Diving deep into B2B SaaS metrics with Tien Anh Nguyen, former CFO at UserTesting

Episode Description

In this episode of Diving Deep, Subscript's CEO, Sidharth, has an engaging conversation with Tien Anh Nguyen, the former CFO and Chief Business Officer of UserTesting.

Sidharth and Tien Anh go deep into B2B SaaS metrics as they discuss:

The subscription metrics a Series B or C company should absolutely obsess over
Advice for executive teams presenting subscription metrics to VCs
The #1 pain point for all CFOs (let's see if you agree)
And more!

Show Notes

Follow Sidharth: https://www.linkedin.com/in/sidharthkakkar/

Follow Tien Anh: https://www.linkedin.com/in/tienanh/

Follow Subscript: https://www.linkedin.com/company/subscript/

About Diving Deep with Subscript

Diving Deep with Subscript is a video series where we dive deep and explore SaaS metrics with leading investors, CEOs, and finance leaders.

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Episode Transcript

Sidharth Kakkar
You've seen it all. You've seen so much, you've spent a long time at OpenView Partners. You then switched over to UserTesting fairly early in the journey as a Series C company and saw it through D, E, F, IPO, all of that. And you're a Chief Business Officer when you went public. It's pretty amazing with all that context. A question for you is what are sort of the metrics that drive and fuel all this sort of growth, especially for Series B or Series C companies? Like, what are the things that you think of that make it possible?

Tien Anh Nguyen
Yeah, well, thanks Sidharth for the kind words, I feel like I've been very fortunate to be in this organization, to play these roles and contribute my part. But I feel like what is personally great for me was to be in the, I would say the front seat of all this happening. First as the VC back in the day when SaaS was something pretty new, when I started out in my career and we were still trying to formalize and standardize these metrics, some of the companies that I met for the first time were really trying to define themselves and trying to explain to investor why these metrics actually matter for them versus some of the older type of metrics that people used to see. And then when I joined UserTesting, it's also at the point where the company was actually going through a bit of a transition from very much of a bottom up, very SMB, or almost B2C oriented type of business where you don't really have a real subscription business going on. You have a lot of these one off usage, pay as you go type of usage. And so I was also part of truly trying to formalize the metrics and trying to understand what metrics really matter for us.

Tien Anh Nguyen
And that's where I got to see the importance of the metrics from the other side of the table, from the operator perspective. For me, when looking back at this time and this experience, I think the answer around what are the key metrics that fuel this growth that people should be looking at at that stage? It's not going to be really revolutionary because it has become the industry standard after the last 15 years. But I think let's just kind of dive into it a bit and talk a bit about my perspective on it. Number one is the annual recurring revenue, or monthly recurring revenue, depending on what the business is like, whether it's mostly based on annual revenue contract or monthly recurring contract, and the growth rate of that number. That number is of course, the most commonly used, the most important metrics when it comes to measuring the growth, the size, the scale, and really the overall performance of the subscription business, because people have really coalesce around this concept. But what are the other metrics that help measure how the drivers, the factors that contribute to that ARR growth rate is performing because you don't get an ARR by just going out there and say, my ARR is going to double next year and hopefully it will double.

Tien Anh Nguyen
There are a lot of things that get into that, right? A lot of it is operational, a lot of it is also strategic. But the numbers that I think are the next level of metrics that contribute to how this ARR number can grow. Number one, retention rates. Both gross retention rate is a measure of all the customer or the dollar in recurring revenue, recurring contract you have from the prior year. How much of that you retain, excluding upsell and expansion, that's gross retention. And net retention is the same kind of ratio, but including upsell and expansion within the same contract, the same accounts. Those are key things because those really help people model, help people understand going forward, what is your business going to be like with this internal organic motion of retaining a customer, renewing them and growing them? And then the second set of numbers that I actually find out that I find very interesting and important as well, although it is actually very simple. It's just the number of subscription customer and how fast this number is growing on an annual or quarterly basis. And to me, from a CFO perspective, number one, I want to diversify my revenue base.

