5 Metrics To Know Before Your Startup Pitch
Raising a round of investment is an uphill task for even the most experienced entrepreneurs. In a situation where first impressions are key, being well-prepared is a must. The problem is that startup founders are always in a race against time and end up compromising on their preparation before an investor meeting.
As an entrepreneur, you are expected to not only describe your business well but also have key numbers on your tips. It is no secret that startup investors love their numbers and would want to quiz you left, right, and centre about them!
Each startup is unique and is defined by its own set of metrics, mostly determined by the stage and industry it belongs to. However, most startups share a common set of numbers that investors are always keen on knowing without which your preparation will remain incomplete.
Here are the 5 key metrics all startup founders must know about before their pitch.
Cost of Customer Acquisition (COCA)
Early-stage startups generally have to shell out a lot of money to onboard new customers because they are yet to prove their worth. They bear the brunt of heavy scepticism and judgement. In fact, having a high COCA for prolonged periods of time is enough to kill a startup even if it has achieved validation or product-market fit.
Formally, COCA is defined as the average cash a startup burns in order to acquire a new customer in a given time period. It can be calculated through the given formula.
COCA = Total Spend on Marketing and Sales / Number of New Customers Acquired
Essentially, all advertising and marketing spending that a startup has to undertake to attract customers are used to calculate this metric. There is no single ideal number for COCA since it is affected by different factors including competition, sales cycle and industry standards. For example, software companies (B2B models) tend to spend a lot more to acquire new users as compared to FMCG brands (B2C models).
As for investors, COCA is a strong indicator of profitability along with the Lifetime Value discussed below. It also unearths potential challenges in scaling sustainably and effectively.
Lifetime Value (LTV)
The second important metric to know is the lifetime value of a customer which refers to the average amount of revenue each customer brings during his or her entire time of association with the company. It can be represented through this formula.
LTV = Average Customer Sale Value x Average Customer Lifespan
As suggested earlier, COCA and LTV are very useful numbers to track and give an indication of the financial health and profitability of a company, especially at the unitary level. Investors are keen to see if over time, the startup is able to onboard users at a lesser cost while extracting more revenue from them.
Yet again, LTV is affected by numerous factors and is not consistent across markets. However, one way to excite investors is by presenting them with a COCA:LTV ratio equal to or exceeding 1:3. This ratio gives some kind of assurance for stability and profitable growth going forward.
Monthly Run Rate (MRR)
This one is a no-brainer because all investors will expect you to know your revenue figures by heart. Having a consistent revenue is a great way to prove market acceptance of the product and continuous sales.
While revenue can be checked over different time intervals, the MRR is the easiest unit to break down into. All you have to do is take the total revenue earned and divide it by the number of months it took you to achieve that average amount. It can be stated as a formula too.
MRR = Total Revenue Earned / Number of Months
The MRR is not only an indicator of the current financial performance but also a sign of how well the company can do in the future. It is a solid basis to forecast growth and check the impact of varying conditions on revenue.
Monthly Burn Rate
Startups have to deal with many costs, especially in the early stages of the business and investors like to check if they can become an impediment to the growth. The monthly burn rate is a metric that measures how quickly a startup is spending money every month and is considered critical by many investors.
To calculate the monthly burn rate, the following formula can be used.
Monthly Burn Rate = Cash at the Start of the Month – Cash at the End of the Month
This metric is generally used in tandem with the MRR to determine if the company is cash-flow positive or negative. If the MRR exceeds the burn rate, it implies a positive cash flow and if the burn rate exceeds the MRR, it is termed as a negative cash flow.
While it is understandable that early-stage startups have a higher burn rate, the important part is to see if the gap between the cash flow at the start and end of the month is reducing over time. A startup that has a heavy burn rate without corresponding traction will find itself in muddy waters.
Runway
A critical metric that startup founders forget to address is the runway. The runway defines the amount of time remaining before a startup runs out of cash, given the present income and circumstances.
A short-sighted approach wherein entrepreneurs look to raise funds with a mere 3-4 months of runway is a red flag for investors because founders do not have much control in their hands. The runway for a startup can be calculated by using the cash available with the startup and the burn rate.
Runway = Total Cash Available / Monthly Burn Rate
This formula will give the number of months remaining before the entire money is used up. Raising investment is a way to increase this runway, depending on the plans you have for the future. It is therefore critical to understand what amount of money will give you what kind of runway so that you are not jumping into the next round of investment right after the first.
It is also equally important to make room for unforeseen circumstances (the covid-19 pandemic being the most recent example) and ensure that you have a decent amount of cash with you before you start approaching investors since the fundraise itself takes time.
