Metric sales

SaaS revenue measurement VCs should consider

Hello and welcome to Protocol Enterprise! Today: what VCs miss about SaaS revenue, Intel’s new chipset, and what’s next for enterprise tech executives.

Twirl up

Despite the move to the cloud, there is no shortage of interest in data infrastructure. According to a Dell’Oro Group report, global spending on data center infrastructure is expected to increase by 10% over the next five years to $350 billion.

SaaS metrics need a restart

In the SaaS industry, where it’s common for a small number of customers to account for the majority of a startup’s revenue, traditional metrics like average contract value (ACV) don’t always provide the full picture.

This is why Nnamdi Iregbulem of Lightspeed Venture Partners has developed a new metric called weighted average contract value (WACV). Nnamdi argues that WACV can do what ACV can’t: tell a startup where most revenue comes from, which customers are most important, and where the most risk lies.

In a conversation with Protocol, Iregbulem discussed his new metric, revenue concentration in SaaS, and what VCs are missing out on in SaaS revenue.

You came up with this metric called weighted average contract value that tries to capture a lot of what we’re talking about, which is [that] just looking at the average doesn’t necessarily capture some of those big customers. Why isn’t the standard LCA metric as useful for comparing different companies with different customers?

The reason that calculating the standard average of contract value has limited utility across different companies is that if the underlying concentration across those different companies is very different, the average simply isn’t comparable. It doesn’t tell you the same thing.

In the same way that, again going back to statistics, taking the mean of a normal distribution tells you something different than when you take the mean of a skewed distribution. So people implicitly assume when they say, “Oh, this company has an ACV of this and this company has an ACV of that,” that they have a very similar concentration of revenue. But if they don’t, then you are actually making a real mistake. But this standard average is so easy to calculate that people use it by default.

What kind of insight does looking at the weighted average give a startup than not just looking at the average?

The most interesting finding is that it tells you where your business revenue is most concentrated. In other words, it shows which type of customer is most responsible for the majority of your revenue. It’s very interesting because it tells you where the risk is in the business, where the growth of the business is likely to be, it tells you what bread needs to be buttered, so to speak, and who you really need to pay attention to to.

The average doesn’t really tell you that. It tells you what the typical customer looks like, but not what the typical dollar revenue looks like. And so I think that’s actually a really helpful reframe when you’re like, “OK, here’s all our income, here’s where it’s at. Where should we spend time? Where should we allocate resources? It’s actually all right to have a more customer-centric view. But if you only think about unit economics, or ROI, that’s where this revenue-centric view becomes really valuable.

What are the benefits for investors? As an investor, if I could see their weighted average relative to their average, how might that inform my understanding of the business?

This is a very common mistake I find among investors where they will come across a company the company will have X number of customers and the standard ACV will be quite small as most of their users are either free users or in a kind of lowest level version of the product. But they have a few significant customers who are spending actual revenue or paying the highest level of one product or another. But since there are so many customers in total, their average number ends up being rather small. And if you, as an investor, don’t dig a little deeper, you can be tricked into thinking, “Oh, these guys aren’t selling to enterprise-type customers, they’re just focusing on small businesses in lower quality. income.” In fact, most of the income comes from very good quality customers. Unless you double click and go deeper, you’ll miss that. So I think investors should really focus on that as a metric and should calculate it if they have the data.

Read more of Nnamdi Iregbulem’s interview here.

— Aisha counts (E-mail | Twitter)

On the calendar

So you’ve decided to move to multicloud. Now what?

It’s never been easier to use multiple cloud providers for modern technology infrastructure needs, but should you use multiple cloud providers? A panel of experts will explain the pros and cons of multicloud computing and how businesses should consider their options as the market evolves. Join us at 10 a.m. PT on March 2. RSVP here.

A MESSAGE FROM DATAIKU

Dataiku is the only AI platform that connects data and actors, empowering anyone to turn data into real business results, from the mundane to the moonshot. Because AI can do so many things, but there is no soul in the machine, only in front of it. Without you, it’s just data.

Learn more

Intel’s Revamped Server Chip Lineup

Intel is delaying the launch of its first server chips made with its most advanced processing technology until 2024, company executives said Thursday at its San Francisco investor meeting.

Xeon “Granite Rapids” server processors will now be released a year later using an improved form of extreme ultraviolet lithography technology called Intel 3. For 2023, Intel has announced that it will now release Emerald Rapids, which will use the technology not Current EUV from the company called Intel 7.

Intel CEO Pat Gelsinger says Intel pushed back its chip launch by a year to take advantage of the company’s planned improvements for Intel 3. Intel 4, the company’s first EUV manufacturing release , will now be used for PCs and cryptocurrency mining chips.

Meanwhile, on Thursday, Intel also announced a new line of low-power Xeon chips for data center processing that doesn’t require the most complex computing or the highest power consumption. Called “Sierra Forest,” the chips will launch in 2024 and will use efficient processing cores that appear to position the new chips to compete with some of the Arm designs that have started making inroads in data centers.

— Max A. Cherney (E-mail | Twitter)

Company moves

Steven Rodgers is quit intel as Executive Vice President and General Counsel. Rodgers retires on May 31 and will be replaced by interim selection Susie Giordano.

Edward Bush has been named COO at Dataiku. Bush previously served as vice president of finance and previously worked at WeWork. His announcement is accompanied by a series of internal promotions at Dataiku.

John Zissimos is the new CMO of Okta, replacing Kendall Collins, who is one of a series of executives who have left the company over the past year. Zissimos was previously digital director.

A MESSAGE FROM DATAIKU

Dataiku is the only AI platform that connects data and actors, empowering anyone to turn data into real business results, from the mundane to the moonshot. Because AI can do so many things, but there is no soul in the machine, only in front of it. Without you, it’s just data.

Learn more

Thanks for reading – see you tomorrow!