (23:52)

LinkedIn is fine right now. I’ve just launched a website, but most of my activity is on LinkedIn, so just look me up there.

Randy Wootton (24:00)

Great. And then for everybody else listening, we will provide a link to the Maxio Institute growth report. You can find me on LinkedIn or send me a note if you’d like to chat. It’s Randy.Wootton@maxio.com. I always have 15 minutes to chat with SaaS professionals and learn from your experience. Maybe one day we’ll have you on Expert Voices. Thanks very much.

Todd Gardner (24:18) 

Thank you, Randy.

Todd Gardner (00:00)

Retention drives future growth more as you get larger. So you absolutely can’t outrun a leaky bucket and you can’t get away with 120% NRR if your gross revenue retention is 80 because NRR is just fundamentally less stable than gross revenue retention is usually driven by outlier growth in the top 10% of your customers.

Randy Wootton (00:34)

Well, hello everybody. This is Randy Wootton, I’m the CEO of Maxio, and this is our first episode of SaaS Expert Voices, the podcast that brings experts in SaaS from around the world together to help us understand where we are today and what’s happening tomorrow.

Today I’m honored to welcome Todd Gardner, the founder and CEO of SaaS Capital for 12 years, and currently the MD of SaaS Advisors. I’ve known Todd for several years. He’s an expert in SaaS, financials, valuation, pricing, and monetization, and couldn’t be more excited to have Todd join us today to talk about what’s happening in the capital markets, how people think about the key metrics for fundraising, and how to pick a lane. So Todd, welcome.

Todd Gardner (01:21) Thanks, Randy. Glad to be here on the inaugural voyage of Expert Voices.

Randy Wootton (01:27)

All right, Todd, well in the intro we talked about your background. Maybe just start with that a bit. You’ve been in this space a long time. What are the things that you are most excited about as you look to where we’re going?

Todd Gardner (01:39) Yeah, thanks. I have been in the SaaS space before it was called SaaS. It was an application service. Providers.

Randy Wootton (01:46)

Oh, I remember that.

Todd Gardner (01:47)

And, yeah. Yeah.

Randy Wootton (01:49) Yeah. We used to call it web-based ASPs.

Todd Gardner (01:51)

Yeah, the venture firm I was at, one of the very first ASPs called US Center Networking, and it was through my exposure to USI I really came up with the idea of a separate funding vehicle for SaaS companies, which was SaaS Capital and really led the whole movement of lending into SaaS companies, which is now a pretty well-established industry. But I think we’re in a really, as painful as the last 24 months have been, or 18 months, we’re in a very productive time, I think for SaaS companies. We’re really back to business. A lot of the froth has been blown off the market. If you look back at other market corrections, you can actually see that these are vintage years where a lot of amazing SaaS companies were established, where founders are being frugal and tenacious and really looking for insights and creating unique companies as opposed to just riding a fundraising wave of A to B to C to D. So again, as painful as it is, I think it’s a really productive time for very focused SaaS companies to build their product.

Randy Wootton (03:05)

Well, let’s start there. So talking about the broader market conditions, we did a great event in Austin where you talked about what was happening in the capital markets. And the thing I loved about it was you did have that long look and long view looking back over the last 10 years to talk about what’s playing out in the capital markets for public companies. And then we at Maxio produced the Maxio Institute growth report, which allowed us to triangulate in terms of what was happening in the public markets and how we saw that play out in the private. So maybe just at the high level, Todd, can you talk a little bit about what you’ve seen and contextualize it, why this time is great for early-stage companies?

Todd Gardner (03:41)

Yeah, so what we talked about in Austin and what people have focused on lately is the recent deceleration in the growth rate of SaaS companies. It’s been pretty acute in the public markets and then mirrored almost exactly through the data at the Maxio Institute, which is the smaller private SaaS company, but it’s been going on for over 10 years. So folks need to recognize this is a maturing industry. It’s not necessarily a sick industry. These companies are still growing on average above 15% but when you’re doing your capital planning, you got to understand it’s a very competitive environment out there. It’s a mature industry and it’s harder to get to the double, double, and triple kinds of growth rates that were very popular with VCs even three or four years ago. So one is just the broader context of where growth rates are on a more normalized basis and then obviously multiples. And so, that’s the great thing about the public market, it’s very easy to track the valuations of businesses. And so we did a comparison of where multiples have been versus where growth rates have been. And it’s a great study of the efficiency of the public markets because they almost exactly anticipated the slowdown of the growth of the SaaS businesses. So multiples dropped well before the growth rates in the SaaS businesses happened.

