Are you fundraising for your startup? Here are the KPIs you need to know. This information will help you understand better how investors interpret startup KPIs.
Your startup’s KPIs are core to the ability to raise capital. They are the criteria that investors will be evaluating your pitch and company on.
So, which data points should be in your pitch deck? How can you expect investors to interpret these numbers?
The Ultimate Guide To Pitch Decks
Here is the content that we will cover in this post. Let’s get started.
- 1. Understanding How Investors Interpret Startup KPIs
- 2. KPIs In Startup Fundraising
- 3. Market Size
- 4. Number Of Customers
- 5. Customer Acquisition Costs
- 6. Revenue
- 7. MRR
- 8. Renewal Rates
- 9. NPS Score
- 10. Burn Rate
- 11. Runway
- 12. Profit Margins
- 13. Cash Flow
- 14. EBITDA
- 15. Lifetime Customer Value
- 16. Conversion Rates
- 17. Cost Of Goods Sold
- 18. Growth Rates
- 19. Market Share
- 20. Summary
Understanding How Investors Interpret Startup KPIs
Key Performance Indicators (KPIs) are essential data points for startups.
They are metrics that founding entrepreneurs should be using for their goals, to measure their health and performance, benchmark themselves against the competition, and evaluate their fundraising ability.
For all of these reasons, it is vital that startups have tools and systems to track and monitor these numbers. Then easily pull them into their data rooms and fundraising presentations.
Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
KPIs In Startup Fundraising
KPIs are essential for successfully operating a business. They are also integral for startup fundraising, and managing investors.
This is critical for including the right data points in your initial pitch and data room, being prepared to answer the questions that interested investors will have, and working with your investors between each funding round.
Your pitch deck is essentially a collection of these KPIs, presented in slide form. Whatever your numbers are, they need to be included to check the boxes that investors are looking for.
After a round of funding is closed, investors will be monitoring your KPIs to see how you are performing, making progress toward your stated milestones, and keeping tabs on company health and the value of their investment.
If you aren’t doing well, then they may not be eager to refer you up to the next rung of investors on the ladder or to extend more financing.
The data that you feel is most important to you may not always be the same as for your investors. Investors can also read a lot more into your KPIs, and view them differently than you might.
So, here are some of the most important figures you need to have ready. That’s how investors interpret startup KPIs.
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TAM (Total Addressable Market), is one of the most important figures for startup investors.
Your fundraising efforts can be dashed right here, regardless of everything else you are doing well. It doesn’t matter how genius your product is; if the market isn’t big enough, investors just won’t be able to generate acceptable returns. Remember that this is a financial transaction, not a charitable donation.
You need a really big TAM. If you are not competitive in this area, then zoom out further.
You will also need to be able to provide answers on your SAM and SOM. These tell investors that you know how to focus, and work to maximize the ROI on your spending.
Number Of Customers
How many customers do you have?
Today, the number of customers you have can be more important to investors than the size of your total revenues, even how much some of these individual customers are spending, or who they are.
Many of today’s most valuable companies are so highly valued because of the number of users they have. Think Facebook and Twitter. The data on a high volume of consumers can be very valuable in a wide variety of ways, which may be capitalized on later.
It may feel great to land big brand name B2B customers. Even more so if those sales or contracts are worth millions of dollars. Yet, for investors, a business that is reliant on just a handful of customers is very, very risky. Even if those customers are huge institutions or government agencies. They can be very demanding, and losing just one may plunge your business into financial distress.
Customer Acquisition Costs
This is one of the most common questions that investors will have for startups.
How much it costs to acquire a customer reveals a lot about a company. It shows whether it is competitive and sustainable. As well as how much can be invested for a predictable multiplied return.
If this number is abnormally high, you may not be able to keep up with your competition. You may not be able to survive price wars. If you get too lean on cash, you may not be able to afford to acquire new customers.
However, this can also be an area where extra value can be found by investors. They may know how to instantly drop this number and boost your profitability. That’s one of the strategies for how investors interpret startup KPIs.
Revenue is a rough, but quick KPI that tells investors how far you’ve gotten, and what stage you are at.
Having revenues means that you’ve proven you can sell, and people are willing to pay money for your product. That de-risks the investment for those with capital.
Your amount of annual revenues also shows how much you’ve grown, and how close you may be to qualifying for another round of funding or going public.
Monthly Recurring Revenues (MRR) has become an especially common KPI in the wake of the SaaS and subscription revolution.
Monthly revenues can be more insightful than annual revenues. It says a lot more about the sustainability and solvency of a business. As well as its ability to invest in improvements and expansion.
