Member Navin Nagiah Speaks: You are not ready (yet) to make a decision.

The Challenge:

If I were in your saddle, I would start with the numbers: revenue, billings, customer retention, revenue retention and so forth. Then analyze both the real and perceived strength of your product, which drives those numbers. Finally, understand the human talent that builds and sells your product. Then you’ll be ready to decide.

If you were in this situation, what would you do?

The case at hand was brought by the CEO of a software company that was retaining only 70% of its customers year-over-year. Moreover, the employee churn rate was nearly 40%. He wanted to know if the time was right to IPO.

Your revenue retention rate at 70% is very low when compared to industry standard SAAS companies, which means a lot of your new business growth is basically replacing your lost renewal revenue. When you extrapolate those lines, you will likely notice that at some point, your new business will barely begin to replace lost renewal revenue. A clear understanding of that possible future situation is the first step.

Second, look more closely at why the revenue retention is so low. Is it because the product is not sticky? Do customers not need the product after first use? Do customers use the product in rhythmic periodic fashion or as one-offs? What changes do you need to make in the product to alter this dynamic? What product and marketing investment is needed to effect this change? How long will it take? It is critical to understand where the product is, how it fits into customer needs today, and how it needs to fit in tomorrow for greater customer stickiness. Once you figure that out, at least in terms of a strategy, it’s time to take a hard look at people and culture.

If your employee churn-rate is 40%, how much of that is folks you wanted to keep versus folks you didn’t want anyway? Which locations churn the most? Has it impacted culture and productivity? What does it take to reduce that churn to 15%?

After thoughtfully answering these questions, I would spend the next 12 months focused on the above mentioned: improving culture, dramatically dropping employee churn, improving your product to better increase product-customer fit, and increasing customer retention. In addition, I might opportunistically look at strategic partnerships as a fallback and means to increase optionality.

In my experience, two kinds of companies go public successfully in Silicon Valley: those growing very rapidly with little to no profit margin, and those growing moderately with significant profit margin. Consider whether you can achieve one of these situations in, say, 12 months. If not, perhaps it’s time to think about exiting through acquisition. Best of luck.