But the thing to keep in mind is while multiples have dropped dramatically from where were we near 20 times ARR at the height of the bubble in 20 and 21, we’re back to where the long-term tenure averages are. So we really have regressed to the mean in terms of SaaS valuation. So they may go up from here, but they could also go down from here, right? Interest rates, and growth rates continue to slow, so it’s easy and there was a lot of chatter at SaaStr about this to say, oh, we can’t wait until growth, until multiples get back to where they were in 2021. You just need to zoom out a little bit and recognize that that was a clear outlier. And so this is a relatively normal period in terms of SaaS valuations, both public and private. And we’ll touch on private fundraising I think a little bit later.

Randy Wootton (06:14)

Yeah, just building on that, I think that’s what we saw in the Maxio Institute growth report is an anonymous collection of the $15 billion of billion and invoicing data going across our system of about 2300 customers. And what we saw very specifically in Q1 of 2022 was a growth rate of about 30%, and in Q1 of 2023 that had dropped to 13%. And in Q2, just in this past Q2, it popped to 15%. And so I think we’re all wondering what’s going to happen at the end of Q3, and we’ll be sure to publish some information there. But I think to your point, Todd, it really is about what’s happening with the growth rate and the valuations being recognition of future growth potential as well, right? It’s not just what your current growth rate is. Is the market growing? Do you have the ability to grow into that?

So maybe shift the conversation a little bit. Okay. So the fundraising environment, as you’ve done a bunch of evaluations of companies both in your role as founder and CEO of SaaS Capital and then as in your recent role as your MD of SaaS Advisors, so you’ve been advising a bunch of companies. What are kind of the three key metrics that investors are looking at to determine whether they’re going to invest and at what multiple?

Todd Gardner (07:30)

Yeah, happy to. And the one thing I would say before we jump to the metrics is as gloomy as it might’ve sounded on the valuation multiples in the public market, there’s a distinct lack of quality SaaS companies going to market right now. And this is from a bunch of survey data from the PE firms and the venture firms, and there’s some good data from Carta and others that valuation in the private markets is actually picking up. Some of that is selection bias because just good companies are going to market, but if you have strong metrics across the areas that we’re going to talk about in a second, it is not at all a bad time to go to market because there’s not a lot of competition for the private capital that’s out there. In terms of the metrics themselves, everybody’s very aligned around growth, profitability slash efficiency, and retention. So none of those should be a big surprise and different firm’s focus will rank those differently, but all three of them are very important and in other periods, just one or two of them may have been important. And I would say every PE and VC or strategic buyer that I’ve chatted with lately, all three of those are very important.

Randy Wootton (08:54)

Which one right now do you think is most important? Which one, if you had to rank it?

Todd Gardner (09:00)

 I think it very much-

Randy Wootton (09:00) I know you love all your children.

Todd Gardner (09:02)

Yeah, I think it depends on the stage, but I would say growth was always number one among those three. And now even in some survey data I’ve seen, and this is consistent with your backers, that Battery retention seems to come to the top as the first thing that they dig into. And when they dig into retention, it’s like you just have to have your ducks in a row on this. And I am still amazed at some relatively large SaaS companies who haven’t done the really hard work to nail down retention, but it should be cohort-based and you need to calculate it on both a net and gross basis. Gross takes out the effects of cross-selling and price increases and even some usage-based increases. And gross is believed to be, and I think is a more pure measurement of the stickiness of the revenue stream. It’s not clouded by some of the things that can be included in net retention.

Randy Wootton (10:09)

I think it’s a great point, especially around contextualizing around stage. So if you’re an early-stage seed series A, you’re not worried about gross retention, but when you start to get into that series B or series C investment, you have product market fit, you’re starting to build a reputable sales model, now you’re starting to really think about, I got a group of customers, I got to keep them. And so I think that gross retention starts to become more important and the investors at that stage start to look at that at almost the line. I mean, not line in the sand, but if anything’s below 90%, they won’t do it. And what they’re looking for is like 92% is what I’ve heard for them [inaudible 00:10:45] just to pass and say, okay, the business model’s pretty good, now let’s go look other places. But if you don’t, to your point, if you’re not able to retain those customers, you have that leaky bucket and it’s super hard to outgrow that with new logos as your install base gets bigger.

Todd Gardner (10:58)

That’s exactly right. So retention drives future growth more as you get larger. So you absolutely can’t outrun a leaky bucket and you can’t get away with 120% NRR if your gross revenue retention is 80 because NRR is just fundamentally less stable, then gross revenue retention is usually driven by outlier growth in the top 10% of your customers.

Randy Wootton (11:30)

I do also think what you didn’t mention, but I know you’re a huge fan of is in that cohort analysis is looking at logo retention and thinking about what’s true at your different size. So you may have a different type of retention logo and dollar at your small, your SMB mid-market versus enterprise customers and deeply understanding what’s happening there, the overall profitability of those different segments, and what the retention profile is going to be because they’re different.

