Cash Conversion Score for cloud companies

Key takeaway

• For entrepreneurs: A higher CCS indicates that the company is effectively converting capital into annual recurring revenue (ARR), which is crucial for attracting further investment and supporting sustainable growth. This metric not only reflects the current health of the business but also its potential for future success, making it a vital focus area for strategic decision-making and operational adjustments.
• For investors: The CCS not only helps in evaluating the financial health and operational efficiency of an investment but also serves as a predictive indicator of the company's potential for sustainable growth and profitability. By focusing on companies with a high CCS, investors can identify those that are effectively using their capital to generate significant revenue, thereby maximizing the return on investment.

Summary

The article "Cash Conversion Score for cloud companies" by Bessemer Venture Partners discusses the importance of the Cash Conversion Score (CCS) as a metric for evaluating the financial efficiency and growth potential of cloud companies. The CCS is a measure of how effectively a company turns capital investment into annual recurring revenue (ARR). It is calculated by dividing the current ARR by the total capital raised minus cash on hand. The article emphasizes that while financings and unicorn valuations often grab headlines, the CCS provides a more substantive indication of a company's health and prospects.

Insights

• The CCS is a critical metric for cloud companies, reflecting the return on investment for each dollar invested.
• A high CCS is unattainable without a strong product/market fit and a scalable sales and marketing model.
• The average CCS for cloud companies tends to increase as the company matures, indicating improved capital efficiency over time.
• Bessemer Venture Partners uses the CCS to evaluate cloud businesses, considering it a proxy for returns and a key performance indicator (KPI).
• The article highlights Zapier as an example of a company with an exceptional CCS, having raised only $1.3 million and achieving over $140 million in ARR.

Implications

• Investors and founders can use the CCS to gauge the long-term value creation and efficiency of a cloud company.
• A CCS of 1.0x or higher is indicative of a company that is effectively converting capital into revenue, suggesting a strong potential for growth and returns.
• Companies with lower CCS may need to focus on improving their product/market fit and sales and marketing strategies to increase their capital efficiency.
• The CCS can inform strategic decisions about when to raise additional capital, as it reflects the company's ability to generate returns on previous investments.
• Understanding and tracking the CCS can help cloud companies position themselves more attractively to investors and manage their growth more effectively[1][2].