Comprehensive Guide to Growing Your SaaS Business (with Calculators)

This post is the second in our two-part series on bookkeeping for SaaS businesses. The first provides a comprehensive bookkeeping guide for SaaS busineses to gain better financial health.

As a founder, it can be tricky to decide on the best path forward—do you pull back on growth and focus on better unit profitability and customer churn, or is growth still your business' North Star? Raising cash to grow your SaaS business is clearly a vital step. But what of the key metrics to track growth and profitability? These data are vital for raising cash and measuring performance after you've raised your cash.

VC-style growth is really about something north of a 10% compound monthly growth rate or 3x year-on-year growth. Being in the range of 2x-3x year-on-year growth would put you in the ballpark of what a VC is looking for, and at the lower end of that range, they would typically be looking to see strong unit economics. But you don’t need to grow at 200% per year to be a great business, and in some ways, slower growth can lead to better companies (we’ll look at that more in a second).

Once you take VC capital, in most cases, you have implicitly agreed to an “all or nothing” approach – get a 10-100x outcome or blow up the company trying. Your financial model will have presented a plan for this, and now your role is to deliver that plan.

So, if the 100x outcome isn’t what you want or you want optionality, then bootstrapping and finding a way to profitability might be a better path. If you choose to bootstrap, the sacrifice is likely growth.

But there is more that goes into this decision as a founder than just growth rates and valuations.

Should You Bootstrap and Seek Profitability or Seek Growth with External Funding?

Start by asking yourself what kind of business you want to build. The economics of SaaS, where customer acquisition is paid back over time through recurring revenues, means that the more customers you acquire, the faster you burn cash – and to grow fast, you need capital.

Let’s say you take $8 million in venture capital on a $40 million post-money valuation and give preferred shares with a 1.5x liquidity preference. You use this capital to grow your team, but things don’t go as well as planned. Now, you are looking for an exit and are potentially laying off team members. Let’s say you end up selling your company for $12 million, which, on the surface, is not a bad exit in the grand scheme of things. But with those liquidation preferences, as founder and owner of 80% of the share capital of the company, you will walk away with nothing, as it all goes towards paying out the preferred shares.

If you had bootstrapped, didn’t overgrow your team, didn’t give up liquidity preferences, and diligently grew your business, taking, say, an extra two years to reach profitability and an exit half the size (a $6 million exit). You would leave with six million dollars in your pocket as the founder.

Bootstrapping to Profitability

Why slower growth and bootstrapping for profitability make sense

• You retain control over your startup. You get to decide what to do, how to do it, and when to do it.
• The other benefit of bootstrapping up to $5m ARR is that you get to fix product market fit issues while small rather than throwing money at a problem and masking the real issue. A classic example is hiring more salespeople to sell a product that doesn’t have a great product market fit – a sure way to burn a lot of money fast!
• Scarcity can often lead to better products than abundant capital, and running lean with a profit focus can drive efficient resource allocation, fostering careful decision-making based on small experiments.
• You minimize dilution when the company is not worth as much.
• Once profitable, the SaaS business can reinvest funds into research and development, enhancing product innovation and maintaining a competitive edge.

Drawbacks of choosing slower growth and bootstrapping:

• Without external funding, growth would be significantly slower compared to venture-backed companies.
• Having to do a lot more with very little capital might lead founders to adopt a cost-cutting mindset, focusing more on cost reduction, including not investing in first-class talent, less research and development and product innovation, or too few dollars earmarked for scaling sales and marketing.
• If profitability becomes the primary goal, competitors prioritizing significant R&D investments will outpace the business and ultimately offer more compelling products or services faster.
• Without a cushion of external funding, bootstrapped companies have less room for error, and companies may not even find product market fit. It can also lead to a short-term focus rather than making better long-term decisions.
• Founders will have to wear many different hats without the necessary expertise, which can be very costly in the end.

Growth With External Funding

Types of SaaS Investors

Angel Investors

Angel investors are high-net-worth individuals who provide startup capital, often in exchange for ownership equity. They are a good fit with early-stage SaaS companies because they often have more flexible investment criteria and a willingness to take higher risks. Angel investors provide capital to early-stage SaaS businesses during the pre-seed and seed funding stages. They aim to earn a higher rate of return than they would from more traditional investments.

PROS

• Angel investors often share knowledge, skills, and connections with the companies they're funding to help foster success
• Higher risk tolerance means funding is available before most institutional investors are an option
• If your business fails, you won’t have to pay these types of investors back

CONS

• Increased pressure to succeed accompanies the higher the promised rate of return
• Giving up equity equates to giving away a portion of future earnings and profits tied to the sale of your business
• Equity entitles investors to weigh in on how your business is run 

Pro Tip: Make sure you and your angel investor are on the same page regarding terms of control. If the idea of giving up equity is a concern, you may want to explore bank or business loans instead. 

