What are some of the key financial metrics that investors look for in a startup?

We have an unhealthy focus on costs. Why? Because we can measure them, and they're easily found and added up. Less so is Value. Why? Because it isn't so easy to determine. Our whole management thinking and effort is spent on attribution and attrition of costs. The customer doesn't care about that, they only care about value. We end up with poor pricing practices accordingly - cost-plus, marginal etc. It's time we moved from the internal costs to external value. Many startups find this out too late (or not at all) as cost and old thinking (and false gods of Shareholder value) deflect away from differentiated value and sustainability.

During investor pitches or reports, highlight the revenue growth rate as a key metric to showcase the startup's sales expansion and market penetration. Explain that a high and consistent revenue growth rate indicates a strong product-market fit. Address the limitations of revenue growth rate by incorporating profitability analysis into your presentation. Be sure to present additional metrics or indicators that demonstrate customer satisfaction such as customer retention rate or positive customer feedback. Also, outline strategic plans and initiatives to ensure the long-term viability of the business. Detailing the above provides a more comprehensive understanding of the significance of revenue growth rate while highlighting broader aspects.

Investors can smell momentum. What’s the clearest way to show investors you are building something valued by customers/users? Traction metrics, specific to your business model: 1.Revenue, MRR, Paid pilots, LOIs 2.Rate of change (weekly, monthly) 3.Conditional commitments from investors with your deal These things signal to investors that other people have interest in your deal, and you have a process, platform and timeline to get more momentum on your deal.

Showcasing a MoM (month over month) growth rate either in terms of revenue or users will help you to establish authority in front of investors. It displays traction and potential that your start-up carries.

There are two ways that a company can increase it's profit margins. Either they increase profitable revenues or decrease costs. Most startups are more focused on market share in the first few years so profitable revenue growth is frequently non existent. Once a company gets past the first few years of growth, investors start to focus on the profitability and how the company will continue to add on new clients. In the later stages of the startup, stakeholders are seeking reduced costs to increase the value of the company. Basically investors expect losses the first few years, second adding profitable clients, and finally in the later stages of a startup reduction of costs.

While these financial metrics are important, it is essential to note that investors also consider other factors, such as the startup's management team, competitive advantage, and industry trends. A comprehensive evaluation includes a combination of financial and non-financial aspects to assess the startup's overall investment potential. Entrepreneurs seeking investment should understand these metrics and be prepared to present a compelling case to investors, highlighting their startup's financial performance and growth prospects. I like to pick - Burn Rate - as a key KPI to observe

Let’s say the startup has achieved a gross margin of 62%, indicating its efficiency in generating revenue from core operations. This relatively high gross margin demonstrates the startup's competitive advantage, pricing power, and operational excellence. Obviously, investors are attracted to startups with strong gross margins as they indicate a solid foundation for profitability. However, gross margin alone doesn’t account for overhead or fixed costs. So, it’s important for startups to also focus on effectively managing those aspects to ensure overall financial health and long-term viability.

Gross margin is key Yet can be deceptive Over time , gross margin can rise but sg&a can also. Keep an eye on the EBITDAR and NOPAT margins. And any changes to the GM Composition.

It's important to recognize that GPM is intrinsically linked with the volume of sales. A business can have a high GPM, but if it's coupled with a low volume of sales, profitability may still be out of reach. Conversely, a business with a lower GPM can still be profitable if the volume of sales is sufficiently high.

A higher gross margin indicates greater efficiency in turning raw materials and labor into revenue, and affords more money for operating expenses and potential profit.

Let’s say a startup has achieved a low and manageable burn rate, spending $39,000 per month to cover operating expenses such as salaries, rent, and marketing. This showcases the founder's ability to operate with leanly. Let’s also say that with the current cash reserves, the startup has a runway of 12 months. That indicates a prudent financial approach to investors. Nonetheless, given that burn rate doesn’t account for revenue or growth potential, the founding team should remain focused on ways to maintain the low burn rate such as increasing sales and expanding their customer base.

When considering the burn rate, it's crucial for investors to look beyond just the figures. While a high burn rate can raise red flags about a startup's longevity, it's not always a negative indicator. Rapid spending might be part of a calculated strategy to capture market share and achieve growth. Nevertheless, it's critical for the startup to manage this carefully and demonstrate to investors a clear path to profitability or further financing, ensuring sustainability.

Customer Acquisition Cost (CAC) must be viewed with Customer Lifetime Value (CLV) to be meaningful. It’s the ratio between the two that determines a startup’s efficiency in acquiring new customers. For instance, say it costs you, on average, £1,000 to acquire one new customer and the CLV is £100,000. The CLV:CAC is 10. You could spend the same for another customer but have CLV of £50,000. Review the different channels you use to acquire customers. It’s not just about costs. Consider the value of the customer too. It could worth spending more on CAC to attract higher CLV.

Analyzing the Customer Acquisition Cost (CAC) requires a balanced perspective. While a lower CAC is generally preferable, it's important to bear in mind that spending more on customer acquisition can sometimes lead to higher quality customers who deliver greater lifetime value. The key is ensuring that the startup maintains a healthy ratio of CAC to the Customer Lifetime Value (CLTV), thus showcasing a sound business model and long-term profitability prospects.

CLV provides insights into customer retention, revenue potential, and the effectiveness of marketing and customer acquisition strategies. A high and increasing CLV is indicative of a strong business model and satisfied customers. And in my practice, investors always view a high CLV as one of the major positive signals, as it demonstrates the ability to build customer loyalty and generate sustainable revenue over time.

Knowing your unit economics shows that you know what you are doing. Having a good unit economics shows that: - You know your business - You focus on profitability - You know your revenue - You know your profit, loss and cost structure

Why is unit economics essential? Because it: 1. Clarifies Business Dynamics: Gives insights into your model, spotlighting strengths and pitfalls. 2. Strengthens Financial Stability: Bolsters cash management and ensures efficient capital use. 3. Optimizes Products: Highlights areas for enhancement, maximizing customer value. 4. Drives Growth: Allocates resources effectively, targeting high-return segments. 5. Builds Investor Trust: Presents clear metrics that showcase strategy and potential. 6. Guides Decisions: Converts intricate financial data into actionable insights. 7. Sets Benchmarks: Provides measures to assess performance and align with industry norms.

Something to note - depending on your business, you may be eligible for impact investors. The goal of impact investing is to create a positive impact on society while also generating a financial return. For start-ups, impact investing can provide access to capital that might otherwise be difficult to obtain from traditional investors, such as venture capitalists or banks. Impact investments can also provide access to resources that are often unavailable to start-ups such as mentors, networks, and expertise. As a result, impact investing can help start-ups grow faster, reach new markets, develop innovative products and services, and create jobs.

"Key Startup Metrics: Churn, MRR, Runway, Sales Efficiency, ROI" Investors examine Churn Rate for customer retention, Monthly Recurring Revenue (MRR) for steady income, and Cash Runway to gauge financial longevity. They assess Sales Efficiency to measure cost-effectiveness of customer acquisition, and Return on Investment (ROI) for capital effectiveness. For SaaS, the Rule of 40% benchmarks growth and profitability.