A very important consideration when projecting SaaS revenue is churn. Your customer churn rate is inversely related to your retention rate, which also makes it inversely related to your ability to sustainably grow revenue.

Conclusion

The hypothetical dynamic revenue build I’ve outlined here is an intentionally overly simplistic example so as not to lose focus from the contention of the post.

A more in-depth revenue build should include, at a minimum, the monthly revenue per SaaS contract, which would allow you to also project SaaS customers as well as growth in the per contract revenue over time. Growth in the contract revenue over time could be thought of as another influence on revenue.

Let’s reflect on what we have done here. At a minimum, this process has forced the management team of the company to think about the operations of their business in a holistic manner. The process connects the dots between the operations of the business and its financial success.

It may well be the case that the projected revenue achieved under this method is very similar to that projected by the company during its Due Diligence phase. However, this isn’t the fundamental value-add of financial modeling for early stage companies. What we have achieved here is the identification of a number of factors that influence this company’s revenue.

Whereas during Due Diligence your revenue depends on what you already know (deals in the pipeline), this dynamic approach allows you to truly speculate about where your business could go.

Assuming you build a more complicated revenue model than above, you’d theoretically have sight into every key metric that will allow your business to succeed from a revenue standpoint and have clarity on the metrics you should be tracking.

These are all measurable metrics, and what’s more, with the dynamic nature of the assumptions in this model, we can quantifiably see the impact of improvements or deterioration in each metric. If an investor asks you what the impact of hiring another three salespeople is, you can tell them instantly.

At ffVC, we consider ourselves active investors and offer hands-on support to help our founders succeed. Consequently, the reason we mandate that our portfolio companies share their KPIs with us every quarter is so that we can help where help is needed. With a portfolio of 90+ companies all tracking a mixture of general and idiosyncratic metrics, we have great insight into what successful metrics look like at all stages of a business. The role of a passive investor is to contribute capital and watch you grow; the role of an active investor is to contribute capital and help you grow.