VC Investors

Venture capital firms provide funding in exchange for equity, typically during early and growth stages. They are particularly interested in scalable and potentially high-return investments, making SaaS businesses attractive because of their recurring revenue models (subscriptions). Venture capitalists (or VCs) invest in startups at various funding stages—from seed to series C+. In exchange for sizeable investment, they often try to assume substantial control.

PROS

• VCs are often easier to track down and investigate than angel investors
• Significant market expertise and connections from a VC can help put you in touch with potential clients, business partners, and additional investors 

CONS

• With large amounts of money at stake, securing venture capital can be challenging
• It may take months to land a meeting and raise funds 
• Because VCs rely on business gains, you must be willing to sell your business at some point

Venture Debt

Venture debt or lending is a type of debt (as opposed to equity) financing for growth-stage, VC-backed startups. It typically involves securing a 3—to 4-year loan from a technology bank or dedicated venture debt fund.

PROS

• Can mitigate equity dilution and help your business build credit

CONS

• Tough for new startups to secure, given the level of revenue required
• Loan and interest payment obligations may inhibit expanding operations
• Your personal assets will be at risk if you fail to repay your loan

Accelerators and Incubators

Both accelerators and incubators are highly selective and competitive business funding and support sources.

Accelerator programs

These programs offer funding, mentorship, and resources over a specific period (usually a few months) in exchange for equity. They are ideal for SaaS startups looking for guidance in the early stages of their development. Accelerator organizations often provide startups with seed funding, mentorship, office space, and supply chain resources in exchange for equity. These three —to six-month programs are essentially fast-paced, high-intensity business development projects.

PROS

• Can help new startups grow quickly
• Include support networks comprised of other startup founders 
• Provide access to investors, financial advisors, and accelerator program alumni
• May help your business stand out through association with graduates who have gone on to establish recognizable brands

CONS

• Pressure to fundraise and scale quickly isn’t ideal for bootstrap startups seeking slower growth over the long term
• Must be willing to exchange equity for short-term program privileges

Incubator programs

Similar to accelerators in terms of what they provide, 1 to 5-year incubator programs focus more on sustainable, rather than fast-paced growth, in a co-working environment where startups can thrive. Incubator programs often operate as nonprofits, which is why they don't always require equity in exchange for support services.   

PROS

• Provide early-stage guidance on building and assessing startup success
• Sharing a co-working space alongside other startup founders can make meeting your business challenges easier
• Access to investors is coupled with sales-pitch and fundraising training 

CONS

• Less access overall to capital and mentoring compared with accelerators
• Highly structured and monitored programs may be difficult for independent startup owners to endure

Government Funding

Most government funding for startups and small businesses comes from grants or tax exemption programs. These can be attractive options for SaaS startups looking to preserve equity.

Government grants have a distinct purpose attached:

• Some are aimed at specific business sectors or teams (like women-owned companies, for example)
• Some are geared toward explicit objectives (like providing hiring funds for SaaS startups)
• Some, like Canada’s IRAP program, fund and support businesses pursuing technology-driven innovation

As for tax exemptions, programs like Canada’s SR&ED (Scientific Research & Experimental Development) allow some SaaS companies to reduce operating costs through investment credits.

PROS

• Available to a wide range of companies
• Sharing equity isn’t required
• Large grant amounts can rival those of VC firms and don’t need to be paid back
• Provide credibility in terms of validating your expertise and securing future funding

CONS

• Application processes for government agencies can be rigorous and highly competitive
• Grants often require a budget and written proposal with no guarantee of acceptance
• Many funds come with spending restrictions and reporting requirements 

Benefits of growth from external funding

• One of the main benefits for founders is that with more significant resources, they can surround themselves with the expertise needed, and companies can attract great talent.
• External funding injects the necessary capital to fund marketing or create a sales-led growth engine, allowing startups to expand rapidly, seize market opportunities and gain a competitive edge.
• Strategic investors often bring valuable industry experience, networks, and resources to the table, guiding start-ups into growth mode acceleration.
• At the same time, companies can focus on continuous product enhancements and innovation.
• Businesses can quickly gain market share and increase brand recognition by prioritizing aggressive expansion and scaling operations. A larger customer base often translates to more revenue in the long run. Additionally, high growth positions the company for potential acquisition opportunities, partnerships, and substantial valuations.

Common pitfalls of growth from external funding

• Raising external capital means giving up a good portion of ownership, which can lead to a loss of control to investors. A typical VC round aims to own 15-20% of the company.
• Raising funds through multiple rounds of financing dilutes the founder’s equity stake, potentially reducing their ultimate financial rewards upon exit.
• You can enter a never-ending fundraising cycle, forever asking, “when should I raise my next round, and how much?” This takes the focus away from running the business and creating real value.
  

When Should a Founder Choose One Path Over the Other?