Tien Anh Nguyen
I don't really want to have just ten customers that account for all of my revenue at Series B or C. Of course, when I'm early on, that's all I have and I'm going to try to add one more customer every day. But once I get to series B or C, I'd like to have a broader base of customer. I have more customers because that means if a couple of those customers go out of business for whatever reason that is outside of my control, I don't lose a ton of revenue. My gross retention doesn't get affected hugely. So I like to diversify my revenue base as the company grows. And the key measure of that is just the number of customer. Number of customer also shows, especially how well my team is actually acquiring new customer. Although people can say, well, having $1 million customer is the same as having 10 $100,000 customer or 100 $10,000 customer. The thing of that is with 100 $10,000 customers, some of them might grow into the next $1 million customer. But if you have just that $1 million customer, you're going to have to grow that customer to 2 million, 3 million, which is actually much harder.

Tien Anh Nguyen
So again, it actually makes it easier if you have more customers to grow. And that's just one strategy. One heuristic that I have. It might not apply in all cases. There are companies like for example, Viva that has three or 400 customers, but hundreds of millions of dollars. They are great, but I'm not that great. So I'm focused on getting more customer and I think it works in a slightly more percentage of the time. And then what drives the number of customer and growth number of customer well is actually the sales opportunity conversion rate. And I highlighted this because it's so important for CFO or Chief Business Officers to really be close to the sales organization, to be close to the go to market organization and understand that the sales team really lives and dies by this win rate. If they don't have good win rate and if the whole company is not going to try to help them to improve this win rate, the company is really not going anywhere because we are going to spend a lot of cycle, a lot of sales and marketing resources going after a lot of opportunities but not closing enough deals and not getting enough new customers.

Tien Anh Nguyen
And again, that drives that cascade down into not getting good ARR growth rate. And then besides these really hardcore numbers that are well defined and can be calculated really mostly straight out from your CRM or your ERP, I also like to really look at some measure of customer satisfaction because at this point in time, as a Series B or C, again, people have enough customer that they should be able to get a pretty significant, significant measure of customer happiness or satisfaction or NPS, however people measure it. There's so many different ways to measure that now, but have the number track it and track it on a regular basis so that there's a conversation piece, so that there's a discussion around is our customer not retaining because they are not happy in some way or not? And is that corroborated by the fact that the NPS score is not improving or declining, for example? So particularly those are the things again, they are very much customer oriented, they're very much growth oriented and again, to me that's because as a Series B, C or even Series D or E company like at UserTesting, we really need to focus on that and prioritize that.

Tien Anh Nguyen
That helps solve a lot of problem. Of course there are the operational math metrics that we can talk about later, but in terms of focusing on growth and obsessing on growth, those are the things that I tend to look at.

Sidharth Kakkar
That's super cool. There's so many awesome things in there. A couple of threads that I just want to see if we can pull on it on. When we talk about smaller customers and having a lot of them versus bigger customers and fewer of them, one thing that I think tends to be a rule in SaaS, is smaller customers tend to churn a little bit more. And I'm curious how you think about that. The $10,000 customer is just harder to retain and the $1,000 customer is very hard to retain.

Tien Anh Nguyen
Yeah, it is true. And there is some level of correlation between the size of the contract and the size of the customer themselves, especially when you get to like the $1,000 or $5,000 contract size. It's very likely that customer who can pay that are willing to do that tend to be smaller compared customer. And those customers do have a higher potential natural attrition rate due to going out of business, running out of funding and so on and so forth. But at the same time though, they are still an important part of the business and the company eventually had to figure out, there are some customers that start small, as in terms of small contract size, but they're actually big customer that they just happen to have a small team. And those are the ones that I mentioned where they can actually Grow into a million dollar customer. Of course, there's a whole segment of SMB or super small SMB customers that are harder to retain. But there are a few examples of companies that have great retention. Atlassian, for example, I have huge retention or DataDog for example, one of the companies that I was part of the Investing Team At OpenView, they have customers from The tiniest company to the largest company, and people don't leave DataDog because they have good product.

Tien Anh Nguyen
So again, back to the NPS Score, right? If you have really good product, you solve a lot of the retention questions, regardless of the customer size.

Sidharth Kakkar
If you can build a business as good as DataDog.

Tien Anh Nguyen
You can talk all day long about that.

