Net Dollar Retention: The New Magic Number

Insights and opportunities from Canada’s largest SaaS conference

Investors evaluate many metrics to determine how appealing a funding opportunity could be. Customer and revenue retention performance have always been important, but are now viewed as even more so for organizations that are subscription-based. This was a recurring theme among the more than 100 global investors who recently attended SAAS NORTH 2021, an industry event developed by L-SPARK that is focused on connecting venture capitalists with company founders. Net Dollar Retention (NDR) has become a critical metric for measuring product, financial and overall company health.

What Exactly is NDR?

NDR, also called NRR (Net Revenue Retention), is calculated by taking the monthly revenue a company generates, plus any upgrade sales, minus any sales downgrades and customer abandonment (churn), all divided by the original monthly revenue. If that formula yields a number greater than 100%, it is a positive result in that growth from the existing customer base is more than offsetting any losses and it is a strong indication that most functional areas in a growing start-up are working well. It represents how ‘sticky’ the company solutions are by virtue of how satisfied existing customers are, and how likely that is to translate into increased customer Lifetime Value (LTV) and business growth.

“As venture investors, we're looking for recurring revenue streams with fast growth," explains Connor Edwards, Senior Investment Manager at MaRS Investment Accelerator Fund. "Valuations are tied to the health and quality of recurring revenue, with an increasing focus on NDR. In the current environment, a company with NDR of less than 110% isn't very attractive and may only receive a single-digit ARR multiple. Whereas companies above 115% NDR get interesting, commanding an ARR multiple of 10x or more. World-class SaaS companies with 125% NDR and higher can achieve ARR multiples in excess of 20x.”

A Positive Return to In-Person Events

After SAAS NORTH organizers had to opt for a virtual event in 2020 due to COVID-19, the return in 2021 to an in-person conference exceeded expectations, with more than 1,000 people attending overall, including many international guests.

No doubt, the event was an opportunity for many to socially re-emerge and re-engage after many months of virtual-only contact. It was, however, also a testament to the SaaS industry itself – an industry that evolved rapidly in response to the increased demands for digital transformation brought on by the pandemic. According to a study by McKinsey & Company, COVID-19 has accelerated the adoption of digital technologies by several years.

Many Wesley Clover portfolio companies have experienced this market-driven change over the past 20 months, creating enhanced or adjunct solutions to complement their existing products. At a focused “Industry Pulse and Investor Pitches” event on the first day of the show, eight companies from the local as well as international Wesley Clover portfolios pitched these solutions – from cloud computing to digital health, volunteer management, wireless security, IoT and more.

Ilker Inanc is the founder and CEO of Turkey-based Twentify, who have developed a SaaS platform that crowd-sources mobile phone users to conduct product/market research. Ilker travelled to the conference and commented: “SAAS NORTH continues to be one of the best yearly tech conferences that I attend. The event presents a unique opportunity to network with start-up founders, investors and potential business partners. During the Wesley Clover investor session, I had the chance to engage with more than 20 investors at once, which was highly effective and resulted in several follow-up meetings with interested parties. It was time very well spent.”

Ottawa-based Cliniconex, who have developed a SaaS platform that automates outbound communications and engagement with patients, family and other parties for healthcare providers, have seen unparalleled growth as a result of the pandemic. Management used SAAS NORTH as a venue for launching their next funding round. Anthony Mar, co-founder and CEO, explained: “I was pleased to launch the Cliniconex $10 M Series A funding effort at the Wesley Clover Investor event at SAAS NORTH. Not only was I able to pitch to investors, but the conference created a perfect environment for follow ups. I had several excellent investor meetings, and I appreciate the help in launching our fundraising program.”

According to the recent L-SPARK State of SaaS report, only $1.17 billion in total capital was invested in Canadian SaaS startups in 2020, compared to $5.13 billion the previous year. No doubt, COVID-19 uncertainty can be blamed for this steep decline, as investors concentrated any spending on their existing portfolio firms. This year, however, total SaaS investment in Canada has rebounded aggressively, effectively doubling the pre-pandemic total by reaching almost CAD$10 billion so far.

We see these same trends in our own portfolio, as pent-up demand is looking to fund credible growth – growth measured particularly by NDR. Watch for updates as our SAAS NORTH pitching companies continue their investor discussions and transition from Early-Stage to Growth-Stage.

To learn more about the Wesley Clover technology portfolio, visit wesleyclover.com.