Your startup is ready to scale and needs funding from investors to take it to the next level. What numbers or metrics are startup investors looking for? And what should you have on hand to best present your business to them?
There is no objective answer to this question, of course.
According to a report by Octopus Venturesthere are three basic indicators that give a good indication of the long-term viability of your start-up:
- Overall growth
- Customer happiness
- Unit economy
Unit economics describes a company’s revenues and costs relative to any quantifiable item that creates value for a company. An example could be average order value (AOV), customer acquisition cost (CAC), or number of deliveries per hour.
Guy Farley, co-founder of the British unicorn A lot of animalssays, “We focused on the same metrics: growth first, customer satisfaction, and full customer acquisition cost.
“As we grew, we began to focus more on the unit economy and accepted lower growth rates.”
#1 – Show growth by revenue or number of users
When presenting, base your growth numbers on consumer growth and revenue. This is usually reported as month over month or year over year.
According to Octopus, investors are typically looking for a 100-200% year-over-year growth rate for start-ups. Consumer companies with 20% month-over-month growth are generally considered the top performers.
There is a growth indicator called the K factor. It is an indicator of virality because it shows how many people a consumer refers to your business. This is calculated by the total number of users x the average number of referrals sent per user x the average percentage of referral signups. If your K-factor is greater than one, you’re going viral!
#2 – Divide your business into units
By breaking your business down into units, you see your business profitability on a granular scale. “Unit” here could be a sold item or a customer.
By using unit economics, you can clearly answer the question “Am I making more money with a customer than it costs to acquire one?” This boils down to understanding a customer’s lifetime value (LTV) versus the customer’s cost of acquisition (CAC), which is the total projected LTV of the customer divided by the cost of acquisition.
#3 – Are your customers satisfied?
If we are to use the KPIs defined by the Octopus Ventures Happiness Index, this can be measured by: customer retention – what percentage of customers have used your product or service more than once; referability – percentage of clients from referrals; churn rate, upgrade rate, and percentage of customers who would be very disappointed if you didn’t exist.
Measuring your customer satisfaction provides a good indication of whether you’ve been successful in targeting your target market. A good example of how happy customers can have a big impact on your numbers is the vintage clothing site. Depopwho created a community around his brand that then spread the word.
“Not only are customer retention rates the ultimate signal of customer love, but it’s also an important factor that determines the size of the addressable market needed to sustain scale,” Helena Barman of Eight Roads Ventures said. “If businesses have lower retention rates, there is more need to replenish lost customers and therefore the number of cumulative customers needed to reach scale can be very high.
“We’re also looking for high-frequency, naturally recurring products — you can’t force customers into behaviors they’re not used to.”
Which indicators are important for your business model?
Which metrics matter to you depends on what type of business you are. According to the report, a company can fall into the following categories: fast niche, fast mass, slow niche, and slow mass.
Slow in this case means an order frequency of one order per month or less.
Fast means more than one order per month.
Niche targets a mass market segment.
Mass targets the mass market.
Metrics for fast mass business
Growth: investors consider the best fast-moving companies to grow 20% month-over-month and show high repeat rates and organic growth.
Customer happiness: by their nature, fast mass businesses mean more choice for the consumer.
Unit economy: AOV is a good metric to know for this business model. Due to rapid mass business competition driving down prices, AOV is a key indicator of business sustainability. Upsell potential can be a big factor.
Measures for Slow Mass Enterprises
Growth: a sustained rate of growth is important. Investors will be looking at 100-200% year-over-year growth.
Customer happiness: retention is less important here, but customer referral numbers and organic growth will be important to show.
Unit economy: margins are important for slow mass businesses because purchases per customer will be few and far between.
Metrics for Quick Niche Businesses
Growth: investors will expect 20-50% month-over-month growth in the early stages.
Customer happiness: essential for these companies to retain and retain these customers.
Unit economy: investors will be keen to see CAC and lifetime value numbers to gauge a community’s potential.
Measures for Slow Niche Businesses
Growth: for this business model, investors will expect a growth rate of between 100-200% year over year.
Customer happiness: a huge indicator of success for slow niche businesses. Companies with this model try to achieve “fandom” levels of engagement, as purchases are large but hard to come by.
“Success in this business model happens once the product becomes a social currency for consumer ‘tribes’,” Ciaran Jourdan of the sustainable fashion site Responsible said. “At Adidas, we deliberately built the Yeezy brand around an authentic community of consumers, based on scarcity and tight control of our supply chain.
“The ‘sold out’ message is the strongest possible desirability driver in this segment. Purchase frequency is lower in this business model segment, but larger companies will control it based on new releases or “falls”. Having the discipline to create scarcity is key here, and companies looking for quick wins to drive sales will only experience short-lived success.
Unit economy: customers must be profitable from their first purchase. The average order value (AOV) here will be the highest among the business models.
Learn more about seed funding
The world started with a big bang, your pitch should too