Sidharth Kakkar
The other question that came up that I wanted to ask you, and that is, a lot of companies we find ourselves when we work with companies, there's a bunch of them that are doing this transition from one off transactional revenue to subscription revenue. You've actually done it, you've been through the thing. Any Advice for folks who are making that transition and are trying to figure out how to think about It?

Tien Anh Nguyen
Yeah, I think it's very hard, and I think nowadays is more complicated because the new Usage Based Pricing model has created another path to go where instead of one off, you buy the capacity ahead of time and you let people use it still kind of like a subscription, but it's more variable and you don't try to negotiate a flat fee upfront. For example, I would say the transition requires really rethinking the business model in that, hey, we used to really go after the quick turnaround business, the quick win business, where people are thinking of one off purchase, and usually that is, faster sales cycle, smaller deal size. But especially a Go to Market Team can get a lot of those deals very quickly. Well, now they have to be thinking about a longer term plan. How do I get a customer that will be using this for over a year at the minimum? Regardless of whether they're signing a monthly contract or an annual contract, in the end, they still need to be using the platform nine months from now or ten months from now. So that means the team has to be motivated slightly differently.

Tien Anh Nguyen
The team has to always be looking at customer with that length at least even further. And the management team, executives like yourself and myself have to really inspire the team to go through that transition and say that that actually helps, is much better for the customer to be committed to commit to a subscription and actually have access to the platform as they want it for the whole year. Instead of doing this, I use it and I don't use it anymore and I don't know when I'm going to use it. It's not going to help them as much especially for software, software is all about having a technology solution that become part of your workflow, become part of your day to day. That is really when the software can help and make an impact. So it's not easy, but it requires really a change in mindset for the whole organization.

Sidharth Kakkar
I really like that point that just predictability and reliability is just a thing that everyone values. So it's always a good thing to have. As companies start thinking about going public. I've never been in that type of situation. So I'm so curious. How does the way you look at the business, or especially some of the numbers that you look at and the metrics you look at the business, how does that have to transform as you're getting ready to do that?

Tien Anh Nguyen
Yeah, and I would say from my experience, this change really start at the later stage, not even as late as trying to go public, but really at a later stage as the company sort of narrow exit option towards whether it's an IPO or strategic exit and the company gets to a certain size, the investor or even the board member will be starting to ask how about the efficiency of your operation? You have proven your growth rate, you have proven that you can do it, but most likely you have been doing that by using up the capital that you have raised at a very rapid rate. So what are the levers, what are the sign, the proof points to show that you are able to really do that at scale, at the same or even higher efficiency rate. And that means a lot of the metrics that people will be talking about will be around efficiency and profitability. So for example, just around acquisition, you have cost of customer acquisition, magic number, CAC ratio or payback period. Right. All these things are just kind of composite way, sometimes really sophisticated formula to help boil out the fact that in order to get a new customer, how much you have to spend in sales and marketing costs and how much that affect your cash flow or your profitability, your operating margins, for example.

Tien Anh Nguyen
And then they also want to start to ask about other pieces of the business. The general and administrative, R&D, overhead, and that's when they're asking about operating margins, gross margins, so suddenly all these more traditional financial metrics start to become important. And I think it's for the right thing because what I can also say is that those metrics are really hard to change quickly because they involve the whole organization. It's not just, well, I'm getting five more new customers and therefore my CAC is going to be reduced, is everybody involved in it? And when it comes to operating margin is the whole organization. So it's good to start actually tracking those, thinking about those relatively early on, even if you're not obsessed with those like what we talked about previously, but because sooner or later people will ask and at that point you really want to understand what are the trends and what are the levers that I can pull to really improve these metrics at some point.

Sidharth Kakkar
That's such a good point. One thing that I'm curious about is CFOs often report these metrics but don't directly control the levers that move these metrics, right? Like CFOs by themselves cannot move CAC, for example, or cannot move burn rate and stuff like that. So what are the more behavioral parts of that job you're really good at in order to actually make the business sort of get to the right point?