There is no one-size-fits-all answer to this question. The key things to consider are the type of business you want to build, the speed with which you want to build it, and what you are prepared to give up to get there. Either way, tracking your SaaS business growth is a paramount concern. Reliably tracking growth means using the right metrics.

SaaS Metrics to Track Growth

Sales & Marketing SaaS Metrics

Monthly Recurring Revenue (MRR) Calculator / Annual Recurring Revenue (ARR)

Monthly Recurring Revenue (MRR) is a financial metric that subscription-based businesses use to measure the total revenue they can expect every month from all their subscriptions. Both MRR and ARR measure revenue generated. MRR, however, reflects customer charges recurring on a monthly basis, while ARR is commonly used with annual contracts.  MRR equals total monthly revenue minus non-recurring revenue.

ARR equals total annual revenue minus non-recurring revenue.

Depending on your business model, you may also want to measure monthly recurring revenue from new customers only and/or recurring monthly revenues from upselling SaaS products or services to existing customers.

Average Revenue per User (ARPU) Calculator (or Account (ARPA))

Average Revenue Per User (ARPU) is used by subscription-based or service-oriented businesses to measure the average revenue generated per user or customer over a specific period. ARPU and ARPA measure the average deal size per user or account to show roughly what each is worth.

ARPU equals monthly recurring revenue divided by total monthly users.

One easy way to track ARPU is with data from your accounting software. You can get a consolidated view of your total MRR even when your business uses multiple payment methods. 

Customer Lifetime Value (LTV) Calculator

Customer Lifetime Value (LTV) estimates the total revenue a business can reasonably expect from a single customer throughout its relationship with the company. LTV helps understand how much a business can afford to spend on acquiring customers while still remaining profitable. It factors in the revenue generated from a customer, the duration of the customer-business relationship, and the costs associated with servicing the customer, enabling more strategic marketing and customer relationship investments. Basically, LTV is an estimate of the average gross revenue a customer will generate before ending their subscription.

LTV equals average revenue per user divided by customer churn rate (see below for the formula and more on customer churn rate).

There are many ways to calculate LTV depending on your churn patterns, and whether you want to include non-recurring revenue or measure by customer segment, for example. 

Customer Acquisition Cost (CAC) Calculator

Customer Acquisition Cost (CAC) is the total cost of acquiring a new customer, including all marketing and sales expenses. It helps businesses evaluate the effectiveness of their marketing strategies. More importantly, it helps ensure that the cost of acquiring a customer does not exceed the revenue they generate. CAC is typically calculated by dividing the total costs associated with acquisition by the number of new customers gained during the same period, providing insights into the investment required to expand the customer base. It is the cost to your company of acquiring each new customer over a given period.

CAC equals adding total sales expenses to total marketing expenses, and then divided by the number of new customers.

CAC typically includes all marketing and sales process costs, including salaries. 

LTV to CAC Ratio (LTV:CAC) Calculator

The LTV to CAC ratio compares the Lifetime Value of a customer to the Cost of Acquiring that customer (CAC). Businesses use this ratio to assess the profitability and sustainability of their customer acquisition strategies. Basically, LTV:CAC measures the lifetime value of your customers against the cost of acquiring them to show the return you can expect.

LTV to CAC ratio equals customer lifetime value divided by customer acquisition cost.

Ideally, LTV should be higher than CAC. Most healthy businesses, for example, have a ratio of 3:1 or more. If your ratio is too high (e.g., 5:1), however, you’re likely spending too little on acquisition costs and could be missing out on new business. If your ratio is 1:1 or less, you’re probably spending too much on acquiring customers.

Customer SaaS Metrics

Customer Churn Rate Calculator

Customer churn rate measures the number of customers who cancelled or didn’t renew their subscriptions in a given period. A high churn rate can indicate problems with the product, service, or customer experience, whereas a low churn rate indicates customer loyalty and satisfaction.

Customer churn rate equals the number of customers (beginning) minus the number of customers (end), and that difference is then divided by the number of customers (beginning).

Churn occurs naturally in every business. But since it costs less to retain a customer than to acquire one, lower churn rates are better. Plus, high churn can negatively impact your cash flow and, by extension, your payroll and other operating expenses.

Calculating revenue churn rate by swapping out the Number of Customers for MRR will show you just how much income you’re losing to customer churn.

If customer or MRR churn rates are growing, you should find out why and end monthly churn trends before it’s too late. 

Financial SaaS Metrics

Cash Burn Rate

Cash burn rate quantifies how quickly a company uses up its cash reserves over a specific period, often measured monthly. Startups and growth-stage companies that are not yet profitable but need to manage their cash should keep a close eye on this metric. Cash burn rate helps investors and management understand the company's financial health and sustainability by highlighting how long the company can continue operating with its current cash reserves with existing spending. Basically, the cash burn rate measures how much money you spend on your business in a given period.

