(14:29) High minimum feature set SaaS products face unique challenges in AEC industry adoption
(34:35) B2B marketplaces in AEC benefit from human touchpoints, unlike B2C counterparts
(39:19) Construction tech firms must prioritize profitability and predictability in outcome-as-a-service models
(42:21) Investors value contribution margin over gross margin for outcome-as-a-service businesses
(53:26) Financial services in construction require robust underwriting processes beyond just technology
(56:05) Marketplace metrics like GMV and take rate often misunderstood in construction tech context
This week on Practical Nerds - tl;dr:
We dive deep into metrics that matter for different business models in AECS
SaaS, marketplaces, outcome-as-a-service, and fintech each have unique KPIs
Human touch points are crucial in B2B, contrary to B2C marketplace wisdom
Why we love ROCE on working capital as the key to B2B marketplaces and financial plays
ARR/FTE is a one of the most powerful and least tracked indicator for great founders in AECS
Also: Debunking common misconceptions about take rates and gross margins
"In B2B marketplaces, especially in AECS, counter-intuitively you do NOT want to limit the amount of human touch points."
SaaS metrics in AECS: The usual suspects, but watch ARR/FTE
Let's kick things off with the granddaddy of all tech business models: Software as a Service (SaaS). Now, we're not here to reinvent the wheel. There are tons of great frameworks out there for SaaS metrics. But here's our condensed view of what really matters to us at Foundamental.
First up, Annualized Recurring Revenue (ARR). It's the backbone of any SaaS business. But hold up – we need to call out a common misconception here. ARR isn't just any old recurring revenue. It's got to be predictable for the whole year. If it's just recurring for the next month, that's Monthly Recurring Revenue (MRR). Don't try to pull a fast one by multiplying your MRR by 12 and calling it ARR. We're onto you.
Next, we look at the rate of growth of that ARR. This is where things get exciting. A hockey stick growth curve? Now we're talking.
Gross margin is another biggie. We're looking for at least 70% here, folks. Anything less, and you might want to reconsider calling yourself a SaaS company. Ideally, we want to see 80% or higher. There's a bit of wiggle room if you're heavy on AI and need some serious processing power, but you better have a clear path to getting that margin up.
Last but not least, we've got the Lifetime Value to Customer Acquisition Cost (LTV to CAC) ratio. This is where the rubber meets the road. We're looking for a ratio greater than 3. If you're below that at the seed stage, you better have a solid plan to get there. By Series A? We expect you to be comfortably above 3.
Now, here's a metric that doesn't get enough love: ARR to Full-Time Equivalent (FTE) ratio. This little gem tells us so much about how efficiently you're running your SaaS machine. It's not just about having a great product – it's about delivering it efficiently, extracting distribution power, and achieving high capital efficiency. At Series A, this ratio can paint a vivid picture of where your company is headed.
One more thing before we move on: we treat enterprise SaaS a bit differently from SMB SaaS. For enterprise, we're looking for net dollar retention north of 120% annually. Hit 130%, and we'll be doing cartwheels. For SMB, anything above 85-90% is pretty awesome.
B2B marketplaces and financial services: RoCE on working capital above 20% is an engine
Alright, let's shift gears to B2B marketplaces. This is where things get interesting, especially in the world of Architecture, Engineering, Construction, and Supply Chains (AECS).
First off, let's bust a myth: B2B marketplaces are not B2C marketplaces on steroids. In fact, many of the lessons from B2C can lead you astray in B2B. Here's the kicker: in B2B, especially in AECS, you don't want to limit human touchpoints. You heard that right. More human interaction can actually be better.
Why? Because in AECS, trust and track record are everything. Your customers are dealing with high-risk, high-consequence projects. They're not looking for a fancy app – they want someone who understands their business and can deliver consistently.
So, what metrics do we look at? One of our favorites is Return on Capital Employed (RoCE) on working capital. If this number is above 20%, you're cooking with gas. Above 50%? You're a money-printing machine. Seriously, if you hit that 50% mark, raise as much debt as you can and pour it into that working capital. You're earning returns that most investors can only dream of.
