Technology

Venture-backed companies must walk the line between fast growth and efficient growth. Even as VCs value high-quality revenue, companies are still held to a minimum growth rate. We think of this threshold as the &Mendoza Line,& a baseball term we&ve adapted to track the minimum growth needed to get access to venture funding. Above this line, startups are generally attractive to investors and even have a good chance for a strong exit.

To achieve sustainable growth, maximizing customer lifetime value is an important component and one that is often underestimated, particularly for SaaS and other subscription-based businesses that generate recurring revenue. It is estimated to cost somewhere between five to 25 times more to acquire a new customer than to keep one you already have. Additionally, Bain research has shown that a five percent increase in retention rates can increase profits by 25 to 95 percent. Even by conservative estimates, retention is a powerful mechanism for growth.

As companies face greater pressure to grow both quickly and responsibly, we are placing more value on customer retention as a barometer for long-term success. And we are seeing smart startups invest in measuring customer happiness in more sophisticated and consistent ways.

In looking at SaaS deals over the past 10 years, we&ve found that a few key metrics and best practices are predictive of healthy business fundamentals. Herethe advice I give startups looking to achieve smart growth through customer retention.

Create a system for measuring customer happiness

First, measurement must be an executive priority. Ensure you have a system in place to measure retention on a quarterly basis (at least) and meet as an executive team to diagnose potential problems. While benchmarking against similar businesses can be helpful, trending your own metrics is the best way to see how your performance is improving or deteriorating.

You&ll need to identify the specific metrics that work best for your business. I recommend looking at how efficiently you&re putting resources toward customer retention, which gives you insight into customer happiness and predicts the profitability of your growth.

The percent of ARR spent on retention tells you how much you&re spending to keep your customers happy; letcall it your Retention Efficiency. You can measure this with a simple calculation:

(Quarterly cost of customer retention) x 4Ending annual recurring revenue (ARR) base

The ability to keep this number low means you&re retaining your customers without burning money. This means you can invest sales resources toward acquiring net new customers rather than replacing revenue from those that have left.

I&d also recommend looking at the Customer Retention Cost (CRC), which measures how much on average you&re spending to retain each customer:

(Quarterly cost of customer retention) x 4Total # of customers in your base

Note, this number may increase over time if you&re moving upmarket — enterprise customers generally require more resources to retain than small to mid-sized companies. If your retention costs are going up, this per-customer number can help you explain why in the context of your go-to-market strategy.

Don&t just measure churn rate

Most startups measure retention in terms of churn rate: dollars that left in a given quarter divided by total ARR. In my experience, churn is a vanity metric and not particularly accurate because it combines customers that are eligible to leave and those that are not (e.g. contracts that were signed in the past month).

Renewal rate is harder to benchmark, but tells you more about your customer happiness and health of the business overall. Gross Renewal Rate shows you the dollars that renewed as a percentage of all dollars that were eligible to be renewed. Calculate this metric (Gross Renewal Rate) by summing all renewed contracts and dividing that total by the dollars that were up for renewal:

Dollars renewedDollars eligible to renew

Net Renewal Rate is a measurement of the growth of your existing customer base, net of any churn, as a percentage of all dollars that were eligible to renew. Include any expansion dollars with your renewed dollars in your calculation to get Net Renewal Rate:

(Dollars renewed + dollars expanded)Dollars eligible to renew

Calculating renewal rate by segment is even more helpful in diagnosing issues of customer dissatisfaction. For instance, if your renewal rates are trending down in the SMB segment but not at the enterprise level, you might identify a problem with product-segment fit. Perhaps the product is too complex for SMB customers, while enterprise customers need those features.

Don&t look to customer success as the fix-all solution

If you&re looking to improve retention, the answer isn&t necessarily to pour resources into your customer success organization. Retention is one area that can be impacted by several functions. Look into the factors that play into customer lifetime value, including:

• Product: Increases in churn or retention costs could signal that you&re drifting from product-market fit or that your product faces increased competitive pressure.
• Marketing and sales: Ask yourself the following: Does your marketing accurately message your value proposition How much is your sales team promising above and beyond what the product can do
• Customer success: Make sure you&re engaging with customers beyond the first three months of their deployment; the next six to nine months are critical for success. Measure customer success throughout the life cycle to ensure users are getting the most out of the product and understand how to use it.

Define a product engagement metric

Understanding how much your customers actually use and depend on your product is the best indicator of happiness. Engaged customers are more likely to renew their contract — which helps to keep your retention numbers steady. They&re also more likely to tell others about their experience with your product, which improves top-line growth.

Experiment with an engagement metric that works for your business: for DocuSign, itthe number of envelopes sent; for JFrog, itthe volume of binaries distributed; for Textio, itthe number of job requisitions written in the platform.

