{"id":15336,"date":"2023-11-13T14:24:28","date_gmt":"2023-11-13T14:24:28","guid":{"rendered":"https:\/\/dev.matsio.com\/matsio\/saasboomi\/?p=15336"},"modified":"2024-05-29T03:43:52","modified_gmt":"2024-05-29T03:43:52","slug":"arr-fte-as-metric-for-india-saas","status":"publish","type":"post","link":"https:\/\/dev.matsio.com\/matsio\/saasboomi\/saas\/operations\/arr-fte-as-metric-for-india-saas\/","title":{"rendered":"ARR\/FTE as *a* metric for India SaaS"},"content":{"rendered":"\n

A few days ago, I wrote<\/a> about the need for Indian SaaS companies to get into the mindset of judicious hiring. SaaS startups saw the highest number of job cuts in 2023, which was widely reported<\/a>. <\/p>\n\n\n\n

You sometimes hear of a SaaS metric called ARR\/FTE as a metric to track and maintain efficiency in a SaaS business<\/a>. And for good reason. When I put out that LinkedIn post, the responses I received were more interesting than I had expected. While many in the industry agreed that ARR\/FTE is an important SaaS metric, what I didn\u2019t see coming was the strong opinion that it plays out differently for Indian SaaS companies versus their US counterparts.\u00a0<\/p>\n\n\n\n

As Indian SaaS firms increasingly build cross-border businesses, there is increased understanding of how to crack new foreign markets<\/a> for Indian founders. It is only fair then that we look at the things that make India-born SaaS businesses unique and different. The assumption for India-born, cross-border SaaS businesses has always been that they have a clear cost advantage because of the relatively cheaper workforce here. But if you look at their ARR\/FTE, the chinks in that understanding begin to show.<\/p>\n\n\n\n

Before we delve in further, let me break this SaaS metric down for you:<\/p>\n\n\n\n

ARR<\/strong>\u00a0is the annual recurring revenue of your business (either the more recent quarter\u2019s subscription revenue times four or most recent month times twelve).\u00a0<\/p>\n\n\n\n

FTE\u00a0<\/strong>is the full time equivalent employees working for your company.\u00a0 The ratio of the two gives you an idea of the revenue per employee.\u00a0<\/p>\n\n\n\n

CJ Gustafson\u2019s newsletter does a great job<\/a> of explaining why ARR\/FTE is an important metric for SaaS companies to track. <\/p>\n\n\n\n

In my original post, I had referred to data from a Meritech report:<\/p>\n\n\n

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Source: Meritech <\/figcaption><\/figure><\/div>\n\n\n

If you zoom in on their original data<\/a>, the top five companies with high ARR\/FTE are incredibly efficient: Expensify ($1.26 million), Dropbox ($768,000), Adobe ($652,000), Shopify ($598,000), and Palantir ($571,000). <\/p>\n\n\n\n

But\u00a0Tarun Kumar Mallapa<\/a>, HackerEarth\u2019s vice president for finance and strategy, had an interesting take. ARR\/FTE is not an absolute SaaS metric. It varies depending on the stage your company is at. It takes businesses time to reach the level of efficiency that the Meritech data represents. This graphic is useful:<\/p>\n\n\n

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Source: OpenView Advisors<\/figcaption><\/figure><\/div>\n\n\n

Across the hundreds of SaaS startups we\u2019ve met from India, I find that many are significantly lower on this SaaS metric than their US counterparts. There are some reasons for this:<\/p>\n\n\n\n

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  1. There are too many entry-level folks in all functions in Indian SaaS startups. Reasons range from \u201cthey\u2019re cheaper\u201d to \u201cthey have passion\u201d.  
    <\/li>\n\n\n\n
  2. Your SaaS product is not doing the job on its own. That leads to customers being unable to manage without help, which means hiring more support staff.
    <\/li>\n\n\n\n
  3. Holding on to professional services till very late could mean that founders are not invoking alliances\/partnerships early enough.
    <\/li>\n\n\n\n
  4. The DNA of over-hiring, once it sets in, is hard to break.
    <\/li>\n\n\n\n
  5. Some startups selling into the Asia market have lower prices than the equivalent product on selling into the US market<\/a>.<\/li>\n<\/ol>\n\n\n\n

    But it is also true that most of this reference data looks at US-based SaaS firms. A lot of friends and industry folks pointed out that Indian SaaS folks can\u2019t draw an apples-to-apples comparison based on this because of operational differences between India and the US. I have compiled some of the most useful feedback that came in below:<\/p>\n\n\n\n

    Scale successful cost saving experiments<\/strong><\/h2>\n\n\n\n

    Kanav Hasija<\/a> from Innovaccer had some interesting inputs on how the healthcare data platform increased its ARR\/FTE ratio while operating teams from India and the US. The company went from $40,000 to $100,000 ARR. His recommendations for founders:<\/p>\n\n\n\n