In this article we are going to tackle the 7 Key Performance Indicators (KPIs) that you have to use to impress your investor.
Well, KPIs are measurable values that demonstrate how effective your company is in achieving specific business objectives. Startups may use them to find ways they can expand their sales to achieve sustained financial health.
Reminder: it is important to mention that not all KPIs are the right match for your startup. When you track the correct KPIs, you can develop a strategy or a set of strategies to optimize company performance.
Well, let’s get started. These are the 7 KPIs that will make you rock your case in front of an investor.
You can calculate LTV:CAC ratio by dividing your average customer lifetime value (over a given period) by the customer acquisition cost (over the same period). The ratio effectively measures the return on investment for each dollar your brand spends to acquire a new customer.
Lifetime Value (LTV): take the net revenue an average client provides your company over a period of time, and multiply times the amount of life you estimate a relationship with your clients lasts.
Example: if you charge your average client $500 per month and, on average, they stay as your clients for 10 months, your LTV will be $5.000.
Client Acquisition Cost (CAC): take your cost sheets in excel and SUM how much you invest in marketing, sales and related expenses on a regular month. Then divide it times the amount of new clients you get each month. If your commercial expenses add to $5.000 and you usually acquire 5 new clients per month, your CAC will be $1.000.
LTV and CAC are even (1:1): it means the cost to acquire a customer is the same as the consumer’s lifetime value.
LTV is lower than CAC (1:1.25): Your startup is spending more to acquire a customer than it will ever make from that customer.
LTV is higher than CAC (4:1): it can expect to make 2 or 3 times what it spent to acquire a customer. A 3:1 ratio is a common benchmark for a “good” ratio. This is also a common number that venture capitalists and other investors want to see.
Often referred to simply as MRR, monthly recurring revenue is the amount of total monthly revenue generated from subscriptions.
This does not include one-time setup, onboarding or other non-recurring fees generated from a subscription. This non-recurring revenue should be reported under a separate P&L line item.
While on the surface MRR is a very straightforward metric, it can give you a crucial picture of how your subscription business is growing (or not).
This will tell your investor how high your selling price is above cost. High margins (above 75%) are indicative of profitable companies and scalable products. But there is a catch: in your pitch you will be asked to justify why can’t others sell at lower prices and steal your market. “Ay, there’s the rub…” For this, my friend, is the toughest question of them all: why YOU? We’ll leave that one for another time.
Revenue growth rate shows how fast the company grows over a certain time period. It is also a key metric for investors in the valuation process. According to Techcrunch, a good growth rate is between 80% and 85% year over year.
To calculate revenue growth as a percentage, you subtract the previous period’s revenue from the current period’s revenue, and then divide that number by the previous period’s revenue. So, if you earned $1 million in revenue last year and $2 million this year, then your growth is 100 percent.
This can be calculated annually, quarterly, monthly, etc. The formula calculates both positive and negative changes in revenue growth.
This KPI refers to the amount of cash your business spends in a month. You can use this information to calculate cash runway and determine whether your costs to income ratio is too low or whether you can afford to invest more in growth efforts like marketing and advertising.
Take this into account: burn rate will vary significantly depending on company stage, pricing model, and industry. Usually, burn rate is a more common metric for early-stage startups, especially before they become profitable.
Customer churn shows the amount of customers leaving your services over a period of time. It occurs when they stop using a product or service, cancel their subscription or close their account.
A high customer churn rate eventually undermines the business’s ability to make a profit and affects its return on investment. To prevent such a scenario, a business should gain more customers than it loses in a specific period.
Expressed in months, this KPI expresses, in layman’s terms, how much time does your company have before it runs out of cash, ceteris paribus.
To calculate it, you will need to know your monthly burn. Use current revenue and subtract your projected expenses. Then divide your remaining cash by your monthly burn, and you have it!
Have you ever pitched to a VC? What other important KPIs did you show? Subscribe to our newsletter for more startup and finance content.