When public market investors aren’t busy going long or short on GameStop, they are bidding up cloud stocks to all-time highs. There has never been a better time to be a public software company.
But in any frothy environment, you can find a mix of cream rising to the top—and dirt along for the ride. How do you identify the signal from the noise in cloud stocks?
I’ve met nearly every private and public cloud company of any material size and put together this list of questions based upon those conversations.
1. What Is Your Net Dollar Retention Rate?
A good starting point is understanding Net Dollar Retention. Many have observed that NDR is the most important metric in the long-term health of a SaaS company. Indeed, most savvy investors are already focused on NDR. Software Equity Group wrote an insightful blog post about the correlation between NDR and price to sales multiple.
While NDR is naturally range-bound for a given business model (e.g., consumption-based businesses have higher NDRs), understanding how a company’s NDR is trending within a relevant peer group gives you insight into the underlying dynamics of the business. It’s worth making sure you understand the benchmarks around NDR across the SaaS world.
2. How Do You Calculate NDR?
Speaking of dynamics, one challenge around NDR is that every company has a slightly different calculation for the metric. It’s important to dig into the metric and understand what drives it. Do they calculate it using a rolling moving average (e.g., 4 quarters)? Do they exclude specific customer segments (e.g., SMB)? How is NDR affected by consumption or other pricing models?
Alex Clayton from Meritech published a useful list of definitions for some of the top cloud stocks.
3. Who Owns NDR In the Company?
In a pre-SaaS business, ownership in an executive team was pretty straightforward. Marketing generates leaders. Sales closes bookings. And so on.
But given the new importance of Net Dollar Retention, the question is who drives it in the company? Investors should evaluate the quality of the team working on NDR. World-class organizations assign an executive to own Customer Success, often referred to as the Chief Customer Officer. Increasingly, the CCO is becoming the main executive sponsor for maximizing NDR.
4. What Is Your Process for Ensuring NDR?
Over the years, companies have built world-class business processes for mission-critical areas of companies. They have sales processes, marketing processes, billing processes. Yet, there is no well-defined process for most businesses to get customers to value and get them to stay and expand. The advent of Customer Success is all about changing this. Does the company have a structured approach to Customer Success? Or do they still approach it reactively as Customer Support?
5. What Are The Early Warnings for Risk and Opportunity?
Finally, how does the company use data to understand, predict and manage future NDR? Which customers are at risk for churn due to lack of usage, customer sentiment, or other issues? Which ones are ready to grow or buy new products? The best cloud businesses have instrumented their operation to run NDR like a science.
Now that you have an understanding of what investors are seeking as they evaluate SaaS companies, do you think your company has the cream to rise to the top? Gainsight’s suite of products can help you pull the right levers to improve your NDR from your product strategy to identifying expansion opportunities. Take a product tour of Gainsight solutions for NDR and join us every month on Linkedin Live where I will be joined with experts in this space, starting with Dave Kellogg on March 18.
