Getting your metrics straight to succeed in SaaS

Elad Gil spends a lot of time thinking about what makes SaaS companies work well. We sat down with the angel investor, startup founder, and business author to get his valuable thoughts on what it takes to hit the road to SaaS success in today’s changing world, including how to land on the best company metrics to watch at various growth stages and how to lean on your company story before you’ve got anything to measure.

“I feel like there have been three types of companies through COVID.” 

For Elad Gil, what seems like a simple categorical statement can quickly turn into a complete take on the state of SaaS—years of experience packaged up as a polished take on everything from Clubhouse to the impact of COVID-19 on the future of work. 

With dozens of portfolio companies, Elad doesn’t have much time to beat around the bush, so a conversation with the Silicon Valley veteran might just start with him picking an entry point and letting it fly from topic to topic. In our case, it started with how tech handled the pandemic.

“There are companies that have been dramatically accelerated.” (That’s companies like Zoom or Stripe or Instacart — where Elad says usage for Zoom may have been pulled forward by three to five years.) 

“There are companies that clearly were impacted really negatively by the fact that people suddenly weren’t travelling. Then there are companies that just not much changed except a reduction in workforce.”

Despite a reporterly tone, there’s no shortage of relatability coming from Elad’s way. “I think it was a really tough year to run a company, maybe the toughest one I’ve seen at least in the last 20 years,” he admitted. “And so I think kudos to everyone for surviving the last year-and-a-half or so.”

That level of understanding and far-reaching industry experience was on display throughout our interview, where Elad shared his insights on the SaaS metrics that matter most, the strengths of companies that hit “massive growth” status, and what it means to pick a winner — both the product and, almost more importantly, the founding team.

What are the most important SaaS metrics to track today?

Unsurprisingly, according to Elad, there is no single answer. 

Instead, he recommends looking at different metrics depending on what stage your company is in: adoption and retention in the early days, then revenue growth in the later stage.

“When a company first launches, honestly what you’re looking for is whether it seems like there’s a real product need. Are customers adopting it at some reasonable rate, and then is that growing?”

Elad believes that the “reasonable rate” will depend on your product, pricing, and customer. In some cases it could be a handful of net new customers; for other products, it could be thousands. Just as important is to look at retention: “Does it look like those customers will stick around and do they see some expansion over time or from a revenue or usage perspective?” 

For a later stage company (“or I should say for both mid- to late-stage”) it’s time to start looking at your overall growth rate. “How fast is the thing actually growing off of a revenue basis, what’s the churn both from a dollar and customer perspective, and what does expansion look like?”

For Elad, a company that turns a $1 customer into $1.40 the next year is best-in-class SaaS, bringing together churn reduction, expansion tactics, and customer satisfaction. 

No matter the company stage, Elad said the biggest pitfall he sees for tracking and reporting metrics in SaaS is when a team optimizes for a single metric “without anything that I consider a health metric to offset that.”

“What are health metrics that allow you to know that the thing that you want is actually working and you’re not driving it off the rails?”

One clear example: a SaaS team that focuses heavily on user growth without looking at churn. Go-to-market leaders could add huge numbers to their user base, but without looking at churn they’ll have no idea what long-term health looks like. 

Outside of in-the-weeds growth metrics, Elad looks at a SaaS company’s ability to move upmarket quickly in the future.

“When Slack went public, 40% of their revenue came from 570 customers even though they were known for this bottom-up, product-led growth approach.”

He said small and medium-sized business (SMB) customers are a hard sell, while a small number of enterprise customers can quickly make up a large portion of revenue. The ability to move upmarket from your original customer segment means the ability to accelerate revenue growth faster than customer acquisition would typically allow. 

So, what about profit margin? There’s a trade-off between healthy margins and growth, but which direction is the pendulum swinging?

Elad says split the difference. 

“Early on, the primary thing you want to optimize for is the growth. Later on, if you think that you can invest in growth sufficiently or you need to sell from the business or you don’t want to be dependent on external capital, then you focus on margin.”

