Part 4/12 Internet Summit 2015: Startup Investment Metrics

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Startup Metrics: What Investors Want to See

Roundtable Overview

When initially evaluating businesses, investors want to get a sense of the size of the business through revenue, bookings, and GMV; once investors have an idea of size, they’ll want to understand the company’s growth to see how well it’s performing. But what’s the best way to present these key business and financial metrics? How can metrics help tell a story? And how do entrepreneurs highlight real product and engagement metrics, not vanity numbers? In this lively discussion, get the real story on the startup metrics that matter.

Featured speakers on this roundtable include:

  • Jonathan Drillings | Principal, Comcast Ventures
  • Holly Maloney | Principal, North Bridge Growth Equity
  • Ian Sigalow | Co-Founder & Partner, Greycroft Partners

I highly recommend all entrepreneurs that plan to raise funds for their business to attend as many investor panels and presentations in their city as possible. When an investor is on the stage, audience can quickly learn about their investment preferences, likes and dislikes and then decide if they want to start looking for ways to get a warm introduction. If there’s a match between investor’s financial goals and your startup, it’s even more important for an entrepreneur to like investors’ personality and work ethics because an investor will not only write a big check for the startup, but also take a major part in the company’s strategy. Some investors are truly passionate about their work and would do everything in their power to help startups succeed. Unfortunately, there are some investors that treat entrepreneurs like commodity. On the other hand, people in the audience can get a sense of investor’s attitude toward entrepreneurs based on their answers on the stage.

Venture Investment Preferences

Holly Maloney, Principal, North Bridge Growth Equity is based in Boston and she invests in growth stage businesses. She prefers to invest in companies that have at least $10M in revenue, are founder owner and operated, are technology or technology enabled services type of business with 20-30% revenue increase per year. The company does not have  be necessarily profitable today, as long as they should be profitable within 12months. She would typically invest $15-20M per round into owner operated companies that are established, have a proven business model, are bootstrapped or financed by few angel investors. Her fund is geographically agnostic, they don’t focus only on California or Massachusetts like many other venture capital manager. The fund has some companies in portfolio that are located  in Europe as well.

Ian Sigalow | Co-Founder & Partner, Greycroft Partners: Greycroft invests in seed stage startups and growth stage companies as well. Their seed round starts at $100k and can be  as large as up to $5M and they can do multiple rounds over time. Their growth fund invests somewhere between $10-20M per round into later stage businesses. The fund is based in New York and Los Angels, employing 19 staffers. Their current portfolio has 70% continental US based companies, usually outside Silicon Valley. They like to invest into B2B software companies, B2C E-Commerce, media; they prefer vertically integrated companies with SaaS business model.

Jonathan Drillings | Principal, Comcast Ventures. Comcast corporate venture fund invests from a large pool of capital across tech spectrum, from B2C tech, e-commerce, B2B enterprise tools, lots of digital media. They make some  Seed rounds, but most of their investment activity happens during Mergers & Acquisition phase, when established companies are looking to buy growth businesses.

What are the most important Performance Indicators from investor’s point of view?

One investor evaluates over a thousand different pitches a year, so it’s really important for startup founders to stand out from the crowd by showcasing relevant and  strong Key Performance Indicators (KPI).

Holly believes that Customer Acquisition Cost (CAC) and Lifetime value of the customer (LTV) are critical. She looks for established companies that have proven product-market fit, look at revenue growth and have mostly subscription based revenue model. A number of young companies face a challenge to get more revenue from existing customer bases. Because of that, she looks at  LTV/CAC ratio trend over time as the trend line is very important, LTV/CAC > 3 or 4 is mandatory for growth companies. She likes to see 20-30% monthly recurring revenue (MRR) growth rate. Finally,  showing a gross profit and cash flow positivity is also a strong KPI that she look for. Long terms, she looks at spending patterns for existing customer base. Ideally, she would like to see that  customers are spending more money over time by buying more expensive subscription packages, not just renewing the package level they currently have.  Because of that, she recommend that marketing managers segment the customers in cohorts and perform cohort analysis to be able to detect any trend changes.  Think about each class of your customers per year or some other period of time and then compare how they behave over time: measure churn, how much they buy, do they buy more expensive products or services. Does cohort grow or shrinks over time in terms of revenue? Or average sales price? What’s the overall number of customers?

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Ian is reminding us that  SP&500 growth is only -0.3% this year (by November 2015). That’s the type of return you can expect when you buy index funds. The fundamental purpose of venture capital fund is to have return that is much higher than a typical index fund. He refers to Triple triple, double double rule of the thumb (double or triple annual growth).  For example, if you can grow from $36 to $72 revenue in one year, then everyone on planet will be wanting fund your business. He also like entrepreneurs to keep in mind a typical exist strategy that investors use. This year is very typical with 20 IPOs and 150M&A exists. Obviously, M&A is the leading exit strategy. To be acquired, the company has to show strong growth year over year.

CEOs in Ian’s portfolio are very creative, a lot of them dyslexic, very analytical, type-A quants. Eventually they figure out how to move the business and they become experts in metrics and what to present to VCs. CEO owns these figures and the culture is set from the top so KPIs are well understood to everyone in the company.

Finally, most startups are tracking their KPIs using simple and free tools. Excel is always the tool of chose along  with Google Analytics to track web traffic. As the company grows, some  eventually move that data into CRM. By the time VCs comes onboard, they want you to be on Salesforce.


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Who gets seed funding?

Ian invests only in people that have done it before, not metrics. He prefers serial entrepreneurs that have scaled and sold businesses before and still have deep expertise in the industry they operate in. For Ian, it’s all about the people, not hard metrics. A red flag for his is a  serial entrepreneur that has hard time recruiting new team the second time around.

Holly likes to see a good team without a single point of failure. The whole team has to buy into a business model and KPIa to be able execute and reach strategic goals.

How introverts can get introductions to investors?

Ian: don’t worry about it, we will find you. His company  always data mine for companies that are growing fast. He believe that most of the the inbound calls are worthless to him. He recommends that entrepreneurs  network with CEOs that have been funded by VCs and if appropriate ask an intro from them. If Ian gets a recommendation from a CEO that he funded before, he treats the tip  as a warm referral. Square 1 is Durham is a great referral source. Otherwise, they will find you if you grow fast enough.

Key takeaways for entrepreneurs looking to raise venture capital roundLight bulb, ideas, takeaways

  • Most VCs invest in growth stage companies, led by serial entrepreneurs 
  • First time entrepreneurs should figure out how to bootstrap the first business with the help of few angel investors or equity crowdfunding. 
  • Recurring subscription revenue is the preferred business model for investors that evaluate LTV/CAC ratio, annual growth rates and profitability

 

About Dragana Mendel 84 Articles
Dragana Mendel is a President and Principal Consultant at ANAGARD, LLC. In her role, she provides management consulting services to small and medium size businesses on the best strategy to achieve their short and long term goals.