As the software-as-a-service business model is rapidly becoming the business model of choice for new software companies, executive teams are continually challenged by the metrics they should be using to gauge their performance.

The best work we have read on this subject is a paper by the good folk at Bessemer Venture Partners.  The paper is entitled “Bessemer’s Top 10 Laws of Cloud Computing and SaaS” and can be found at http://www.bvp.com/cloud. Another excellent piece on this subject is by David Skok at Matrix Partners, and can be found at http://www.forentrepreneurs.com/saas-metrics/. In our opinion, both these pieces are a must read for all SaaS executives and entrepreneurs. 

However, for early stage companies, what if you don’t have enough data to really have robust metrics mentioned in the above articles?  The acronyms can be a little intimidating: CMRR, CPipe, FCF, CAC, LTV, CLTV, ACV, ARPU, COGS, GAAP Revenues and others – Renewal Rate, Churn, Growth Rate, Bookings, Revenue per employee, Expenses per employee, Profitability per employee!  It eis tough being a B2B startup CEO!  Should they focus on building their business, motivating their employees, hiring, enhancing their management team, closing deals, or managing so many metrics?  It is a unique, but very real dilemma.

We fundamentally believe that there are six metrics every SaaS company MUST track.  We believe that the data required to do this requires the bare minimum that every company must have from day one.

1.     CMRR or Committed Monthly Recurring Revenue:  This is the new “bookings”. For the best definition on CMRR (different from MRR in that it is increased by new contracts going into production and reduced by the churn (see below)), see the Bessemer paper.  The CMRR MUST ALWAYS BE INCREASING.  The growth rate of your CMRR is your real growth rate.  CMRR must also ONLY INCLUDE RECURRING SOFTWARE REVENUE.  It should not include one off deals, services deals or any other “out-of –the-ordinary-need-deal-because-it-is-strategic-but-does-not-fit-into-business-model” deal.  Pure software.  Pure recurring.  Simple.

2.     Churn: There are two kinds of churn that must be measured after Year 1.  The first is customer churn and the second is revenue churn.  Even in Year 1, the focus should ALWAYS be on those customers and those deals that you think will derive lasting value from your product.

a.     Why is Churn important? Lets use numbers to illustrate this. Suppose your CMRR is $100,000.  And you are growing (in terms of NEW CMRR) at 15%.  So, in a normal situation your CMRR should be $115,000.  But if your revenue churn is 20%, that makes your entering CMRR $80,000.  So, your new CMRR, after churn, is now $95,000, a DECLINE of only 5%.  This gets even worse if you are not growing.  A revenue churn rate of less than 10% is an absolute MUST. 

b.     In terms of customer churn rate, every company must identify its key customers, and ensure that the churn rate on those is less than 5%.  For example, if your CMRR is $100,000, losing a customer with $1000 in CMRR, is far less critical than one with a CMRR of $10,000.

3.     Cash flow is a critical metric.  You should always know your exact burn rate, and how many months you have before you require more funding or are profitable.  Any entrepreneur who does not have this information at their fingertips at all times will not succeed.  This is not to suggest that you have a full time CFO from day one, but you must have a financial controller who you trust explicitly.  Over time, you must follow other key metrics like CAC as well.

4.     The next 3 metrics can all be categorized together – they are revenue, expenses and profitability per employee.  Needless to say, as a business achieves true scale, revenue and profitability per employee needs to be going up, and expenses per employee must be going down. The CEO should divide this into revenue per R&D employee and Sales employee as well.

For more questions or clarifications, please feel free to email us at preetish@cervinventures.com or neeraj@cervinventures.com.

After successful deployment of capital in Fund I across four companies, we picked Claritics as our first investment in Cevin Ventures Fund II. Claritics is pioneering a nascent field that we call social intelligence.  The process by which we decided to invest in Claritics is fairly representative of our general methodology and we encourage entrepreneurs to read this before sending in your business plan.

A little bit of background here – we had been noticing the “big data” trend in the industry for some time.  Between the Hadoop momentum, the acquisitions of Greenplum (by EMC) and Aster Data (by Teradata), and explosion of data being consumed and delivered, we wanted to play in the big data space.  However, as micro VC’s who invest between $500,000 and $2mm, its hard to invest in an idea that involved building a new platform because that is a very expensive proposition.  We were looking for an idea that leveraged an existing platform.

