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Your Buyer Is Rebuilding The Cube Anyway
Hi, it's CJ Gustafson and welcome to Looking for Leverage.
Acquirers ask for a lot of data when they’re thinking about buying you. And the most important pieces of evidence in determining if your revenue is durable can be found in what is colloquially called the cube.
I'm talking about a hefty export that includes:
every customer you have
how much they pay
for how long
going all the way backwards through your entire company history
and also forward through whatever you've got under contract
plus any deals in your pipeline.
It’s like a revenue colonoscopy, blending your ability to flawlessly report historicals with your ability to accurately forecast the future.
Your FP&A team is going to spend more hours on this deliverable than anything else in the deal, and most of the effort will land on one analyst so it’s done consistently each time (sorry, Collin if you’re reading this).
The dumb version
It gets called a cube because you're slicing the same revenue across multiple dimensions: who paid it, when it landed, how long it goes for, and whether it's still there.
A lot of analysis falls out of this artifact, but perhaps the two most critical items that can be derived from it are:
An ARR waterfall, which walks from your revenue at the start of a period to your revenue at the end, contemplating what you added, what grew, what shrank, and what churned.
And a net dollar retention bridge, which looks at your existing customer behavior and assesses how much growth you have embedded in your business model.
Producing the cube is a big lift if your systems aren’t engineered correctly. It can often mean reconciling several years of customer records (that nobody was maintaining with a buyer in mind) by hand. And in the process it forces you to wrestle with existential questions, like,
“what's the definition of a customer?”
“what should parent child relationships look like?”
“does a deal close when it's signed or starts?”
Making it real
Here‘s what you need to know about building the cube.
Throw the raw data in the back, and run the lookups from the front:
The last tab is a straight export from your CRM, pasted in and otherwise untouched. You aren’t going to get ARR or CARR (contracted annual recurring revenue) from your ERP, so it has to come from your sales system of record. Same goes for your pipeline.
Everything in front of it is formulas pointing back at that export to create the dimensionality that we mentioned. Nothing anywhere in the file should get typed by hand.
This sounds like housekeeping, until the buyer asks for the same numbers cut by segment, or by cohort, or with one subsidiary stripped out, and wants it before that afternoon’s call (just felt my stomach drop). That’s why how you build it matters. It needs to be easy to update.
You'll refresh it more times than you think:
Diligence often runs for months and the business keeps operating during that time.
Therefore, customers churn, deals close, and renewals slip.
Every change to customer contracts moves the waterfall and the retention bridge the buyer has already calculated in their model, so by the time you close the acquisition, the cube will have morphed multiple times
The pipeline section is a hidden test:
You're also reporting deals in flight, classified by stage.
So when you call something late-stage in March, the buyer checks in May whether it closed by looking at the cube.
This is a test on your forecasting discipline, and informs how the buyer should feel about the integrity of any other data you’ve provided.
It underscores why it’s so important to hit your forecasts during diligence.
When it clicked
Your valuation is predicated on your momentum as much as it is on your revenue.
We had a customer about to churn in the middle of a sales process. It was going to be a big hole, and I knew it would show up the next time we delivered an updated cube, which was three weeks before our slated close.
So me and the CEO honed our narrative around what we had in the pipeline to fill the gap. And (this is the part that really mattered) we said why the customer was leaving in the first place. Turned out they were downsizing the whole company and our product got cut in a tech review.
A word on pipeline - this is where I’d be careful, if not conservative. During a VC funding round you can lean forward on what's coming. Everybody understands how the game is played. You are selling the dream, and nobody’s holding you to the forecast in a Series B deck.
In a sale, you're handing a buyer near-term numbers they will absolutely hold you to, and every miss between now and close gets priced accordingly. If they’re buying you off forward revenue, a $200K ARR deal at 5x is $1M in purchase price, and potentially more if they start to question your revenue durability and decide to lower the revenue multiple all together.
What to do Monday
Bridge it to the GL before anyone outside sees it: The cube comes out of your sales system, while your revenue comes out of your accounting system. The two will not agree. But your GAAP revenue will appear inside the cube in some form. Timing, non-recurring items, billing entities, credits create deltas. So build the bridge yourself and write down the logic.
Settle the definitions before you build anything: What counts as a customer, how parent-child relationships roll up, whether a deal closes on signature or on start are all things you should define and apply consistently.
Fix the architecture now, while nothing's at stake: Best practice calls for exports in the back, lookups in the front, and no typed numbers anywhere. Doing this under a deadline with a buyer waiting is how errors get in. You can make this cube a part of your monthly reporting process for investors. You’ll be killing two birds with one stone for many of the things they already ask for.
Know your churn list before they ask: You should have a clear view of any customers at risk in the next two quarters, what they're worth, and why they're leaving. If the reason is something other than your product, get that in writing from the customer while the relationship is still friendly. As a precaution, run your top ten customers as a percent of ARR too, and check what your retention number does if any one of them walks.
Name the owner and clear their calendar: This lands on one analyst who already has a day job, and it runs again and again for months. Decide now who that is and what they stop doing when the time comes. This is important.
Wishing you a cube that has no hardcodes,
CJ
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