Your start-up is ready to scale up and requires funding from investors to take it to the next level. What are the figures or metrics that start-up investors look for? And what should you have on hand to best present your venture to them?
There isn’t one objective answer to this question, of course.
According to a report by Octopus Ventures, there are three core metrics which give a good indication of long-term viability in your start-up:
- Headline growth
- Customer happiness
- Unit economics
Unit economics describe revenue and costs of a business in relation to any quantifiable item that creates value to a business. An example could be average order value (AOV), customer acquisition cost (CAC) or number of deliveries per hour.
“As we grew, we’ve started focusing on unit economics more and accepted lower growth rates.”
#1 – Show growth by revenue or number of users
When pitching, base your growth numbers on consumer growth and revenue. This is usually reported as month on month or year on year.
According to Octopus, investors will typically be looking for a growth rate of between 100 and 200 per cent year on year for early-stage businesses. Consumer businesses reporting 20 per cent month-on-month growth are typically deemed as top performers.
There is an indicator of growth called the K factor. This is an indicator of virality as it shows how many people a consumer is referring to your business. This is calculated by total users x average number of referrals sent per user x average percentage of referral sign ups. If your K-factor is above one, you’re going viral!
#2 – Break down your business into units
By breaking down your business into units, you see the profitability of your business on a granular scale. “Unit” here could be an item sold or a customer.
By using unit economics, you can clearly answer the question “Do I make more money from a customer than it costs to acquire one?” What this boils down to is understanding the lifetime value of a customer (LTV) compared to the customer acquisition cost (CAC), which is the total projected LTV of the customer divided by the cost to acquire them.
#3 – How happy are your customers?
If we are to use the KPIs outlined by Octopus Ventures’ happiness index, this can be measured by: customer retention – what is the percentage of customers who have used your product or service more than once; referability – percentage of customers who have come from referrals; churn rate, upgrade ratio and what percentage of customers would be very disappointed if you didn’t exist.
Measuring how happy your customers are provides a good indication of whether you have successfully nailed down your target market. A good example of how happy customers can have a big impact on your numbers is vintage clothing site Depop, which created a community around its brand who then spread the word.
“Not only are customer retention rates the ultimate signal of customer love, it’s also an important factor determining the addressable market size needed to support scale,” Helena Barman of Eight Roads Ventures says. “If companies have lower retention rates, there’s a greater requirement to top up churned customers and therefore the number of cumulative customers needed to reach scale can be very high.
“We also look for high frequency, naturally recurring products – you can’t force customers into behaviours they’re not used to.”
Which metrics matter for your business model?
Which metrics matter to you depends on the type of business you are. According to the report, a company can drop into the following categories: fast niche, fast mass, slow niche and slow mass.
Slow in this case means an order frequency of one order a month or less.
Fast means more than one order per month.
Niche targets a segment of the mass market.
Mass targets the mass market.
Metrics for fast mass businesses
Growth: investors view the best fast mass businesses as growing by 20 per cent month on month and demonstrating strong repeat rates and organic growth.
Customer happiness: by its nature, fast mass businesses mean more choice for the consumer.
Unit economics: AOV is a good metric to know for this business model. Due to the amount of competition between fast mass businesses which drives prices down, the AOV is a key indicator of how sustainable the business is. Upselling potential can be an important factor.
Metrics for slow mass businesses
Growth: a sustained pace of growth is important. Investors will be looking at between 100 and 200 per cent growth year on year.
Customer happiness: retention is less important here, but customer referral figures and organic growth will be important to show.
Unit economics: margins are important for slow mass businesses as purchases per customer will be few and far between.
Metrics for fast niche businesses
Growth: investors will be looking at growth of between 20 and 50 per cent month on month at the early stages.
Customer happiness: essential for these companies to build a loyal following and retain these customers.
Unit economics: investors will be keen to see CAC and lifetime value figures to assess the potential of a community.
Metrics for slow niche businesses
Growth: for this business model, investors will be looking at a growth rate of between 100 and 200 per cent year on year.
Customer happiness: a huge indicator of success for slow niche businesses. Companies with this model try to reach “fandom” levels of engagement, as purchases are big but hard to come by.
“Success in this business model happens once the product becomes a social currency for ‘tribes’ of consumers,” Ciaran Jourdan of sustainable fashion site Responsible says. “At Adidas, we deliberately built the Yeezy brand around an authentic community of consumers, based on scarcity and a tight control of our supply chain.
“The ‘sold out’ message is the strongest possible driver of desirability in this segment. Frequency of purchase is lower in this business model segment, but great businesses will control it based on new releases or ‘drops’. Having the discipline to build scarcity is fundamental here, and businesses that go for quick wins to drive sales will only experience short-lived success.”
Unit economics: customers must be profitable from their first purchase. The average order value (AOV) will be the highest here out of the business models.