Another key metric: Monthly Gross Merchandise Value (GMV). For a Series A, we're looking for at least $1 million monthly GMV. That's $12 million annualized, folks. But remember, GMV is not the same as ARR. Don't make that mistake.
We also pay close attention to the interplay between margins and working capital. The higher your margins, the more leeway you get on working capital. If you're operating on thin margins, you better have negative working capital cycles (meaning you get paid before you pay your suppliers).
We look at financial services in AECS quite similarly to marketplaces . This is a broad category, covering everything from lending and invoice factoring to insurance and payment infrastructure.
The key? Human touchpoints and track record. Remember, your customers are operating under serious risk and time pressure. They don't want a fancy fintech startup – they want someone who understands their business inside and out.
Just like with marketplaces, we love here RoCE on working capital. Above 20% is good, above 30% is great, and above 50% is insane. If you're hitting that 50% mark consistently and without defaults, load up on debt and deploy that capital.
But here's where it gets tricky, especially for SMB-focused financial plays in AECS: your cohort retentions. In project-based industries like construction, your customers might not start a new project every month. This means your cohorts will never look as clean as in other models. That's okay – we know that. We’re not looking for perfect 130% every month.
What we're really looking for in these financial cohorts is how well you're managing this dynamic. Are you deliberately choosing when to onboard customers? Are you aware of the project cycles in your industry? Your cohorts tell us more about you as founders than about the business itself.
For enterprise-focused financial service ventures in AECS, we expect to see new projects being financed every month with the same customer. Your cohorts should look pretty good here.
And forget about vanity metrics like Gross Transaction Value (GTV) or gross underwritten premiums. The only thing that matters from a revenue perspective is net revenue.
For both marketplaces and financial service opportunities, don't get too hung up on building software right out of the gate. In the early days of eg. a B2B marketplace, your secret sauce isn't code – it's relationships and track record. Focus on delivering value consistently, and the tech can come as you standardize your repeatable processes.
Outcome-as-a-Service: Judge on 30%+ contribution margin, not gross margin
Now, let's talk about a model that's near and dear to our hearts at Foundamental: Outcome-as-a-Service (OaaS). This is a model that delivers guaranteed outcomes to customers in high-risk, high-consequence situations. And let me tell you, in AECS, this model is pure gold.
When evaluating an OaaS business, we look at it more like a marketplace than a SaaS company, but with some key differences. The big one? You're often your own supply, so we can't run typical supply-side metrics.
So what do we look for? First up, early net profitability. If you can show us net profitability in the first few months, you've got our attention. It tells us you can deliver margins into a buy-ready market and control the outcome.
Next, we want to see repeat purchases from the same customer. This shows that you're delivering real value, not just a one-off solution.
But here's the real kicker: contribution margin. If your contribution margin is north of 30%, you've got something special on your hands. Why contribution margin and not gross margin? Because in OaaS, your sales efficiency can vary widely. We've seen OaaS models with 40-50% gross margins but 35-40% contribution margins because they're so easy to sell. On the flip side, we've seen 85% gross margins with similar contribution margins because the sales motion is tougher.
Another metric we love for OaaS: the ratio of realized revenue to order book. This one's a bit technical, so bear with us. If your delivery spans more than 30 days, your realized revenue and order book will start to disconnect. By tracking the ratio of these two numbers over time, we can spot trends. If it trends towards 100%, you might not be closing enough contracts. If it trends down towards 50%, you might be selling too fast and not delivering efficiently enough.
Every OaaS business has a sweet spot for this ratio. For some, it's 72-75%. For others, it might be 60% or 80%. The key is to find your sweet spot and stick to it.
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Keywords: #ConstructionTech #VentureCapital #StartupMetrics #SaaS #B2BMarketplaces #FinTech #OutcomeAsAService #AECS