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:
- Cost of Acquisition (CAC)
CAC is the cost of acquiring a new customer. It’s critical to understand this metric to ensure sustainable growth. It is calculated as follows:
CAC = (sales + marketing expenses) / number of new customers acquired- Churn (especially true for SaaS companies) Churn is the rate at which a company is losing customers. High churn can signal underlying issues such as poor product/market fit, technical issues, poor customer support, etc. Companies should track both customer and revenue churn as the rates can differ. Customer churn is calculated as follows:
customer churn rate = number of customer lost in a period / total number of customers at the start of the period- LifeTime Value (LTV) LTV is the total revenue a company can expect to generate from a customer over their lifetime. Understanding LTV will help drive decisions around customer acquisition, retention, and pricing. LTV is calculated as follows:
LTV= Average revenue per user / churn rate Average revenue per user = total revenue in a period / number of active customer in that period- Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR) Monthly recurring revenue is the revenue a company can expect to generate from its customers on a monthly basis. Companies should have systems in place to track the following types of MRR:
- New MRR – Revenue generated from new customers acquired in a given month
- Expansion MRR – Additional revenue from existing customers through upsells
- Churned MRR – Revenue lost in a period
- Pipeline Coverage Pipeline coverage is a ratio that compares the value of opportunities in your sales pipeline to your revenue target for a given period (typically a quarter or a year). It helps determine if your sales funnel has enough opportunities to meet future revenue goals based on expected close rates.
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?
- Churn (especially true for SaaS companies) Churn is the rate at which a company is losing customers. High churn can signal underlying issues such as poor product/market fit, technical issues, poor customer support, etc. Companies should track both customer and revenue churn as the rates can differ. Customer churn is calculated as follows: