Metrics helping grasp attention from early-stage investors
The following infographics are specially designed for entrepreneurs at the beginning of their business venture journey, who are seeking funds for their startup projects.
There are an infinite number of measures and metrics that can represent a company’s financial health and its projections of future development and growth. But in order to grasp attention from early-stage investors, it is important to emphasize key metrics that will help business people to gain interest from angel investors, venture capital firms and other financial institutions.
Andreessen Horowitz, a top early-stage venture capital firm with USD 4.35 billion assets under management and average annual investment of one billion dollars, compiled a list of 32 metrics startup investors pay the most attention to.
While these metrics are important, we focus on the core 15 metrics that will allow entrepreneurs to understand the essential measures and numbers that should be included in documents, such as Concept Development, Feasibility Study and Business Plan, increasing their chances of achieving the funds.
These easy-to-read infographics are divided into two sections: Financial metrics and ratios and Engagement and product metrics. Each of the 15 metrics are clearly defined so entrepreneurs will understand what investors want to know before considering their involvement in a startup.
FINANCIAL METRICS AND RATIOS
Bookings vs. Revenue
Booking and revenue are not the same thing, therefore they should not be used interchangeably, and both metrics should be represented.
Booking is your customer commitment to spend money with your company. Usually a booking is tied to a contract between your company and the client. Example for a contract will be a license agreement in enterprise software or a subscription agreement in a “software as a service” business. Revenue is recognized when the service is actually provided or in the case of licensed software, when the product is delivered to and accepted by the customer.
Recurring Revenue vs. Total Revenue
The higher the percentage of total revenue coming from product revenue, the better. Since revenue generated from services has lower margins and is non-recurring, investors will give a higher valuation to your firm.
Although the Revenue metric is highly important, Gross Profit shows the proportion of money left after deducting the real cost of goods that, depending on the company, can include manufacturing, delivery and support.
LTV helps to determine the value of a client in the long-term. It represents the present value of the future net profit from the client over the duration of the relationship.
Unearned and Deferred Revenue
This metric refers to “software as a service” (SaaS) businesses, and represents cash collected at the time of the booking in advance of when the revenue will actually be realized. As the company starts to recognize revenue from the software as a service, it reduces its deferred revenue balance and increases revenue: for a 24-month deal, as each month goes by, deferred revenue drops by 1/24th and revenue increases by 1/24th.
A good proxy to measure the growth, and ultimately the health, of a SaaS company is to look at billings, which is calculated by taking the revenue in one quarter and adding the change in deferred revenue from the prior quarter to the current quarter. If a SaaS company is growing its bookings (whether through new business or upsells/renewals to existing customers), billings will increase.
Total Addressable Market
This measure represents the market size in quantitative terms, where analysis incudes your target customer profile, their willingness to pay for the product or service, and how to market and sell the product.
Sell-through rate is calculated by taking the number of units sold in a certain period of time, divided by the number of items at the beginning of the period. In the marketplace business, the higher the rate, the more attractive investors find the company. This metric indicates whether suppliers see good returns on their marketing effort.
A simple definition of this metric is: network effect occurs when the product or service becomes more valuable as more people use it. Good examples of network effect include eBay and Facebook.
ENGAGEMENT AND PRODUCT METRICS
This is an important metric for a tech or software company. It helps to detect clients who continuously use the company’s services. The higher the number, the more attractive the company is to potential investors.
Average Revenue Per User
ARPU is defined as total revenue divided by the number of users for a specific time period, typically over a month, quarter or year. This is a useful metric as it shows the value of users on your platform.
This is the rate at which cash is decreasing on the company’s accounts. Consider this an important metric for a startup, to keep an eye on financial resources.
Compounded Month-on-Month Growth
This metric is more useful than simple average of monthly growth, as it measures periodic growth and helps benchmark growth rates against competitors. CMGR = (Latest Month/First Month)^((1/# of Month)-1).
Net Promoter Score
NPS is used to size up client satisfaction and loyalty to a product or service. In order to have an unbiased sample, it is important to survey all clients and not a subset. It is crucial to focus on all clients and not just clients who use the service a certain number of times.
This analysis divides users into groups depending on their activities and behavioral habits over a specific period of time. Thorough analysis will show how users engage with your product over time. It can take a number of people signed up for your service and during one month monitor this group, to reveal how many users stayed long term.
Customer Concentration Risk
Customer concentration shows the percentage of revenue attributed to each customer. The lower the concentration, the better, as it means customers have less leverage over pricing and less control over product development.