Todd Gardner (11:57)

Yeah. In fact, the best independent variable if you’re comparing revenue retention across companies is your ACV. So the size of your contracts, and if you’re selling into the SMB, it’s a bit of a double-edged sword. A lot of times you can like, look, I’m never going to get to 95% gross revenue retention selling into the SMB. Those companies go out of business at a greater rate than that, and that’s absolutely true. So you get some structural churn, the lower your ACV. The flip side of that is that’s just a negative in your business model, that you’re not keeping those customers. So it’s not necessarily a great excuse. You can be outperforming your peers in that area, but the fact of the matter is you’re still churning those customers on a regular basis, and so you need to acquire them efficiently, which is the third leg to the stool.

And some investors look at this differently than others. Some are like, hey, in this environment, you need to be profitable or we won’t look at your company. Others, it’s just more around capital efficiency, and the most popular metric right now, and I think this is a great metric, is your burn ratio, which is basically how much you grow ARR compared to how much money you consume on a net company-wide basis. So it’s like a CAC ratio, but it includes all of your spending. If you’re not burning money, that’s not a relevant metric and you’re really looking more at your profitability on a net basis, so your operating merchant or whatever, or free cash flow, however you want to measure it. But these are the efficiency metrics that folks are focused on. And I still think on a unit economic basis, folks are digging into CAC payback, which is how quickly you get your sales and marketing investment payback from your customers. Because that’s an indication of, hey, if we lean into sales and marketing, how efficiently can we grow the business? So it’s a unit economics efficiency metric in addition to some of these more macro ones.

Randy Wootton (14:10)

Yeah, I think that whole idea about burn ratio if you’re unprofitable is wicked important. One of my favorite articles you wrote was it was something about the porpoise move where every once in a while you want to try to get EBITDA positive just to show that you can do it, and then you’d be deliberate about where you make your investments after that. And so if you go EBITDA negative cashflow negative and that burn ratio starts going in the other direction, you’re just much more in control of it than if you’re fighting to get profitable and the burn ratio is out of whack and then it’s like, oh God, I got to get more capital. Do I do that from debt? Do I take it down round? Et cetera. And so I think really having your hands as CEO or CFO on the levers of and being able to show that you can get profitable. To that point, the other article that you just posted, which I thought was really interesting was this idea about picking a lane. And so to your point, there are really two different profiles of companies that are fundable, and then there’s this great middle, which is you don’t want to be caught in the middle, the Death Valley. So can you talk a little bit about how those different profiles have evolved and what you really need to be solving for in terms of your company profile to be able to continue to get funded and to be able to drive up that valuation over time?

Todd Gardner (15:24)

Sure. I think I wrote this because we’re coming off this really unusual whipsaw period where essentially for SaaS businesses, money was virtually free for a while and then almost overnight there was no capital available at all. So everybody was using the same playbook, which is you’ve got to reduce the burn. And everybody went through those exercises. And then coming out of that, some lucky few companies really cut down on their burn, their growth rate continued to go, and that’s a wonderful combination of growth and profitability, but for many others, they reduced their burn and growth slowed. And so now they’re in this period of relatively modest or low growth and modest profitability or losing money, and that was okay for a little while people are trying to get their footing and say, hey, what’s next? But it’s not okay anymore. The whipsaw of the capital markets is over. We’re in a relatively normalized period even though growth rates are shrinking and it’s very dangerous to be in this low-growth, low profitability area. And so it’s really a call to management teams and investors to become very intentional about where you’re going next. Do you have, and in the article I outlined, what are the steps that it takes to return to growth, right? Is it data-driven? Is it objective? Is it fully funded? I mean, is there really an honest to God return to growth for this particular business, which is incredibly hard to do? It’s really hard to re-energize growth in a SaaS company, but you can do it and it might even be a new product or a new market, but it needs to be very intentional. And if not, you need to pick the profitability lane and not break even but really make some money. And Randy, you helped me build on this, which is there are ways to create value through making money. That’s how most companies do it. And in the SaaS world, it can drive, if you’re at scale, that can easily drive an m and a strategy, which is very interesting to private equity firms. And then even if you’re not at scale, what it does is it moves you from a really crappy multiple of revenue because you lack growth to a reasonable valuation based on an EBITDA multiple. And this is getting profitability into the 15, 20, 25% operating margin. So it’s very important to get out of the middle, the Death Valley as you put it, or the dead zone, and get intentional about one direction or the other. And that was the gist of that blog post.