Enter Claritics.

The (obvious) first two things we endeavor to determine in the first meeting is the caliber of the team and the market opportunity.  Both Raj Pai and Jay Bala, CEO and CTO of Claritics respectively, had been involved in the data integration area for a number of years and had worked together at Informatica.  Raj had then moved onto the big data arena with Aster Data, while Jay had worked in the behavioral analytics space with Quantivo, a cloud analytics company.  In addition, one of the Managing Directors had worked with Raj before and both Raj and Jay came highly recommended by one of our portfolio CEO’s. Bottom line: Team – check.

On the market size, the initial idea was to focus on social gaming analytics.  However, the conversation rapidly evolved to other areas to which the same approach could be applied to: social commerce.   Once we expanded the field of vision, the opportunity was obvious.  Social gaming will be a $3-$5B market in the next 2-3 years, with the analytics space alone being about 5-8% of that – or about $150-$250 million.  Social commerce is expected to be a $30B market in 2015, and the analytics part of it will be in the $2-$2.5 billion range.  Market – check.

Our final concern was our major one coming in – would they be building their own platform for big data queries?  The answer was a resounding no – Claritics intended to leverage an existing big data player (announcement coming in the near future), and did not intend to build their own big data platform.  So: leverage platform – check.

Once we had crossed these hurdles, we went into the due diligence mode.  We performed a detailed technical due diligence on the product, and came away impressed.  Technical prowess: check

We spent significant time on the business model.  What kind of pricing would we offer our customers?  Would this be a freemium model?  If so, what would be give away for free?  A couple of days after every meeting would inevitably see Raj and Jay reaching out to us and discussing their thought process.  It was obvious that they were listening very carefully, and had an educated response every time.  And, no, they did not agree with us all the time.  Team flexibility: check.  Does the team listen: check.  Is there a potential business model (or 2 or 3): check.

The final part of the process was the negotiation.  That took us about 2 weeks to get through and at the end of it, we were happy to add Claritics to our portfolio, and as the first investment in our second fund.

Cervin Ventures is actively investing in entrepreneurs and companies that intend to rapidly disrupt the B2B software and services space.

Our five portfolio companies have done exactly that.

• Involver has disrupted traditional marketing and print media
• Zephyr has changed the rules of the game in test management
• Snaplogic is in the process of revolutionizing the data flow and integration process
• Systems in Motion is disrupting the offshoring industry with its inshoring model
• claritics is leveraging existing platforms to offer companies bleeding edge big-data analytics

Cervin Ventures believes that there are major trends that threaten the way business software is delivered and used today:

- Ease of use and Speed to use: Business customers are demanding software that is more intuitive and easier to use. Most of these employees are using software like Facebook and LinkedIn in their personal lives, as well as some sort of free email like Gmail and Yahoo! Mail, and are demanding software that is of a similar nature. This is a new trend that is commonly being called the “consumerization” of enterprise software. Users of Enterprise Software are also requiring that the software they purchase be deployed quickly – they are not willing to wait the months and years that old school enterprise software required.

- On-demand software using cloud computing and SaaS principles: The new Enterprise Software paradigms must include the ability for users to buy software on-demand. They should be able to dial up and dial down their usage of software according to their dynamic needs. In addition, customers need to have flexible pricing models so that they are not tied down to traditional pricing methodologies. In addition, we fundamentally believe that software that is not offered as a service is not a viable model in the future.

- Portability: B2B Software users, much like their counterparts in the B2C world want to be able to use the software applications when they want, where they want. This means that enterprise software applications must be available on mobile platforms. These most often include the iPhone, Android and the iPad.

- Social Collaboration: Enterprise software must allow for the users to be able to communicate and collaborate among themselves. This means that new software solutions must come with the ability to build and manage communities so that the new “knowledge company” is enabled within each and every software application that an enterprise purchases.

Entrepreneurs must pay heed to these fundamental trends that are changing the landscape of enterprise software. Incumbents in the space are under threat and will either be crushed over time, or will have to make strategic acquisitions to prevent their demise. Ultimately, we believe that incumbents will acquire innovation and prefer to cannibalize themselves.