What Business Metrics Do Investors Check Before Investing?
Are you a Startup Founder about to raise or already raising external investor capital? You MUST know what business metrics those investors are going to check. The outcome will determine if they invest or not.
Be The Queen Or King Of (Your) Business Metrics From Day 1
Don’t wait until you are about to start a fundraising campaign to take an interest in your business metrics.
That means that if you are not financially inclined (never took accounting or finance at school or college), you might need to get help. Someone needs to gather financial data and key it into a spreadsheet (worst case), or preferably into an accounting software package. Most small business accounting and reporting packages also allow the user to define which financial and business metrics to track.
"You Can't Manage What You Can't Measure" - Peter Drucker
There are four (4) main business metrics that will help you keep your business healthy, and certainly help you stand out in the crowd of other startups when it comes time to raise external capital.
MRR - Monthly Recurring Revenue
Monthly recurring revenue is the sum total of all revenue your company reliably earns every month from ongoing customer contracts and subscriptions.
What This Business Metric Says To Investors
MRR ultimately determines how much money you can get from an investor or a bank. Many tech banks offer credit lines based on a startup’s MRR. When demonstrating MRR, make sure you show:
The trend of your MRR in the past 24 months
Customer concentration
The rate you’re adding and losing MRR (MRR churn)
MRR Churn
MRR churn is the rate at which you lose MRR. You can find your gross MRR churn by picking a time period and dividing the amount of MRR canceled in that period by the total MRR at the beginning of the time period.
Your net MRR churn takes upsell and expansion into account. You can find your net MRR churn by looking at a time period’s canceled MRR minus any added revenue from existing clients (for example, if one of your customers moved up a pricing tier) and dividing it by your MRR at the start of the time period.
What This Business Metric Says To Investors
To investors, churn speaks to your product/market fit. Low churn is a good indicator that your product is truly delighting the market and addressing a serious need. Churn also speaks to sustainability. If you’re churning a lot, you need to acquire new customers constantly to make up for the loss of your old ones. That’s expensive, and not a good sign of healthy growth.
That's The First Two Business Metrics, Now For The Last Two...
Customer Acquisition Cost (CAC) Ratio
Your CAC ratio helps you evaluate the efficacy of your sales and marketing campaigns by determining the cost of acquiring a new customer. You can find your CAC ratio for the quarter by taking the difference in gross margin between this quarter and the last, annualizing that difference (multiplying it by four), then dividing that number by how much you spent on sales and marketing during this quarter.
What This Business Metric Says To Investors
CAC Ratio shows how efficient you are in bringing on new customers. Investors will often look at this metric and the ratio of lifetime value of a customer (LTV) to CAC to determine whether or not you’re positioned for sustainable growth.
The 40% Rule
The 40% rule says that your growth rate plus your profit should add up to 40%. For example, if you’re growing at 20%, you should be generating a profit of 20%. If you are growing at 40%, it’s OK to have no profits at all—as long as you’re not running in the red. If you’re growing at 60%, you can afford to lose up to 20%.
What This Business Metric Says To Investors
If your growth rate and profit add up to less than 40%, you’re either growing too slowly or burning through money too fast—or both. Focus on growing your company and/or controlling your spending before you pursue debt or equity financing.
Takeaway
Whether it’s to run a more efficient and sustainable business, or because you want to impress investors so as to secure external capital, Startup Founders who also carry the title of CEO, simply MUST be intimately aware of, and be able to answer questions about their company’s business metrics, especially the four mentioned above.
About The Author:
James Spurway is an Angel Investor, Mentor, Advisor, Speaker, former Commercial Pilot, and Author who specialises in raising debt and equity capital. He strives to model diversity, equity, and inclusion in the founders he agrees to invest and work with. He has paused his angel investing activity to focus on raising his first US$ 50M venture capital fund, which will invest in startups that can accelerate the achievement of net zero emissions. James spent the past 33 years living in Hong Kong, Vietnam, Germany, Switzerland, Monaco, the USA, Thailand, the Philippines, Singapore, and Australia, his country of birth. In that time, he started 10 businesses, exited from seven, shut down two, and kept one. He has invested in a total of 50 startups since 2001 and had six successful exits.