When investing in a Series A round, VC firms heavily relies on data supplied by the founders and make decisions based on a combination of data analysis and personal intuition, and past experience. Despite the individuality of each start-rely up, there are certain common metrics that serve as a gauge for evaluating their potential as an investment opportunity.
It's crucial to keep in mind that the opinions of venture capital firms can vary widely, with each firm having its own "key metric" they prioritize. The following should not be considered absolute truth.
Revenue It's crucial to keep in mind that each venture capital firm has its own perspective, and the following should not be considered absolute truth. That being said, revenue is a highly regarded metric when evaluating a startup's success. It represents the income generated from a company's operations, calculated as the sales price multiplied by the number of units sold.
Startups can generate income from a variety of sources such as service fees, transactions, one-time project fees, subscriptions, licensing, etc.
The extent to which a startup's total revenue is influenced by its biggest paying client or a group of high-paying clients, is determined by dividing the revenue from the leading customer by the overall revenue.
A measure of the startup's expansion, reflecting the percentage rise in revenue from the previous period. It provides insight into the current growth trajectory and pace of the company.
The Rule of 40 suggests that the sum of a software company's revenue growth rate and profitability margin should be equal to or exceed 40%.
The Number of Months of Steady Revenue Increase (15% or More Month-over-Month)
illustrates the amount of money remaining after deducting the direct costs of producing and selling a product or service, not including overhead expenses such as salaries or rent.
The viability of a business can be determined by examining the relationship between the Lifetime Value (LTV) and Customer Acquisition Cost (CAC). Ideally, the LTV should be at least three times greater than the CAC, indicating that for every dollar spent on sales and marketing to acquire a new customer, the business generates at least $3 in lifetime gross profit.
The Average Customer Lifespan is a measure of the duration between a customer's initial transaction and their final one before they end their relationship with the service. To determine the average lifespan, one must add up all individual customer lifespans and divide the sum by the total number of customers.
Churn rate refers to the percentage of existing revenue that is lost as a result of clients ending or reducing their relationship with a company
Net Revenue Retention measures the recurring revenue of a particular group of customers over a one-year period, comparing the revenue generated by the same group one year ago to the current revenue generated.
The Average Contract Value, or ACV, is a metric that measures the average annualized revenue per customer contract. To assess the feasibility of reaching $100 million or more in Annual Recurring Revenue, it's important to consider the historical ACV in context and determine if the targeted growth is realistic by multiplying the ACV by the number of required customers. However, it's important to note that comparing ACV across different startups can be unfair due to differences in business models.
The CAC Payback period refers to the amount of time needed to recover the costs incurred in acquiring new customers. A short CAC Payback period, such as recovering costs after the first purchase, is considered impressive.
The Operating Margin is a measure of a startup's financial health and is calculated by dividing the operating income (which is calculated as gross profit minus operating expenses) by total revenue. This metric takes into account all operating costs, excluding interest and taxes.
The amount of time that elapses between a startup's launch and its Series A funding round is significant as it may indicate potential problems with the company such as poor timing, limited target market size, etc. if it takes an excessive amount of time to achieve "product-market fit".
The percentage of ownership held by the founders and key management personnel in a company's capitalization table is a crucial factor to consider when raising funds. Typically, it is advised to offer 10-20% equity to investors during pre-seed and seed rounds, but the ultimate objective should not be to secure the highest valuation. Instead, the focus should be on finding a balance between the necessary funding to reach key performance indicators and milestones, acceptable dilution of ownership, and selecting a partner-investor who aligns with the startup's goals and strategy.
The total headcount of a company reflects the size of its workforce. Ideally, less than 30 people.
Revenue Per Employee… evaluates the efficiency of your workforce by determining the revenue generated per employee. Ideally, above $100k+
The Magic Number indicates the amount of revenue a company generates for each dollar spent on sales and marketing. It is determined by dividing the difference between the current quarter's annual recurring revenue and the prior quarter's by the prior quarter's total spending on sales and marketing.
The Sales Cycle Length refers to the duration required for a sale to be completed, expressed in terms of days, weeks, or months.
Burn Multiple is a metric that indicates the amount of revenue a startup generates per dollar spent. There are three commonly used formulas for calculating the burn multiple: 1) Bessemer's efficiency score: Net new ARR divided by Net Burn; 2) Hype ratio: Capital Raised (or Burned) divided by ARR, and 3) David Sachs' burn multiple: Net Burn divided by Net New ARR.
Customer Cohorts - the percentage of customers who continue to use the service after 3, 6, or 12 months. Ideally, the ideal retention rate should be 60% or higher.
The total amount of funding received before securing a Series A investment round.
Cash Runway is the duration until the available cash is exhausted, prior to securing funds in a Series A funding round.
The North Star Metric is the central, defining metric for a startup, used to set long-term goals. This metric is specific to each startup and is critical for the company to determine and communicate clearly with employees, investors, and the public if necessary. After a Series A funding round, it is expected that the founders will have identified the North Star Metric.
Good luck with your metrics and have a great business!
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