based on the presentation from Edward Keelan, Investment Director, Octopus Ventures at our webinar on 14th April 2021
What is customer success and how does it affect a Fund’s decision whether to invest in your business or not?
We dove into the topic of Customer Success at our recent event with Adam Hale, Chairman of the Scaleup Institute, among other prominent positions and Edward Keelan, Investment Director at Octopus Ventures, who shared his insights on the role it plays in securing Series A growth capital from a Fund.
This article summarises the key points, from a Fund’s perspective.
| Read this piece on the 12 points that set apart ‘just renewals’ from Customer Success
Why is Customer Success important to investors?
Besides Annual Recurring Revenue (ARR), Retention Rates are one of the most important metrics Funds look at when reviewing a pitch. Growth cannot happen without strong retention, and you can’t get strong retention without extremely good customer success, which turns your customers into active advocates.
Statistics show that it costs 6x more to acquire a new customer than it takes to retain one, so it’s not only an essential growth tactic but a financial no-brainer to put more of your resources towards satisfying your hard-earned customers.
Competition is becoming fiercer every day, and the big winners are those who know their customers best, and a customer that becomes an advocate will be your best salesman – sadly, the opposite is true, too. So, listen to your customers, gain their insights and feedback, and you will be a step ahead of your competition while also building a more meaningful relationship with your clients.
What do many companies do wrong?
There is a lot of focus on growth – rightfully so, after all, this is the ultimate measure of success. However, growth cannot disguise the lack of customer success. It is easy to get ahead of yourself before understanding your customers and what they really want, or what they are willing to pay for.
It is also common that companies focus heavily on bookings when evaluating their data. A five-year contract with a client can look great in your numbers, but Funds will be more interested in your ARR and retention rates than the balance of current upfront payments. If you believe that you have an incredible product, you should be striving for the opportunity to upsell that customer every year and increase the revenue on that contract.
Failure to measure and monitor engagement is another pitfall of many businesses. The standard follow-up of “how are you finding our product” every 6 months is not enough. You need a feedback loop telling you every detail from how your customers are using your product to what elements they are using and where is the product falling short.
What is retention anyway?
Stating your retention rate at 95% means nothing, and that is because it can be calculated in many different ways, all of which can give you a different number. 3 quick ways to calculate it are Logo, Gross Revenue and Net Revenue Retention.
Logo Retention is just as it sounds, each ‘logo’ counts the same – no matter how big or small the contract is. Gross Revenue Retention is the percentage of recurring revenue retained from existing customers in a given contract year, not counting any upsells – this is a good statistic for taking out the noise of any sudden increase. Lastly, Net Revenue Retention accounts for both upsells and downgrades which makes it favoured by many.
Neither method is superior to the others and as a general rule, it is always best to illustrate your measurements through examples of sustainable retention. An investor is likely to calculate retention in more than one way so you will be best positioned if you prepare accordingly.
Why does it matter for valuations?
According to SaaS Capital, a 1% increase in revenue retention of a SAS company increases the valuation by 12% in five years. This goes to prove that increasing retention even just by a few customers will have a significant impact on your growth potential, especially if you also increase the revenue per customer. This is where Customer Success plays a huge role and can make all the difference to your business – and fundraising.
3 more takeaways
If you don’t know your KPIs, then stop what you’re doing and make it a priority. Your pitch deck should be informed by your business model and financial analysis, so you want to be crystal clear on these.
If your retention is not where it should be, you should not be looking at growing further but shift your focus to fixing that first. Customer success does not belong to sales, so the answer to increasing retention is not adding more salespeople. A SaaS business with less than 90% retention rates will set off alarm bells at a Fund and can be the reason why you fail at securing the sought-after growth fund.
We at ScaleUp Group specialise in these crucial preparation processes and can significantly reduce the time (wasted) and disruption to your business while increasing your chances at raising capital. You wouldn’t climb a mountain alone, and you don’t have to go on this journey alone either – we are proud to present a 100% success rate in Series A fundraising for our Clients.
Want to know more? Get in touch.