Investors typically consider several metrics when evaluating startups for investment. Although these metrics usually vary depending on the industry/sector, stage of the startup, and funding rounds.
Fundamentally, here are Top 10 key metrics that investors often explore to review a startup, before investing:
1. Financial Metrics
a. Market Size & Growth
Investors often look at the size and growth potential (CAGR %) of the market the startup is targeting.
Total Addressable Market (TAM): Quantifies the total market size/opportunity for a product/service. A large TAM indicates significant growth opportunities, and VCs typically target > $1Bn markets.
Serviceable Addressable Market (SAM): Quantifies, what percentage of TAM can be served.
Serviceable Obtainable Market (SOM): Quantifies, what percentage of SAM can be captured.
b. Revenue and Growth Rate
Investors assess the startup's revenue and its growth trajectory. They analyze historical revenue figures and projected revenue growth (based on financial projections) to gauge the company's potential.
Specific to SaaS Startups (based on subscription or recurring revenue)
Monthly Recurring Revenue (MRR) represents the predictable revenue generated from subscription-based customers each month and is a fundamental indicator of a SaaS company's financial health.
Annual Recurring Revenue (ARR): ARR is the sum of all MRR over a year, thus providing a more extended view of revenue. It's a key metric for understanding revenue growth.
MRR and ARR figures demonstrate the stability and predictability of the revenue stream.
It's a good idea to segregate the MRR from existing as well as new users, and cross sell revenues from such users.
Specific to E-commerce/Marketplaces
Gross Merchandise Value (GMV): refers to the total amount of sales a company makes over a specified period (quarterly/annually.) GMV is not the same as overall revenue (which can include fees or services.)
c. Gross Margin (Gross Profit)
Gross margin reflects the profitability of a company's core operations. Investors examine the startup's gross margin to assess its ability to generate profits. By the way, the "growth at all costs" model is a passe.
2. Operational Metrics
a. Customer Acquisition Cost (CAC) and Customer Lifetime Value (LTV)
Customer Acquisition Cost (CAC) reflects the total cost of acquiring each customer. It measures how much a company spends (on marketing) to acquire new customers. Organic customers typically have lower costs and are highly preferred. The Average CAC by industry is here.
b. Average Revenue Per User (ARPU)
ARPU measures the amount of revenue a company generates on average from each customer. ARPU = Total Revenue / Total Number of Users. Typically used in SaaS or subscription-based startups.
c. Churn Rate
The Churn rate measures the rate at which customers cancel their subscriptions or stop using the startup's product/service. Investors assess churn rate to understand customer retention and the stickiness of the offering. Median Customer Churn Rates by Industry in 2022 is here.
d. Burn Rate and Runway
Investors evaluate a startup's burn rate, which measures how quickly it is spending its cash.
Runway measures how long a startup can sustain its current operations with its available capital i.e. how long can a company operate with its existing cash reserves before requiring additional funding.
3. Customer Metrics
a. User Engagement and Retention Metrics
Investors look at metrics such as new signups, daily active users (DAU), monthly active users (MAU), paid accounts, and user retention rates. These metrics indicate the level of user engagement and the stickiness of the product.
When measuring your active users remember to:
Clearly define it, and be consistent in applying that definition.
Ensure it’s a true representation of “activity/engagement” on your platform.
b. Net Promoter Score (NPS)
NPS is a metric used to gauge customer satisfaction and loyalty. Satisfied customers are more likely to stay and refer others, contributing to growth.
c. Product/Market Fit Indicators
Product/Market Fit indicates a scenario in which a company's target customers are buying, using, and telling others (word of mouth) about the company's product/service in numbers large enough to sustain that product's growth and profitability. Some of the strong indicators of a viable Product/Market fit include:
Consistent growth in user engagement, paying customers, and word of mouth.
High CLV:CAC ratio, high retention (low churn), and low burn rate.
In summary, metrics are essential tools for startup founders because they provide the necessary data and insights to make informed decisions, track progress, secure funding, and drive sustainable growth. By leveraging metrics effectively, founders can navigate the challenges of scaling their businesses and achieving long-term success. Well-documented metrics demonstrate a startup's ability to measure its progress and deliver on its promises. This transparency builds trust with investors and can facilitate fundraising efforts.