Startups aspiring to raise growth capital need to ensure their financials are investor-ready. As part of becoming investor-ready, it is important to be aware of which financial metrics your business should keep track of as you grow your business.
Why it’s important to keep track of these metrics
With the right financial metrics in place, the numbers will show investors if your business is viable. Additionally, by focusing on these metrics, potential problems can be identified at an earlier stage and fixes can be put in place. Even if the the metrics are not good, you can still raise money, however, it may not get good reception or good valuation.
5 Important Investor-Metrics for any Startups
When potential investors evaluate statups, they will review the company’s historical financial statements, financial forecasts and the pertinent unit economics for the business. There are a lot of startup metrics that can be tracked to monitor your growth, and especially for SaaS-businesses, we highly recommend reading David Skok’s “SaaS Metrics 2.0 – A Guide to Measuring and Improving What Matters”. Of course, which metric to keep track of will vary depending on your industry and the stage of your company. In our experience, here are the top 5 investor-metrics applicable to most startups:
- Lifetime Value of Customer (LTV)
LTV is the amount of revenue or profit a customer will generate throughout their lifetime.
- CAC-ratios/CAC payback
CAC (Cost of Acquiring a Customer) payback is the time it takes to recoup the cost of acquiring the customer. It also provides a gauge of how much effort/budget can be allocated to marketing and sales for acquisition purposes. The longer the payback period, the risker for the business. Typically, CAC payback is 12 months.
- Churn-rate – especially true for SaaS companies
Churn-rate is defined as the percentage of customer turnover during a given time period. SaaS company’s monthly churn rate is typically 3%. Revenue growth becomes more challenging when churn is higher. More effort will need to be placed on customer acquisition, demanding additional funding which will impact profitability.
- Expansion MRR
With the Expansion Monthly Recurring Revenue (MRR), investors can see how quickly a company can grow. This metrics is especially important to SaaS companies as it measures the predicable and recurring revenue of the business.
- Marketing efficiency ratio (LTV to CAC)
Simply put, CAC must be less than LTV and by a significant multiple. The higher the multiple, the more profitable. To break even for SaaS businesses, the multiple is around three and closer to five to be really profitable.
Having Investor Metrics ready from the get-go not only arm you with the correct data investors are looking for when you start raising growth capital, but will also help you understand your business, whether it’s profitable and identify problem areas.
Does your current bookkeeper understand these concepts and can they help you get Investor Ready?