Cash burn rate equals the starting cash balance minus the ending cash balance, which is then divided by the number of months in the period of analysis.

Burn rates are important for understanding your cash runway (the amount of time remaining before you burn through your cash reserves) and when you should be gearing up for a new round of funding.

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) Calculator

EBITDA measures a company’s current operating profitability. It focuses on a business' core operations by stripping out expenses related to financing, tax regimes, and accounting decisions, offering a cleaner picture of operational performance and cash flow. EBITDA equals net income plus interest plus taxes plus depreciation and amortization.

Because EBITDA reflects your ability to generate cash flow from operations, it’s a key metric for investors assessing your business's value.

Gross Margin Calculator

Gross margin represents the percentage of total revenue the company retains after direct costs of producing the goods and services it sells. It shows the percentage of revenue exceeding your company’s cost of goods sold (COGS).

The gross margin percentage equals revenue minus the cost of goods sold, and the difference is then divided by revenue.

Ideally, your gross margin will be 80%+ since the higher your margin, the better your company generates revenue from each dollar spent. 

However, if yours is an early-stage company without a mature customer base, support costs for individual clients will probably be higher, and your gross margin will likely be lower.

Compound Annual Growth Rate (CAGR)

CAGR measures the average growth rate of your ARR over a period of years (or the rate at which it would grow if profits were consistent and reinvested each year). 

While not a true measure of return, CAGR smooths out erratic or volatile revenue growth rates so potential investors can more easily compare your growth with similar companies.

Using SaaS Metrics to Grow Your Business

Are you spending too much or too little on marketing and sales (and when is a good time to accelerate spending)? 

The LTV (customer lifetime value) to CAC (customer acquisition costs) ratio is important in evaluating revenue versus the cost of acquiring that revenue.

• If your LTV:CAC is 3:1, for example, you’re getting a 3x return on your cost, which is great. Your business should be willing to spend up to that amount to acquire new customers. 
• If your LTV:CAC is much greater than 3:1, you may be underinvesting in sales and marketing, and it could be time to ramp up your spending in those areas. Before you do, however, you should examine your CAC payback period (the time it takes for a new customer to “pay back” the cost of acquiring them).

Here’s an example of how that works.

If your ARPA (average revenue per account) is $500/month and your CAC is $3000, your CAC payback period would be 6 months (3000/500). This is an important piece of data when placed alongside your LTV because if your LTV were less than 6 months in this scenario, you’d know you weren’t recovering your cost to acquire customers. 

Since it’s best to break down your KPIs (key performance indicators) by lead source, you’ll benefit from working with your controller or sales and marketing leaders to keep track of important metrics like these.

When should you loosen your metaphorical purse strings (and how can you decide where to spend)? 

The best time to increase your spending is when you have a healthy LTV to CAC ratio. Once that’s in place, you should take a close look at your lead sources. Are there areas where your CAC is lower but quality remains high? Increased spending in those areas is likely to reap the biggest rewards.

Here are a couple of simplified scenarios to consider.

• Let’s say you spend $5000 to partner with a third-party publication to put on a webinar, and you get five viable sales opportunities as a result. If you could get 5 equal opportunities from your $1000 Google Ad spend, it would be clear where your money should be spent. 
• On the other hand, if you were toying with the idea of bringing in some business development reps (BDRs), you could expect your CAC to increase dramatically. However, this spending wouldn't likely prove profitable unless you also saw a vast increase in new deals, ARPA, or LTV.

While it’s worth noting that people will always be your most expensive investment, not every spending scenario is going to be straightforward.

Working with your controller to model out various assumptions and potential situations is a good way to understand your numbers and determine where your financial outlay will result in the biggest returns. 

Do your metrics show happy customers?

In most cases, the cost of keeping an existing customer will be lower than the cost of acquiring a new one. And there’s nothing worse than increasing your customer base and smashing your growth sales numbers just to see a spike in your churn. 

If your customer churn rate is already high, or your net promoter score (NPS) is quite low, you may want to pause, dig deep, and get to the source of your poor customer success metrics before hitting the gas on new growth activities.

Why you may need to reduce churn include:

• Your product doesn't meet customer expectations.
  You should look for ways to improve your software to ensure you’re meeting customer needs.
• Your product is too difficult to operate or to learn how to use.
  You might want to simplify your software or make your customer service more efficient with onboarding and client success teams dedicated to troubleshooting.

Using a lost customer survey will help you better understand excessive churn rates and improve retention by finding customer satisfaction.

Remember, as customer satisfaction grows, your clients are more likely to:

• Use your service for a longer period of time,
• Increase their spend,
• Be willing to share their experiences through testimonials, case studies, or videos.  

Whatever your ultimate goal, tracking and analyzing SaaS success metrics is key to growing your business and attracting funders for growth.