I’m the first to admit that raising money can be a huge distraction and an extremely frustrating experience for any entrepreneur. You may wonder why I have patches of grey hair and defined wrinkles at the ripe young age of 31. Wonder no more, it’s all about money, money, money, mon-aaay! It can also take your focus off the horizon for just long enough to find that your ship has veered into coastal rocks and will soon be exploding into smithereens.
Fundraising is a long process and is all about building relationships; wining and dining investors with the hope of getting them into bed so you can both roll around in a big pile of money. The guys with the money invest in people—people they trust and value– which is why building a strong relationship with investors is primordial, just like dating. Clearly, your idea/product needs to be valuable as well. It’s all about getting the formula right, traditionally this magic equation works:
Great Product + Experienced and Enigmatic Team = CASH MONEY.
Having a compelling story to tell your investors will play a big role in ‘The Pitch’, the objective being to provide them with stimulating, informative and engaging content. I’m all for putting on my Sunday’s best, getting a little freaky and telling stories to VC’s that are going to get their curiously piqued.
So when it comes to pitching your startup to investors, what is going to make them quiver at the knees, and fall into your arms like a damsel in distress?
Namely, we say a big “no no” to vanity metrics. Don’t fool yourselves with page views, unique visits, amount of downloads and all that jazz. These metrics have no correlation to the success of your company.
Investors want to see actionable metrics that count, metrics that reflect how your business is performing, metrics that steer you in the right direction. Needless to say, each business is different so the metrics that correspond to it will vary. Below is a rough guide to some of the top metrics that our friends with the money look for in a fledgling startup. I’ll say it just one more time… metrics.
1. CAC (Customer Acquisition Cost)
Say what? In other words, how much does it cost you to get 1 customer?
The math Take the entire cost of sales and marketing over a given period and other related headcount expenses and divide it by the number of customers you acquired in that period of time.
What says the VC? We consider CAC as one of the most important metrics for an early stage startup because to grow you need users but these users will obviously cost you money, and getting good users that convert can be a costly process. For a business to be profitable on each new customer, you will need to balance two variables, CAC and Life Time Value (LTV). IF the CAC is more than the LTV then the customer acquisition strategy needs to be adjusted. Most early stage startups fail because of a poor customer acquisition strategy, which is why it’s essential to get it right.
2. Retention Rate
Say what? What percentage of people who use your product in month 1 still use it in month 2 (etc.)
The math Using cohort analysis, you can calculate over a period of months, the percentage of users that still use your product. E.g Users sign up in January. The same month they make 1000 purchases but in February they only make 800 purchases. The retention rate in this example is 800/1000 = 80%.
What says the VC? Knowing the retention rate allows us to monitor the performance of a company in retaining its customers. The higher the retention rate, the stronger the business. Try and compare the amount you invest in acquiring new customers with how much you spend on reactivating existing ones. Which is more cost effective?
3. ARPU (Average Revenue Per User) & LTV (Life Time Value)
Say what? The amount of money that a company earns for each of its customers over a given period of time.
ARPU = Total revenue/amount of buyers
LTV = ARPU * (1/churn) – there are different ways to calculate LTV but this is a simplified version.
What says the VC? The LTV is often overlooked however we consider it as one of the most important metrics to benchmark. As we previously mentioned, the LTV needs to be higher than the CAC for a business to work. Understanding these numbers helps you define whether your customer acquisition strategy needs to be modified. It’s important to take into consideration that the LTV is just a prediction of the future business based on current assumptions however as we all know with any business, things can change on a daily basis.
4. Viral Coefficient
Say what? This measures the organic growth of your company. To have a viral coefficient of 1, every registered user has to bring on 1 registered user.
1. Calculate the average number of invitations sent per registered user (e.g. database = 1000, sent invitations = 5000, average invites sent per user = 5)
2. Calculate the percentage of referrals that signed up (e.g. 20%)
3. So if 20% of the referrals signed up you would have 5000*20% = 1000 new users
4. Initially you had 1000 users and you got an extra 1000 through the referrals.
5. Viral coefficient: 1000/1000 = 1
What says the VC? The higher the viral coefficient, the more exponentially your company will grow and the less it will cost you to do so. Oftentimes fledgling startups nosedive due to a poor customer acquisition model so the higher you can get your viral coefficient, the better. The types of conversions seen by organic users (referrals) can surpass that of users achieved from traditional marketing so it can help your business in more ways than one.
Say what? The speed at which clients are becoming active, including events, in addition to various actions on the website. E.g. conversion of visitors to registered users / registered users to buyers / how long it takes users to purchase after registering etc.
The math Depends on what activation metric you want to measure, E.g. sign up, purchase, download, complete a profile, etc.
What says the VC? Again this depends on what activation metric you want to measure. Let’s take the example of registered users to buyers. A higher activation rate is more valuable as you are essentially creating a more engaged and profitable vehicle. Lets say you have a database of 10,000 users and you only activate 10% compared with the same database but a 20% conversion. Which sounds better to you?
6. Repetition rate
Say what? What percentage of your database uses you product again after making 1 purchase/reservation/whatever it may be.
The math Amount of buyers that have done more than one purchase/total amount of buyers.
What says the VC? This is geared more towards e-commerce but again, the higher the repetition rate, the more engaged the users are with the product and the more interesting the opportunity. Higher repetition rates relate positively to LTV.
Say what? How much money your company is making
The math Check your bank account!
What says the VC? This isn’t a hard one. The more money you are making and the quicker you do it, the quicker the ROI for the investor.
These are just some of the key metrics that give investors a snapshot of your business and help them analyze if it’s a viable opportunity for them or not. As selling a dream isn’t as easy as it was before, make sure you know your metrics inside and out!