He cited Google, of all companies, as a primary example. In its first four of five years, Google didn’t have a great business model. Everything they did led to growth—without much money to follow. They tried syndicating search to Yahoo and AOL, for example, and set up blade servers for an enterprise search solution. 

Eventually, they built out AdWords and AdSense. “That’s the thing that was really explosive for them revenue-wise,” Elad said. “But the only reason it was explosive was because they built out market share.” 

Metrics may be all-important to a growing SaaS company, but they’re not everything. 

In another interview, Elad was asked what three things a startup should achieve before VC firms will start to line up to fund them. He answered:

1. A high margin, rapidly growing business.

2. An exciting market.

3. A great team

But he added a fourth, too: if you don’t have any of the three, you at least need a compelling story. 

Elad double-clicked on that idea: “The easiest thing to fund is a rapidly growing, high-margin, low-churn business. But that’s very rare to have early; it’s almost unheard of. Or you just have a good story.”

With or without a high-margin, rapidly growing business, an early startup can identify and capitalize on their own compelling story. 

“A good story usually means you’re in an interesting market, or just doing something that looks cool or isn’t in a market segment that a lot of people are trying to fund,” he laid out. “And then hopefully it turns into one of these companies that has all those other characteristics, and everybody starts chasing it for funding.”

One timely example jumps out: Clubhouse. 

Elad isn’t just an investor—he funded the company when it was just the two founders. But, for him, the story was clear. 

“Their general premise when we raised money initially was they were just going to do interesting things in audio. And they hadn’t quite built the Clubhouse app yet,” he explained. “It was just two very compelling people that I’d known for a decade who were working in an interesting area.”

But Elad isn’t pretending to be an oracle: “I thought there would be a big consumer wave again, but I never would’ve thought that it would have grown as rapidly as it did. It was just insane, the growth that they’ve had.”

Instead, it’s an example of just how important the story can be. Clubhouse went from having two of the four traits Elad highlighted (a great story and a great team) to a company with a “really strong growth engine.” 

When Elad puts on his entrepreneur hat, he has one piece of advice for startup founders looking for fast growth: Find product-market fit. 

“It sounds very trite, but it’s incredibly hard. You need to find something that customers truly want and need versus something that’s a ‘nice to have’.”

He sees the demarcation—pre-product-market fit and after product-market fit—as clearly as a line in the sand. Before product-market fit “all you’re doing is trying not to fight with your co-founders and trying to find a way to make the damn thing work.”

Bad advice abounds on both sides of the line, he says: “Too much post-product market fit advice was given to pre-product market fit companies. You had a product that nobody cared about and you were told to go build a giant sales team and would burn through a bunch of money and die because you didn’t really have a thing to work.”

According to Elad’s experience, after a founder lands on product-market fit, everything changes.

“Suddenly everybody wants what you’re building and you have a second product you need to focus on: your company.”

Too often, Elad sees founders make mistakes around building out the executive team. “People whose product is clearly working and accelerating are told: ‘Well, you shouldn’t really hire a VP of Sales. You should wait and just figure out sales yourself,’ which is terrible advice for something that’s working.”

In other words: Be ready to scale both your team and your growth quickly after you land on product-market fit.

“People often feel like they have to hire executives only when there’s enough scale to support them — and it’s the other way around,” Elad said. “If you need to hire executives, you can support scale. I view it as this Rubicon that you cross around product-market fit. And once you cross it, you’re just in a very different situation.”

After crossing the parabolic river, it’s time to move from product focus to distribution focus—quickly. 

Elad explains, using Slack and Microsoft Teams as an example: 

“Early on in the life of a company, the main folks you have to worry about from the competitive perspective are other startups, basically doing the same thing. And then you start to break out and your company really starts working.  You have a three to four year period before any incumbent wakes up and notices what you’re doing. That’s your golden moment to lock in distribution and customers. Once you have distribution and customers, the core thing you can do is cross sell into them and expand accounts.”