Your ability to keep customers happy without spending a ton of resources speaks to the value you&re delivering. And if you retain customers efficiently, you can spend more on acquiring new customers. In evaluating a portfolio company, I&d much rather see a business with good growth and high-quality customer retention than one with explosive growth but low retention. VCs will hold you to these metrics — make sure you&re accountable for them.

This onefor all the due diligence fiends and competitive landscape mapping mavens out there.

PitchBook, the data and analytics service for private equity and public markets, is rolling out an automated suggestions feature for premium users when they&re doing searches on companies for market intelligence.

The new service is based on machine learning technology that scours PitchBookfinancially focused information and data set. Each word in a description is represented in 300 dimensional space using the global vectors for word representation software lifted from researchers at Google and Stanford, and those vectors are then applied to companies to determine their various relationships.

&The differentiator for why the output of this is going to be high quality. When we look up a company is because we have this proprietary set of financial related news and information,& says Tyler Martinez, the director of software engineering and data science at PitchBook.

During an advanced search, the Suggestions algorithm stores the entire search as a vector ad compares it against a larger word embedding model to find similarities among companies.

Behind the new features is a years-long effort to get more financial data at more scale, according to the company. PitchBook invested in web mining tools and an automated news collection technology that can process 30 billion words.

And the amount of material that PitchBook and its competitors have to track has expanded exponentially since the company was initially launched years ago. There was $28 billion invested into 1,700 deals across the globe in the first quarter of 2018, and the geographic expansion of the private equity business and the explosion of interest in private markets has created a new demand among investors who don&t know what they don&t know, according to PitchBook.

&We built suggestions because itreally hard to keep tabs on what is a big challenge in the market,& says Jenna Bono, a product manager for the company.

Healthcare delivery is an incredibly complex topic, but one that has a simple truth: health security is key to living a good life, and, ultimately, for developing a strong economy. Unfortunately, billions worldwide suffer from lack of access to even the most basic of medical diagnostics and treatments, since doctors often aren&t available and the costs when they are can be exorbitant.

Thatthe world that Thomaz Srougi grew up with in his native Brazil. Brazil has made health security a major priority, offering comprehensive and free medical coverage to every citizen, a right enshrined in its constitution. That simple right though is riven with challenges, from a lack of public funding, to long queues for services, to geographic disparities between urban cores and rural areas.

Those with the means use private medical services, but those costs are far outside the reach of the majority of Brazilinhabitants. The country may have made a commitment in words, but it has in many ways failed to fulfill that commitment with actions.

Srougi wanted to bridge that gap. He had medicine in his DNA: his father was a urologist, and so saw first hand the challenges of the public health system. He spent years as an investment banker and financier, and also netted two masters degrees from the University of Chicago in business and public policy. But he yearned to return to Brazil and work on ameliorating the massive health disparities that he saw in his youth.

His solution would eventually become Dr Consulta. The concept was simple: offer the sort of universal access of the public health system, but with the quality and timeliness of the private health market. Srougi and his team opened their first clinic in 2011 in a São Paulo favela, the irregular slums that spread like an archipelago through Brazilcities.

Since that humble beginning, Dr Consulta has spread rapidly throughout the country, becoming the largest private medical service provider in Brazil, according to the company. It now boasts more than 2,000 doctors, and has served more than a million patients in a country of 208 million. In São Paulo alone, the company has 44 medical centers. That growth has certainly caught the attention of venture capitalists, who have plowed $100 million into the company since its inception.

The company started off with just the brick-and-mortar of clinics. They were bare bones, but functional. A doctor is always on call, and they are located in the hearts of neighborhoods to guarantee accessibility. Patient records are stored digitally, and perhaps most importantly, prices are — relatively — reasonable, with basic procedures costing only around $20. Those savings come from vertical integration — the clinics are one-stop shops for medical treatments, allowing doctors to save time and money on tests and other procedures.

Dr Consultaapp allows patients to get results and feedback faster

Over time, the company has increasingly focused on its digital practice. With its large number of patients, the company is building out its data science practice. With its patient records, Dr Consulta hopes to move beyond just basic app workflow tools to predictively analyzing patient trends and finding new and robust treatments. The hope is that the careful application of machine learning algorithms will allow the company to simultaneously improve its patient outcomes while continuing to drive down costs.

That data could also be valuable for medical researchers. The company is exploring partnerships with universities and others who might be able to use patient data in a confidential way in order to investigate new therapeutics. That data could be particularly valuable since Dr Consultadata could add significant diversity to existing datasets from Western countries.

With the clinics in place, the company is now branching out into new product lines to continue expanding its footprint. One initiative is to offer a sort of rewards card that can be used with retail partners. The idea is to build upon the brand that Dr Consulta has built and create a community of retailers that might offer complementary goods and services. The company is also building out a subscription program that would allow customers to pay a flat monthly fee for unlimited medical care.

In short, Dr Consulta wants to be the hub for health and wellness for each of its patients. The company offers a unique example of how concentrating on underserved markets with services priced effectively can be a massive startup opportunity, while also helping people find the health security they need to build better lives.