10 Key Metrics Early-Stage Investors Want to Know About Your Startup
So, you’ve decided it’s time to put your growth plans into action and turn your startup or young business into a world-conqueror. But before you start dreaming of being labelled “the next Steve Jobs”, you need to raise capital. Whether you’ve bootstrapped until now, or are looking to raise further growth capital, the process is roughly the same. It requires structure, preparation and a whole load of supporting documentation.
And guess what? We’re not talking about your slick, new marketing video. Potential investors will usually require a business plan, executive summary, and financial data in order to gain an insight into your company, in terms of past performance, present standings, and future plans. While every investor has their own set of criteria when it comes to making a decision – for some a personal one-on-one meeting is all it takes – there are some key metrics which generally attract careful consideration. These metrics apply whether you’re setting up an equity crowdfunding campaign or approaching a bank.
This indicates how expensive it is to make your product or offer your service, and is expressed as a percentage. This is calculated either by taking the business’ total sales revenue and subtracting the cost of goods sold (then dividing by the total sales revenue) or the selling price of an item, minus the cost of goods sold.
Also known as the “top line”, this metric indicates the growth or expansion potential of a business by highlighting increasing or decreasing sales over a period of time. Rather than simply being a snapshot of revenue, it is able to convey trends.
Also known as the “bottom line”, “profit attributable to shareholders”, or “burn rate”. This shows the business’ total earnings and is calculated by taking all costs incurred (including cost of doing business, depreciation, interest, taxes, and other expenses) away from revenue.
This metric shows the profitability of individual products. The contribution margin is used to determine whether variable costs for your product can be reduced, or if the price of the end product should be increased. Depending on the sector your business operates in, this margin can range from 5% to 25%.
A metric which shows the revenue potential of each of your individual customers. The larger churn your business experiences, the more difficult you will find revenue growth. In order to expand your customer base, your number of new customers must exceed your churn rate.
The cost associated with attracting customers to your business. As you work to engage potential customers, you spend money on producing the product or service, research, and marketing. The objective is to spend as little as possible on customer acquisition, within reason.
Showing your sales targets to potential investors – and whether you’ve achieved them – indicates how well your product is selling and whether or not your sales team is performing efficiently.
This is the single biggest expense for most start-ups and a lot of established businesses too. Potential investors will be interested to see whether you pay low salaries (which could raise questions about employee retention in the future), or excessive salaries (which could limit your company’s operational future).
A metric which indicates how efficiently your business uses its employees. In general, a relatively high revenue-per-employee rate suggests that your team is producing more sales, which is a positive sign. It’s important to remember that some sectors and products generally require more people in order to generate higher sales.
Non-Personnel Marketing Budget
This is perhaps the only variable metric on the list, as it can be controlled and adjusted month-to-month. Typically, it refers to the amount of money spent on advertising and events, which can be increased or decreased as your other marketing efforts progress. It is a good indicator of how well your business understands its market, but also of how responsiveness your business is to recent sales results.
Once you’ve included this information in your business summary, you might just be ready to begin your capital raise.
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