It says a lot about your ability to stay consistent. Or reveals seasonal trends in your business.
Renewal rates or churn rates dig even deeper into the success of a startup and its finances.
Looking at monthly recurring revenues alone does not show how much of that money is coming from new versus existing and repeat customers.
If your income is all coming from new customers, that is far riskier and less reliable. It also suggests that your net profit is going to be a whole lot lower than if you had all repeat customers. You are burning a lot of money, and may not be creating a sustainable or solid business.
High churn rates indicate that users are not pleased with your product or service. Which should be a huge red flag for investors.
Your Net Promoter Score shows how many of your customers are or are likely to refer others to your business.
Referral customers are typically the most profitable. They may cost nothing to acquire. Or at least a fraction of having to advertise and sell new cold customers.
Strong NPS Scores show that customers are more than happy with what you are selling them, and how you are serving them. This is very attractive to investors and indicates there may be a substantial amount of goodwill value. That’s another of the critical ways how investors interpret startup KPIs.
Burn rate is how much money your startup is burning through. Expressed on a monthly basis.
Firstly, this tells investors how much money you will need to raise in this round, just to survive. Typically startups are raising new rounds every six to 18 months. On top of that, they will need to account for inflation, the risk of income interruption, and having capital to invest in growing and achieving the next milestones so that you qualify for more funding.
Burn rate also reveals your level of sustainability and stress. It can indicate whether you have too much overhead or are being very efficient and productive with what you have.
This is how many months of money you have left in the bank. If your burn rate is $10k a month, and you only have $30k in the bank and are still a pre-revenue startup, you need to close and put cash in the bank in less than three months. If you don’t, you won’t make payroll, and may have to close down.
In this scenario, an investor knows that you are under intense pressure, and will likely have to accept whatever terms they demand in exchange for more capital. Even more so if they drag out the process for another two months.
Whereas if you have 18 months of runway left in the bank, your startup will be in a strong negotiating position.
One of the first things that investors will notice is how your profit margins stack up to industry benchmarks.
If you are underperforming on this KPI, they will certainly want to know why. If you are grossly overestimating profit margins in your financial forecasts, that can destroy your credibility. Unless you have good answers for why then they may perceive you do not understand your industry.
Profit margins also show how sustainable and scalable a business is. If they are too thin, you’ll easily fall into the red. You won’t have enough margin to be able to scale or take advantage of new distribution channels. Which will also decrease the chances of ever being acquired.
How much cash is flowing through your business?
This can be very important to some investors and acquirers. All your other KPIs can be strong, but without cash flow when you need it, you can still go bankrupt. Even in your best month ever for sales and orders.
If you have a lot of cash coming through the business regularly, you may have more flexibility to make investments, make it through crises, and see your company thrive when others are struggling.
This staple business metric may be most commonly used for later-stage startups and when it comes to M&A transactions.
Still, it shows if you are on track to a great exit, or qualifying for larger amounts of funding from private equity firms, and strategic corporate investors.
Even as you’re reading up on how investors review and interpret the KPIs and other metrics you present, you’ll need more. You’ll also need guidance on how to share information with investors to make the right impact. Not sure how to do that? Check out this video I have created.
Lifetime Customer Value
This is one of the most important numbers for businesses to understand.
Sadly, few give this the attention or appreciation it deserves. Which ultimately leads to many poor and self-sabotaging decisions.
Savvy investors should want to know this KPI to understand how well you are doing at maximizing value and ROI. As well as to evaluate what potential there is to grow profitability. Keep this factor in mind when figuring out how investors interpret startup KPIs.
This is a tricky data point that can be calculated in different ways. Yet, it is a very telling KPI.
If you are outperforming industry benchmarks, that can look great on your business. If your conversion rates are subpar, it could be a red flag and dealbreaker. Or an opportunity for your investors to help you unlock more value, revenues, and profits.
Cost Of Goods Sold
How much does it cost to make your product?
Investors want to know if this is reasonable and in line with others. Or whether you are grossly overspending.
They may be able to help you improve this dynamic. Or at least it can justify why you are seeking to raise so much money so early in your company journey.
Traction and fast growth are a must to be considered a fundable startup. How this is measured and how fast you should be growing will vary by stage and type of investor.
It could be on a weekly, monthly, or annual basis.
How much of the market are you already capturing? How much room is there left to grow?
KPIs are integral for startup success and successful fundraising. Know the most important key performance indicators to be tracking internally as a business, as well as those that startup investors may put the most weight on.
By understanding how investors interpret startup KPIs, you can better execute fundraising campaigns and pitches, while showing existing investors that you are delivering, or over-performing on your promises, and making the best use of their capital.
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