Fundraising can be a really exciting time in your startup's journey.
But it's a lot more fun when you have answers to the questions that investors are asking.
There are some common metrics that VCs look for that are important to have a fundamental understanding of for your business. If you prepare for these questions, it will make presenting to investors more enjoyable, and make the fundraising journey exciting, rather than heartbreaking.
The two most attractive metrics to showcase to an investor are Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR).
It's important to note that MRR and ARR are different from revenue, which is also different from sales.
MRR represents the amount of recurring revenue coming into your startup's business every single month, and ARR represents the amount of revenue coming in every year.
[See our blog post for more information on calculating MRR and ARR]
A strong ARR is even more impressive for investors because it means that the startup will collect the full 12 month amount upfront, which is very healthy for cash flows.
Investors will look to see how the MRR and ARR are trending. They like to see startups that have a high level of expansion and high level of stickiness, or low client churn.
MRR and ARR signal the health of a startup's sales process, which ultimately leads to the most important metric: growth. For more information, see our blog post on how to forecast out your startups MRR & ARR.
Another important metric is Customer Acquisition Cost (CAC). CAC signals how much it costs for your startup to acquire a new customer. The formula is simple:
This metric is important as it can help you improve your company's marketing return on investment, profitability, and profit margin. It also helps determine if your capturing true value from your customers.
That brings us to our next metric: Lifetime Value (LTV). Understanding what is the expected total revenue that you can expect from a new customer will be a very important metric, especially in relation to your CAC.
That's why investors will always compare your LTV to your CAC, with an ideal LTV to CAC ratio of 3 to 1. If you're ratio is closer to 1:1, you're spending too much, or your customers are churning too soon. On the other hand, if it's closer to 5:1, you're spending too little.
Next, your Profit Margin dictates how much you make from selling a specific unit. If you're an e-commerce company, it means when you sell your product and subtract out the COGS for that product, how much is your gross profit and what percentage of your sales is that gross profit. That is your Gross Margin or Profit Margin.
Investors love to see companies with very high profit margins, as every dollar saved in your Cost of Goods Sold can go into other areas of the business related to your operating expenses.
As every founder has learned, with startups, cash is king. Startups are always raising capital because they're posting losses in order to expedite their growth. Because of that, your Cash Burn will be one of the most important metrics investors will look at.
They'll use that to determine when your startup's Cash Out Date is coming up, or when your company will run out of money. This is an important metric not only for your investors, but also for you to prepare and ensure that you have a plan to fundraise at least three to six months in advance to prevent any mishaps.
When it comes to your cash burn, by far your largest expense will be your Headcount Spend. It's estimated that 50% to 80% of a startup's operating expenses typically relate to their headcount spend.
Understanding how much money you're spending across which departments and hires will be another important metric that you can show to investors.
Knowing and understanding these metrics will help you win over investors and secure that needed capital.
Are you gearing up for a fundraise? We have a lot of resources that can help you, and we'd love to help you scale your startup effectively.
Josh Aharonoff CEO and Outsourced CFO for startups
Hey - thanks for checking us out!
Would your startup benefit from dedicated Accounting & Finance expertise? We'd love to talk!
We crunch your numbers so that you can focus on what matters the most - growing your business.