Randy Wootton (18:21)

And so just kind of putting some numbers around it, I think high growth being, I think we talked a little bit about, and it used to be you had to grow at 40%, 30 is the new 40, but if you’re in that 30% sustainable growth CAGR over time, you have a little bit more flexibility to continue to invest in growth. And I think your plan, the thing I really liked about it was just this, as a management team, you got to be clear-eyed about the path to growth. What are the investments you’re making in either product segments, regions, or if you have access to capital m and a, that’s going to help you drive that growth? And it’s almost like not just when you’re a series A, series B, you’re trying to get the replicable sales model down so I can get a bunch of deals. And then as you get into series C and series D, you need a replicable growth model. What does that look like to drive that high-end? I think on the other point, if you’re in that 10 to 20%, you’re still viable SaaS. And to your point now you’re taking the profits. I think of it like you have a cash engine that then you decide to invest in your growth engine. That growth engine could be behind the plan that you described. It could be putting money away to do m and a. It could be just putting money away to see how this thing’s going to play out. But if you’re down at like 0% growth as a SaaS company, that’s a whole nother problem [inaudible 00:19:38].

Todd Gardner (19:38)

No, I was just saying I think single digits on either one of those, so like marginally profitable or marginally unprofitable, and then the growth rate and also in single digits, you just need to get on a direction. The idea of hanging around the hoop and seeing if something interesting is going to happen isn’t viable in this particular economy.

Randy Wootton (19:59)

Yeah, I think that’s really when you get to the pivot, right? The pivot, what are you going to do? One of the things I heard from an investor, Sequoia, when I was at another company was it is really hard to do a pivot in a high-growth SaaS business where there’s been an enormous amount of capital invested in future potential. So a pivot in that case turns into a recap. No investor wants to recap, but if you are looking at the reality of under single digit growth and not being able to get profitable and running out of cash, it’s a come to Jesus moment.

Todd Gardner (20:34)

And by the way, a recap is also another way to create value. If you say, all right, we’re going to drive 20% operating profits or 25 or 30% operating profits, it’s not the home run everybody was hoping for, but you can certainly operate in that dynamic for a period of time and generate real returns for investors and the management team.

Randy Wootton (20:59)

Yeah, that’s great. So I think we’re kind of wrapping this up. I think we’ve talked a bit about the broader capital market, and what’s happening, it’s a blip, but we’re going back to the norm. We’ve talked about the private marketplace where we’ve seen it fall, the public markets. We’re seeing broadly across our 2300 customers, which skew S&P to mid-market under a hundred million growth rates in Q2 being about 15%, but with a little tick up. So we’ll see what happens in Q3. We talked about fundraising, the several metrics that investors are looking at, and really the key insight in terms of picking a lane, are you solving for profit? Are you solving for growth? Todd, is there anything else you’d like to leave our listeners with at the end of this?

Todd Gardner (21:42)

I would say, one thing you forgot to mention, or I think we talked about on the fundraising front is don’t be afraid to test the market right now. I do think the capital overhang and all the dry powders absolutely real, and a lot of folks just aren’t going to market either on an m and a basis or a capital raising. So you need to have your ducks in a row and you need to be driving and performing reasonably well in all three of those metrics. But it’s not as bad a time to raise capital, I think as a lot of CEOs and management teams think.

Randy Wootton (22:19)

Yeah, to that point, I was just at a conference with the other Battery CEOs that are part of this growth equity majority-owned fund, and someone mentioned it was something like a trillion dollars out there in terms of capital ready to be deployed. At the same time, one of my GPs, Chelsea Stoner, who’s wicked smart and has been in the space a long time, incredibly successful, has said when she looked at our growth index report, she said, yeah, they’re still seeing winners that are doing T two D three, right? Tripling in the first two years and doubling the three years after that. And so there are people who have good business models that are getting funded, but for Battery, for example, they see over 5,000 deals a year, of which they only invest in 20. So I do think to your point, you can test the market, but you have to clean things up and be picking one of those two lanes and being super clear about your value creation plan, not just your growth, but your next two to three years, and how are you going to create value based on the market, the size of the market, the TAM, your specific unique capability, the differentiation you have and your replicable sales model and your replicable growth model.

Todd Gardner (23:30)

Yeah, well said. I think it’s haves and have-nots to some degree in the fundraising market right now, but there is capital out there.

Randy Wootton (23:38)

Amen. All right. Well, Todd, it’s always a pleasure chatting. I appreciate you taking the time. Look forward to continuing the conversation and on LinkedIn where people can find you on LinkedIn. Is there someplace else that you would like to advertise for people to track you down?

Todd Gardner (23:52)

LinkedIn is fine right now. I’ve just launched a website, but most of my activity is on LinkedIn, so just look me up there.

Randy Wootton (24:00)

Great. And then for everybody else listening, we will provide a link to the Maxio Institute growth report. You can find me on LinkedIn or send me a note if you’d like to chat. It’s Randy.Wootton@maxio.com. I always have 15 minutes to chat with SaaS professionals and learn from your experience. Maybe one day we’ll have you on Expert Voices. Thanks very much.

Todd Gardner (24:18) 

Thank you, Randy.