Net Dollar Retention Rate - with Kris Beible - Software Equity Group

**Ray Rike** (0:00)
Hello, I'm Ray Reich, CEO of RevUp Squared and the host of the Metrics that Measure Up podcast. We talked to a wide variety of B2B SaaS industry thought leaders, executives, and people just like you to discuss how they use metrics, key performance indicators, and benchmarks to enable better data-driven, metrics-informed decisions that accelerate revenue performance and increase enterprise value. If you'd like to gain insights into how your metrics measure up to industry benchmarks, you can learn more at revopsquared.com. Now, on to today's show.
Welcome to today's episode of the Metrics It Measure Up podcast. Today, we are joined by Kris Beible, Vice President at Software Equity Group. I've been following Kris and his colleagues at the Software Equity Group for several years, as they publish very insightful SaaS industry metrics, enterprise valuation and reports, both inside of their monthly SaaS index updates and their annual software industry report. In today's episode, we will be covering three main topics. One, SaaS KPIs are most critical in a SaaS company from both a M&A perspective and a public market perspective. The net dollar retention KPI and why it's so important to B2B SaaS companies. And when do KPIs become an imperative in a SaaS company's evolution? Kris, welcome to the show and please take a moment to introduce yourself and what led you to being a guest on the Metrics That Measure Up podcast.

**Kris Beible** (1:37)
Well, thank you, Ray. I appreciate the introduction and happy to be here and looking forward to a good conversation, dialogue and digging into some of these sort of key metrics today and how they impact the value and valuations for software and SaaS businesses. I've been with SCG for a little over 15 years, have played a lot of different roles here at Software Equity Group, both on the deal and execution side and also on the business development side and overseeing a lot of the research, which I know you followed for some time. But really since inception have been solely focused on providing information and guidance to software and SaaS, management teams and entrepreneurs, not only information that can help them think through timing for an exit either in the near term or long term, but also obviously when the time does come, our core business is advising software and SaaS companies, typically on the smaller end of the spectrum, 5, 10, 15, 25 million AR businesses through a control transaction, which used to be just strategic buyers, but in today's market, there's a lot of private equity investors out there. And I know the topic of our conversation today is a lot around metrics. And certainly the financial folks are really laser focused on how businesses are performing from a financial standpoint. So excited to participate and provide any insights that you think would be helpful to your audience.

**Ray Rike** (3:02)
Chris, thank you so much for joining us. And one of the things we'll talk about later on, I think, is how a $5 million AR company is the new $20 million AR company based upon private equity and how they've impacted the entire mergers and acquisitions landscape. But let's first talk about the high priority KPIs that you see over your hundreds of transactions. At RevLop Squared, we had to create the first five, because our KPI framework, because so many organizations and entrepreneurs and founders really wanted to know what are the most important KPIs that I need to capture, calculate and use to make better data decision, metrics and form decisions, kind of data driven decisions. We look at these five, so I'd love to get your perspective on the five that you kind of see as the most important when you're doing your M&A advisory work. We look at number one, the rule 40, which really measures growth and free cash flow. We look at gross dollar and net dollar retention as critical enterprise value driving metrics, customer lifetime value to cap the ratio. We also, from an operating perspective, really like our customers to look at cap ratio, and then that amazing cash flow generator gross margin. Those that are five that we call our first five, let me ask you, what are some of the top KPIs you recommend to your portfolio companies?

**Kris Beible** (4:21)
Yeah. I think generally speaking, I think are sort of some of the top metrics or KPIs that we track generally overlap with, I think, some of your focuses. So I would sort of answer it this way. It's changed a little bit over the past couple of years. So growth sort of trumped a lot of other metrics in prior years. So two, three years ago, we would say growth, revenue growth is the highest corollary to EV to revenue or EV to ARR type multiples. Over the past two years, maybe folks have started to maybe see, not that anyone was forecasting what occurred in 2020, but that maybe a recession was around the event, were in the seventh inning or something like that, of expansionary period. And people have gotten a little bit more risk averse. Retention has really come into the forefront. And so I think today retention, both from a gross and from a net dollar standpoint, is probably the number one metric that investors and buyers are honing in on today. Growth is still certainly important, and I'd probably rank it as maybe number two in terms of one of the first couple questions that we would typically get from buyers and investors when we're getting on the phone with them to talk through an SCG client. And then some of the other ones like LCB to cap ratio are certainly important. And I would say gross margin, clearly. Gross margin certainly can be a very key determinant of the future scalability of the business and whether you're truly viewed as a SaaS business or maybe more of a services organization.