Favorite AI Metrics

Favorite AI Metrics
by Sri Muppidi

Earlier this month, I wrote about how some startup investors are focusing on net revenue retention rates to find the AI startups that will have a better chance of hanging on to their early, blistering revenue growth. That rate, which measures a company’s ability to keep its existing customers and increase their spending over time, could be a better indicator than simple revenue growth, some investors say.

But plenty of startup investors think even net revenue retention rates can obscure the actual health of a company’s sales. These include Mitchell Green and Brian Neider, partners at growth equity firm Lead Edge Capital, who say a big order from a large customer can overshadow the loss of an AI startup’s other customers.

For instance, say a company has 100 customers paying $10 per year, totaling $1,000 in revenue. One of them decides to renew for the next year and also increase its spending to $5,000. However, the rest of the 99 customers decide to cancel their contracts.

The five-fold increase in total spending raises the company’s net revenue retention rate to 500%. But the gross revenue retention, which measures revenue of existing customers excluding any increase in that revenue, is only 1%, as the company only retained $10 of the original revenue. This measure can highlight if the company is losing customers.

“A lot of [artificial intelligence] businesses have 50% gross dollar retention,” Green said. “We’d love to find one that has 90% gross dollar retention.”