Metric Stack - Capital Efficiency Metrics and more!
Metric Stack - Capital Efficiency Metrics and more!
Second edition: balancing growth with healthy spending habits
Welcome back to Metric Stack. I'm your personal metric assistant, Priyaanka Arora, Content Researcher & Writer at Klipfolio. Thank you for your overwhelming response and support that made launching this newsletter a pleasure! This second edition continues our exploration of the hottest SaaS metrics that experts rely on.
How do you measure hope?
Although hard to quantify, hope plays a key role in the strategies of every business on the planet. New businesses are born from the hope that your idea will take off, that your go-to-market plan will succeed, and that your new hires will be the spark that builds a culture of prosperity and hard-work.
One concrete way to measure hope is through growth. A growth mindset works by turning hope into skills. To exhibit a growth mindset, you must convert an idea into an actionable plan and see failure as a learning opportunity.
At the same time, growth looks different for everyone. If you’re too focused on growth and the hope that it brings, it can be easy to overlook how you got there. If you’re burning $10M to earn $5M, it may be time to re-evaluate your growth strategy.
Enter Bessemer Efficiency Score
Bessemer Efficiency Score measures the benefits of a company’s current spending habits. By tracking net new Annual Recurring Revenue (ARR) against net burn as a multiple for incremental dollars added for each dollar spent, you sum up capital efficiency in a tidy, easy-to-benchmark number. Here’s the formula:
Bessemer Efficiency Score = Net New ARR / Net Burn
What’s a good Bessemer Efficiency Score benchmark?
Bessemer Venture Partners, who coined this metric in 2017, suggest that the Bessemer Efficiency Score for a company making less than $30M ARR should be greater than 1x, with the most efficient companies scoring greater than 1.5x.
Shopify, for example, has a Bessemer Efficiency Score of 6x, meaning they earn six times as much as they burn. Take another example, say you’re making $10M net new ARR and have a $7M net burn. Divide your ARR by your burn to get a Bessemer Efficiency Score of 1.4x, which is good but there is still room for improvement.
Why you should care about capital efficiency
Growth at all costs leads to funding, so why should it matter how exactly you grow? Well, funding isn't a means to patch wounds left by a relentless grow-at-any-cost mindset. Burning more cash isn't the answer to gaps caused by excessive spending.
You do need to spend to grow and investors do care primarily about growth metrics, but you still need to temper unbounded hope with a pinch of realism.
Realism pairs well with resiliency.
If bad times hit (*cough, cough* Covid-19), you want to be able to stay afloat and bounce back on the other side. This means you don’t need to rely as much on external funding either. In other words, you’re efficient; a quality that gets overlooked for the glamour of “up, up, up” growth justified by any means.
The aim is to use efficiency metrics such as the Bessemer Efficiency Score - or its converse, the Burn Multiple, to cultivate prudent spending habits and ultimately grow through means that are healthy for your business.
Sneak preview: I’ll talk about one of the most fun metrics I’ve come across, the Hype Factor, in the next edition. But it’s all the same idea: growth is much more valuable when coupled with wise spending. So keep that growth-mindset, but be smart about it by tracking your efficiency metrics.
What’s new on MetricHQ
Have you checked out MetricHQ yet? You should, it’s a huge collection of metrics curated by industry experts in SaaS, Marketing, Finance, Sales, and more. Last week, we collaborated with Differly to publish a set of four customer loyalty metrics: Transaction Recency, Average Purchase Frequency, Customer Retention Rate, and Spend Lift. Give them a read if key loyalty metrics interest you.
Stay tuned for the next edition of Metric Stack Newsletter to get the latest scoop on all things metrics! Send feedback, comments, questions here: parora@klipfolio.com