As your startup grows, you’ll likely be searching for more funding. Whether for operational cost, improving marketing efforts, or hiring more employees, it’s important you are ready to share key metrics with venture capitalists who may be interested in investing in your startup.
Impressing them is one thing, but preparing relevant information to answer their questions is another. The best approach is to show them data that proves they will likely see a return on investment.
Here are five metrics every VC wants to see from your startup that you should incorporate into your financial modeling and pitch deck:
Market data plays an essential role in the decision-making process for VCs. They’ll want to look at a variety of aspects because each of them provides insight into whether or not they will see a return on their investment.
Here are a few areas of market data VCs analyze before making a decision:
- Size of the market (market cap)
- VCs are usually attracted to startups with large market caps. The bigger, the better in most situations. You’ll want to present your market size analysis with market research reports from third-party estimates and customer feedback involving their desire for the product.
- Your competition can make or break a VC’s interest in your startup. If the market is full of other startups or well-established businesses, the likelihood of working with you is significantly lower. You’ll want to prove competition is not a huge concern for your startup.
- How your startup differentiates itself from others
- While an abundance of competitors may turn VCs away from investing in your startup, you may be able to re-grab their attention with the way you differentiate yourself from the competition. They will be more interested in your startup if you show how and why it’s different from your competitors.
Customer Acquisition Cost (CAC)
VCs will be interested in your customer acquisition cost (CAC) because it shows how much it costs to acquire a new customer. The goal is for your CAC to be low, meaning gaining new customers doesn’t come at a large expense for your startup.
To determine your CAC, VCs will take into account:
- Your ad spend
- Sales rep salaries
- Cost of marketing campaigns
With this information, they will determine if your CAC is sustainable and reasonable and use that to help with their investment decision.
Average Revenue Per Client
Once they’ve taken a look at your CAC, they will begin to shift their attention to the average revenue per client. Essentially determining how much money you make from each of your clients. When VCs combine this with CAC it allows investors to see potential profitability in your business.
A bonus metric that is relative to average revenue per client is churn. Churn refers to how many customers leave on average in a given period. This metric is typically calculated monthly and, again, gives VCs an idea of how sustainable your overall client base is.
Here is an example:
- Product cost: $50/mo
- CAC: $75/customer
- Average revenue per client: $150 (3 months)
- Average gross margin per customer = $75
One of (if not the) most important metrics VCs are interested in is expense allocation. Because they are giving you money to make more of it, the way you are spending and have spent your money in the past can tell them whether or not they are interested in investing in your startup.
VCs will expect detailed records including:
- A comprehensive budget
- Spending reports by category
Again, their decision to invest will heavily rely on their opinion of whether or not your startup is spending money in the right places.
Often, startups are looking for more investors because they need to hire more staff. If this is the case, VCs will want a detailed review of your payroll systems. Some of the main points of concern are:
- Your current hiring processes: They’ll want to know if it is sustainable and in shape for making several new hires.
- Your retention rate: Are you hiring because you are growing or are you hiring because you have a hard time keeping employees?
- Company culture: Do you have employees who like their jobs and can you use their positive feedback as leverage for hiring additional employees?
- How quickly have you hired: VCs will want to make sure you are hiring at the right pace. If you are too quick to hire, it could lead to overspending, layoffs, and lower retention rates.
Have the Right Data for Potential Investors
When you begin to start pitching your startup to VCs, it’s important you have everything they are looking for prepared and ready to go.
The key startup metrics of interest include:
- Market data
- Customer acquisition cost
- Average revenue per client
- Expense allocation
- Payroll data
When you can present these metrics to potential VCs, it gives them the info they need to make important decisions pertaining to their investment in your startup.
To appealingly prepare all this information, you’ll want to work with an expert in helping high-growth companies. Founder’s CPA is just that. They’ll provide unparalleled support as your business scales. To learn more about how Founder’s CPA can help prepare your startup for venture capitalists, visit https://founderscpa.com/contact-us/.