May is metric month! My last two posts focused on ARR and the Rule of 40 respectively. This post will focus on your companies' spending habits and how efficiently you are growing. This metric was coined by Bessemer Venture Partners (BVP), a premier venture capital firm, and is commonly referred to as the BVP Efficiency Score. Let's take a look at how to calculate the BVP Efficiency Score and why its important.
What is the BVP Efficiency Score and Why Does it Matter?
The BVP Efficiency Score is a framework for evaluating a company's spending efficiency. Many Software as a Service (SaaS) startups have a "grow at all costs" mindset and burn through investor capital. If times are good, this is a perfectly fine approach, as companies can continue accessing venture capital money. However, if times turn bad and investors are less willing to make invests, then unprofitable SaaS companies may be in trouble. The BVP Efficiency Score tracks HOW companies are growing and provides a benchmark to compare them on.
How to Calculate and Interpret the BVP Efficiency Score
The BVP Efficiency Score is simply Net New ARR divided by Net Burn. Your Net New ARR is any new ARR sales plus any ARR from upselling existing customers minus any churned ARR. For the denominator, your net burn is your revenue minus your operating expense. Once you divide these two numbers you have your BVP Efficiency and it's time to interpret your results.
BVP scores are put into three tiers high, medium, and low. Anything under .5 is considered low. This means you are burning over twice as much as the new ARR you are bringing in, not great. Any score between .5 and 1.5 is in the medium tier. In this tier, your ARR gains are relatively proportional to the additional money you are spending. Lastly, any BVP over 1.5 is in the high tier. This means your ARR gains are outpacing the money you are spending. To put this into context, $2M in net burn would produce at least $3M in net new ARR. Companies with high BVP scores are more attractive to investors because it shows that their money won't be wasted and can be used to generate more ARR. It's important to remember that the BVP Efficiency Score is best used for early stage companies making less than $30M in ARR.
Summary
The BVP Efficiency Score is a great indicator for how your company is growing. It's important that your company is not an endless money pit for investors, and the BVP shows that you will spend their money well. Companies with high BVP scores can raise money in both bull and bear economic environments so it's definitely something you want to track and present to investors. If you are having trouble with properly calculating and tracking your BVP score, reach out to us at InfleXion Point. We are happy to help!
Comments