Cash Conversion Score — A great SaaS metric
Bessemer Venture Partners wrote a wonderful blog post on a new metric used to indicate SaaS business returns. It’s called Cash Conversion Score and I am a fan. It’s calculated using the following formula:
(Current ARR)/(Equity+Debt — Cash)
Why is CCS a good metric? Because it’s a good way to analyze how effective companies are at deploying capital as it relates to growth. It’s also a metric that works at different stages of growth, giving it wider application and use. Market-winning B2B SaaS companies not only raise large amounts of capital, they utilize that capital to effectively grow the business.
Given the fragmentation of most SaaS industries and the winner-take-all nature of most SaaS markets, we need metrics like CCS to understand how effective companies are at utilizing capital to drive growth at different stages of growth. CCS gives us a better long-term understanding of product-market fit and scalability as it pertains to sales & marketing.
What is a good CCS? Utilizing investment data, Bessemer created a Good, Better, Best Framework to use as a reference point. It is listed as such:
- Good: CCS of 0.25–0.5x yielded an IRR of 40%.
- Better: CCS of 0.5–1.0x yielded an IRR of 80%.
- Best: CCS of 1.0x+ yielded IRR of 120%.
In short, CCS illustrates the ROI for every dollar invested. The higher the CCS, the higher the IRR. CCS indicates that at earlier stages of product-market fit and revenue growth, companies should be as nimble as possible with additional capital raises. Both IRR and CCS will be low at this stage — meaning highly dilutive capital raises without a proven business model.
Even with a strong product market fit, if the business cannot show scalable unit economics, CCS score will be negatively impacted. A high CCS Conversion Score means that there is healthy CAC/LTV payback and low churn rate. CCS should be used in comparison with these other metrics when trying to gain a full understanding of a company’s financial health.