Tien Anh Nguyen
I would say it's hard to know how each CFO would do that. That's the holy grail of the CFO, especially VC back CFO if you can help somehow influence or help direct that trend and it really depends on the relationship of the executive team or the management team. Personally, I was very fortunate at UserTesting to have been able to work with really great colleagues who also aligned, who really understood really well the importance of these metrics and who are aligned with me and with the company as a whole as to how we are going to drive towards this. So my role personally was mostly around sharing my perspective, pulling together information from different parts of the organization that people in one team might not understand how they might be impacting the CAC or how they might be affecting the operating margins and affecting other teams, for example. So I tried to pull that together. I tried to have a pretty regular cadence where I explained that to my colleagues, explain the trends and the direction of where these metrics are going and how they are interconnected to my colleagues and share with them ideas about how those can be influenced and updated and work closely with them.

Tien Anh Nguyen
If they raise their hand and say I actually want to do this, I want to help move this into this direction, what other ways I can do it, then I would sit down and brainstorm with them. So that's my approach. Some other people would have approached that are very effective too. And some other people just happen to have a really great business model and it just come with great margins. Good for them. But for DataDog, I think it's all about. From my perspective, it's all about having a hugely important product. A product is so sticky in the right position, right. Of course they have to sell it, but it drives so much of that success. But there are many ways to get to it and working together with colleagues is also great to get to it as well.

Sidharth Kakkar
It's funny, this is my second company and I think that sort of lesson has been drilled into me repeatedly that the level of product market fit that you have can drive the whole thing all the way, all the way to that. You see this with certain companies where it's just like so impressive.

Tien Anh Nguyen
Yeah, but I'm sure there's still a lot of operational things that have to work out on the back end, right. We just don't see that. And I think I would say the great product market fit doesn't take away from all the operational heavy lifting that team have to do to maintain that and actually scale it up over time as well.

Sidharth Kakkar
That's true, but it can be a little easier. You just never have to worry about CAC.

Sidharth Kakkar
When moving to a little bit earlier stage when companies are raising rounds where metrics really matter. Series B, C, Ds, do you have any advice for executive teams as they think about how to best present those metrics and how to prep for those rounds, having been on both sides of the table?

Tien Anh Nguyen
Yeah, I would say this, I would take the management team angle first. I think for the management team, it's very important to really have a very standardized set of slides or presentation or data points around these metrics. Usually I would say it's two or three at the most four slides about that an investor would want to look at at the first or the second meeting about these are the core metrics of the business and these also metrics. These are metrics that everybody agreed to be important. So you want to have a chart of the ARR in some way to show the growth rate. You want to show a chart of one of the CAC metrics just so that you show that, hey, I know that, I know that everybody's going to measure CAC and things like that. And then you want to show, like I said, number of customers, a couple of those other things, pipeline or win rate and the like. And the key is that those have to be very consistent, those have to be well defined and you really want to have really strong conviction when telling the story about that. You're going to say, for example, if you happen to show the growth rate, they are growth rate increasing, or you want to explain that well this is because we improve our conversion rate, therefore we add a lot more new customers and that is adding up.

Tien Anh Nguyen
Or it's because our net retention rate has improved over time. Because our customers love us and we keep adding more new products. So the rate of growth of ARR is actually growing. But these things get tied together and usually again, for investor, I would say two things. Number one, when they are going through a pitch, that's what they are going to hone in. Once they like the team, once they like the product, they're going to say, is this company having good enough metrics for me to move on to the next stage? Because investors are focused on moving the deal to the next stage. Just like your sales team, they want to spend time with the right company. So they need to find this flag, the signal to move onto the next stage. Now in the next stage. And now I'm going to switch back to the investor side. Ultimately, the investor will be wanting to do a lot of this analysis themselves, especially I would say series B onwards. When they know that the company would have enough data, enough customer, enough historical data to do some analysis. They love to do this cohort analysis. They love to understand retention rate in their own way.

Tien Anh Nguyen
They want to go and slice sales and marketing costs so that they can do CAC by segment all these things, right? So they really want to do that and that's why they are going to ask for can I get your big customer database with your monthly or annual revenue or ARR by customer so that our analysts and our associate can do our own crunching. So ultimately the finance team, the CFO wants to be prepared for that in the data room because it's going to be important for the investor to have that conviction. And that might actually help a lot because once they figure that out the data and do their own analysis, they might even have a better story about your business than the management team because they have seen many other companies, they can see benchmark and they can say, wow, you guys actually have for companies that are in the same space or companies that are selling to the same customer. You actually have much better net retention rate. Then they might ask what is your secret sauce? And then at that time you know that you got the deal. So actually be prepared for that data.

