Raising capital can be complex and time-consuming for entrepreneurs. Many people struggle to balance. The demands of fundraising and operations. So as a Founder, it's imperative that you understand the process and requirements of funders or investors before approaching them.
It shouldn't be a surprise, that like banks, investors will have a set of criteria. They will look at and assess you against before they consider you for investment. Indicate discovered in this blog will provide an investor with insight into the companies, growth potential, financial stability, and overall health.
Monthly recurring revenue (MRR)
this is an indicator of a reliable and consistent revenue stream. MRR is a measure of how much revenue the company will generate month and month through subscriptions and contracts. Zoom and slack a good examples of sass companies with strong MRR, which help them attract significant level of investment.
Customer acquisition cost (CAC)
This is the cost of acquiring a new customer and is an important metric for evaluating efficiency and effectiveness of a company's marketing and sales efforts. A low CAC relative to the lifetime value of a customer is a pretty good indicator of the scalability and sustainability of the business revenue model. The Dollar Shave Club is a good example of a business with slow custom acquisition, cost and long high lifetime value.
Lifetime value (LTV)
Simply put, this is the total revenue that you expect to generate from a single customer over a lifetime with you. This is very important in relation to your customer acquisition costs, ensuring that lifetime value is high and long enough to offset your customer acquisition costs.
Gross Margin (%)
This is a measure of how profitable a company's products or services are. This gives an investor, a good indication of the profitability of the company and its pricing power, the higher, the margin hired ability to generate significant profits. Apple is a prime example of high gross margins thanks to its premium pricing strategy.
User Engagement
This is particularly important for digital services and products. there are a variety of metrics such as daily active users, time spent on the platform, and retention rates. High user engagement will indicate high stickiness and therefore high growth potential. We see this with TikTok, Facebook, and gaming software like Fortnite.
Churn rate (%)
This is the percentage of customers who cancel their subscription or stop doing business with you in a given period of time. The higher your churn rate, the more red flags arise with investors because this indicator suggests that they are not finding enough value in your product or service to stay with you.
By no means, is this an exhaustive list. Be wary of analyzing these KPIs in isolation as it can be misleading. By understanding the significance of each KPI and understanding, and demonstrating your clear understanding of each, relative to the stage of your business, and the sector and geography in which you operate, you will be in a better position to make a strong case for your company and the investment you require.
Not meeting these, and other KPIs, like in the example of WeWork, who saw their share price plummet when it became clear that they were not able to generate the revenue, margins, and returns promised to investors, not to mention, the debt they had piled up. Another startup many would not have heard of, that suffered the same fate, was Quibi, that despite raising significant levels of investment, could not attract sufficient paying customers.
How can we help
Raising a round, whether your seed or series C, is incredibly time-consuming. If doesn't have to be difficult though. We teach Founders how to fish, so that this fundraising doesn't consume you and your business.
If you're still at the idea stage, I suggest you consider joining the Founder Institute, where you will get hands-on support in validating your idea and getting to market. I'm a firm believe of making a $300 mistake rather than a $3 million mistake. Founder Institute is the right place to start.
If you need one-on-one coaching, book a session here.
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