It’s the time to move quickly, before incumbents have the chance to cross-sell a product that’s 50% as good with three- or four-times the distribution efficiency.

“Slack built an amazing product and service loved by millions. But it’s possible Slack may have given Microsoft time to build Teams. And then Teams just got pushed out to all their enterprise clients, and they now have a bigger footprint. I don’t have any insights into Slack, but that may be one of the reasons they ended up selling to Salesforce.”

Building out distribution as an asset gives you two benefits, in Elad’s view: It allows you to buy or build other products to cross-sell, and it’s a good defense mechanism as you lock in your channel so nobody can swoop into your business segment.

Investing early in startups has given Elad Gil outsized success—but he doesn’t pretend it’s easy, even for him. 

It takes a keen eye. But, more than that, it takes a huge amount of patience. 

“I think fundamentally the hardest part about early stage investing is identifying the things that are going to be massive,” Elad said. “And it takes 10 years for one of these things to substantiate, right? I invested in Airbnb in 2010 and Stripe right around there. It takes a long time for these things to get as large as they do.”

His secret? “Squint and hope that you’re seeing the future properly.” 

Beyond that, it’s about identifying an entire market early on. “Good startup markets are non-obvious. If it was obvious, everybody would be doing it and there wouldn’t be an opportunity.” 

If there’s a proxy for finding that sure thing, it’s picking a winning team.

But how do you evaluate the quality of a founding team, especially in the early stages when numbers aren’t compelling yet?

Elad looks at four things:

Founder-market fit. Pulled from another early stage investor, Chris Dixon, the concept focuses on ensuring that it’s the right person in the right market. “What are they actually building, and are they the right person to build that thing? Somebody who’s going to build a data infrastructure company may be very different from somebody building a consumer app — both in terms of what they’re excited about and what they’re capable of doing.”

Rapid learning. “The nice thing about Silicon Valley is you can show up and not know anything — over time, you do very well if you can learn quickly and you’re adaptable.” Elad has funded founders in their 20s, 30s, 40s and 50s — the one commonality he looks for is how rapidly someone can expand their thinking and how they go about it. Are they proactive about talking to different people? Who do they seek out for input?

Good old ethics. “I look at the basics: are they ethical? Are they good people?”

Playing strengths. Elad works with founding teams for a specific reason: “Startups are like a team sport. It’s not a solo thing.” For Elad, it’s key that any founding team has two different people with two different strengths: a builder and a salesperson. “And by salesperson, it doesn’t necessarily mean selling customers. Can you convince employees to join you when there’s nothing? Can you convince people to fund you when there’s nothing? Can you convince a customer to do a POC when there’s nothing?”

With a winning team in place, that “nothing” quickly turns into something. 

Pulling back up to the 30k foot view, Elad sees that tech is growing at a more rapid pace across the board as VCs pour more money into tech and companies explore remote work options. 

“There’s been this odd thing where a lot of money has rushed into tech. And that’s driven a lot of valuations up for companies across the technology sector, both public and private,” said Elad.

“I remember two years ago when to say that something was a $100 billion company was a really big deal. And then you suddenly have Airbnb, and probably Coinbase, Stripe, and Snap. All these companies are worth $50 billion to $100 billion in a way that I don’t think was anticipated.”

Add to that the interesting question of how companies will (or won’t) adapt to remote work, and you have a recipe for big growth in the future. 

“Before COVID, despite all the attention remote work was getting, there’s only three companies I can think of that hit any size as a remote-only company: Zapier, Automattic and GitLab. Now, is there any actual change? Is the tooling better? Are people used to it?”

Those are the questions Elad looks forward to answering next.

Elad Gil is an investor or advisor to private companies such as AirBnB, Airtable, Coinbase, Flexport, Gusto, Instacart, Opendoor, Optimizely, PagerDuty, Pinterest, Square, Stripe, Wish. In addition to founding and operating tech companies of his own (MixerLabs, Color Genomics), he’s also managed product teams and acquisitions at Google and served as a VP at Twitter.