Tien Anh Nguyen
Make sure that data is clean enough and be prepared for people asking follow up questions around that it's difficult to do it at the first time around because you're like, oh my God, why are these investors asking for so much? But once you raise a couple of rounds, you are like, okay, they are always going to ask for that. So I'm just going to go ahead and prepare and tell them this is the data, go and have fun with it.

Sidharth Kakkar
That's awesome. I'm curious how you think about this because you've invested at OpenView but raised from funds that are not OpenView, but what's interesting to me is that different funds have sort of different levels of rigor around this. And I feel like OpenView is like one of the most rigorous around some of the data stuff. Has that been your experience too?

Tien Anh Nguyen
I actually think that maybe at UserTesting, we just have maybe the good luck or bad luck, but the investor that invested in us, they all do very rigorous analysis. Like I say, after a while, I just have this one big data set that I constantly update. And I would say a lot of different investors ask for exactly the same thing. Maybe just a certain stage or a certain type of business where people want to dig deep and have the same level. They might call it in different way. And then some people might ask for it at the very end of the process. Some people might actually ask for it earlier up front. So that might also be the reason why they don't appear to be the same, but at some point they will ask for it as well. Yeah.

Sidharth Kakkar
Internally we talk a lot about sort of the reason you get this stuff together is there's like the external part and the internal part. The external part is the fundraising, your board reporting, stuff like that. But then there's the internal part of we call it building a better business.

Tien Anh Nguyen
Yeah.

Sidharth Kakkar
And I'm curious, how would you frame it? Why should someone care about their financial metrics or subscription metrics? What's the why behind it?

Tien Anh Nguyen
Yeah. Wow. This is kind of like asking why are you a CFO at all? It's so existential, so fundamental. Yeah. Let me kind of gather my thoughts and explain. I think it is because internally the subscription metrics are like the ultimate way to measure the health of a SaaS business, a subscription business for sure, but the way we define them, the way they are built, right. They are really trying to tie together different threads that contribute to the performance of the business. They are trying to say how well is your product serving the customer, how well is your customer success team maintaining the relationship and growing them, how well is your go to market team qualifying new opportunities, adding new users. Right? So when you break down the component of those metrics and especially how those metrics get moved around by those factor, you realize that they actually have basically tend to go into the rest of everybody in the organization. And I think understanding how the importance, the relative importance of each of those factors, how they are affecting the company's particular subscription metrics is one key reason why you want to actually looking at those and looking at the data behind those metrics, it differs for different business, different stage as well.

Tien Anh Nguyen
Like you said very early on, you don't have enough data for retention metrics, but you have a lot of data for customer acquisition. Later on, you start to have more retention metrics. And naturally that means you have to start looking at more of your customer success organization and so on and so forth. And then further down the line, like I say, more efficiency metrics, where it's like, well, I can do the same thing at the same cost, but is there a way for me to do more, but with less costs or slightly less cost? Again, in order to really narrow down that and see the impact of it, there must be a great understanding of the subscription metrics and trust in that as well. I think that's also important in the sense that people have to be so familiar with it, so aware of it, and so sure about the provenance of the data that three years from now, people, you can look at the trend and say, wow, guys, our ARR growth rate has been improving over time. It's not because we change the definition of the ARR and that's why we suddenly get more ARR this year than last year, but it's because we actually have done something great.

Tien Anh Nguyen
And there is the reason, like you said, you can break down the ARR growth into this part is the retention part, it is the expansion part, it is a new customer part. And tie those again back to the activities that the team did and explain to the team and really correlate how well we did in each of this area. Again, so having the whole management team understanding that we have some good data, the data is consistent and we know how to tell the story of the trends is important and it also help motivate them and help them, guide them in helping us achieve better growth rates and better metrics over time.

Sidharth Kakkar
Very cool. That's awesome. So we talked about the high level of the why behind the metrics and why we should look at them. But then there's the sort of the nitty gritty of the how. Like how do we go about taking the actual data and making sure that we're actually able to drive the insights that the business needs. And that can be pretty hard. And so I'm curious sort of what are the challenges you've seen in that and how do you think about it?

Tien Anh Nguyen
Well, I would say data is like the number one pain for all CFO. That's a very common issue that I heard from all CFO, my colleagues, my fellow CFO usually complain about, well, I don't have the right data. All the data gets too long to be produced. And I think that's really the symptoms of these issues where the process of getting to this data, getting to this metric is very challenging. What I see some typical issues people don't have the right system connected together. Data residing in multiple places, they are not the same format, they don't connect together. All data, certain data points are not available in the past, when you change the ERP or when you change the connection, suddenly all data, do not speak to new data and you don't have a trend and all that costs. The process of putting together these metrics really difficult. Pulling together correct metrics that people trust, metrics that can be mapped over a long period of time, become very difficult. And I would say this is very common for many companies because again, they are changing a lot all the time. They're changing system, they're improving the changing processes and every time there's a change, the data structure change and you cannot stop the growth and the change of the business just so that you can have data to speak to each other.

Tien Anh Nguyen
So what happened is, in order to get to some of these data points, CFO really tried to hoard a lot of this data, had this gigantic pull of raw data. And every time they want to create these metrics, they work on those together, reconstruct, reconstruct the metric, going backwards, trying to fill in the blank and spend a lot of time doing that. In the end it's so so, but it's still not great because the old data is still not that reliable. It's very fragile. So any sort of error in this process can cause a huge error in the output and it's not repeatable. Again, that's a problem that we have. We want to be efficient, we want to be timely, we want to generate these metrics in a timely manner. But it takes a lot of time and there's a lot of unknown variable in that process. So most CFO are very uncomfortable at some level with the data that they have, especially these days when there are so many data sources lying out there. And so what I would say is the ideal case is when we have one system that tie everything together, our system is smart enough to constantly adjust, adapt and pull the right data together so that the data is there in the same consistent format with the history, so that these metrics can be calculated and analyzed in a consistent way.

Tien Anh Nguyen
Because with that, people will trust data, people will believe in it and it's more timely and more actionable.

Sidharth Kakkar
Yeah, we see this all the time too, it's just there's finance leaders are just uncomfortable with the data that they have because they're like I have no idea if this is right.

Tien Anh Nguyen
Especially another thing is with the fact that a startup, there's fair amount of turnover, especially in the operations staff, right? Accounting person might leave, the invoicing person might leave, and again, when they leave, it's just like having a new system, a new person coming with a slightly new system. You don't really know how the two data sources talk together. So again, it's unavoidable. And like you say, people are generally quite uncomfortable with that. That's why personally, I have always been very big advocate of trying to automate as much of this as possible, make it standardized as much as possible whether using AI for certain things, having data in the right structure and constantly be thinking about how am I generating these metrics from the data that I have so that again, you avoid having lack of availability, lack of compatibility between data sources

Sidharth Kakkar
Totally, 100%, very much resonates. I mean, that's why we do what we do.

Tien Anh Nguyen
Great.

Sidharth Kakkar
Amazing. To close out, one question I had for you is you've seen so much over your career and a lot of our audience is series B and series C finance leaders. And I'm curious if you could give one piece of advice to those finance leaders, what would you say?

Tien Anh Nguyen
Yeah, well, I'm sure they have plenty of great advice and plenty of great material to draw from for me, maybe because of my background as a VC and being able to fortunately seen a lot of these different companies over time my personal perspective is the finance leader really wants to focus on the top driver of growth whether again it is new customer, whether it's retention or whether there's less churn for example, or expansion. Find ways for the company to invest in it instead of just being the typical finance person that I need to make sure that I need to cut costs, I need to ensure cash runway which is super important and of course somebody is instinctive for every finance leader but try to also take the other perspective which is growth really drives a lot of things open up new opportunities, open up both new challenges but also new venue for the company to go further in this path and realize the grand vision. So find ways to help the company invest in the driver of growth. So figure out the driver of growth and then figure out the right resources to invest and really kind of show that to the rest of the management team to encourage them.

Sidharth Kakkar
Be a true partner to those teams.