Metrics VCs want to see

The final post in this series centers on critical metrics that venture capitalists like to see.

Founders regularly ask about revenue or growth thresholds beyond which we’d invest at the Seed or Series A rounds. The reality is metrics are circumstantial, meaning we’re more interested in the context of the metrics.

For example, $2M in subscription revenue (the sticky kind!) is generally more interesting than $2M in revenue that is non-recurring. In the same breath, the $2M in subscription revenue might lose its luster if the same startup earned $1.9M in the previous year, as this would signal anemic growth. Perhaps you’re growing like crazy, but product usage is fading over time; this downward trend would suggest weak product-market fit.

While context is king, I can provide guidance on the metrics that we like to see as a starting point.

Product value delivered + the associated leading indicators

It’s easy to adopt vanity metrics like “downloads” or “user signups” as your north-star metrics. However, these metrics do not always translate into customer value. No customer value = no product-market fit = no revenue.

Accordingly, you want to identify your metrics for customer value and the upstream indicators that suggest you’re on the track to delivering value. For example, if you’re building an e-signature product, the product value delivered metric might be signatures executed and a leading indicator could be contract uploaded for signature. These metrics also help you assess product-market fit. In the e-signature example, if the signatures executed indicated 50 last month and 100 this month for the same cohort of users, then it’s likely you’re tracking toward product-market fit.

To derive your north-star metric, here are some questions to consider:

• What value does your product provide?
• How do you know when the value has been delivered?
• How can you quantify this event?
• When do you know you’re on track to delivering value?

Customer retention

No one likes leaky buckets. If you are losing customers nearly as often as you are acquiring them, you may be a savvy marketer, but your product isn’t living up to the expectation set forth in your product marketing. Ideally, you are acquiring new customers (logo expansion) and also generating new revenue from existing customers (dollar expansion). As an early-stage startup, your product may look different today than it did 12, 9, and even 3 months ago. You should track customer retention according to the period in which they were acquired — or better said — according to their cohort. It is logical that these metrics will vary and, ideally, improve between cohorts.

Here are the key metrics for retention:

• Logo expansion (# of net new customers) + churn
• Dollar expansion (upsells to existing customers) + churn
• Cohort data (revenue performance tracked against others who became customers in the same period)

Customer acquisition cost (CAC) & payback period

The goal is to buy your customers’ money at a discount: You pay to deliver a product to your customers, and they give you some amount greater than that. Said another way, it costs you less to acquire and deliver a product or service than what you earn from your customers. It’s okay if these numbers are mismatched at the early stages, but we should be able to identify a path to more favorable economics down the road.

Here are the corresponding metrics:

• CAC = Total cost of sales & marketing / # new customers
• Payback period = The time (usually months) that it takes to recover the cost of acquiring a customer. For example, if it cost $10 to acquire the customer and you charge $2.50/mo, your payback period is 4 months.

Revenue generated + the associated leading indicators

Money talks! VCs want to see revenue tracked on a monthly basis. Depending on your business model, this could be bookings (non-recurring revenue), monthly recurring revenue (MRR; applies to SaaS), revenue (usage-based products), gross merchandise volume (usually associated with the one-time sales of goods and services), and so forth. Note: Revenue is a “lagging” indicator, meaning you don’t earn it until the end of the sales process.

You also want to know you are on the path to earning revenue, so you should also track leading indicators that map to your sales funnel. These often include leads, qualified opportunities, demos, negotiating contracts, etc. Understanding your conversion rates helps you better predict future revenue. For example, if you know that 20% of customers who receive a demo buy your product and your average contract value (ACV) is $150, then the value of your pipeline with four customers who have seen a demo is $150 * 20% * 4 = $120.

Here is what you need to consider:

• What are my bookings?
• What does my sales funnel look like?
• What are my conversion rates at each stage in my sales funnel?
• How many prospects are at each stage?

Series conclusion

The framework outlined in this series is a guide, not a prescriptive grading rubric. Hitting impressive metrics, knowing when to raise money, having a pulse of a viable market opportunity, running with a dynamic and complementary founding team, and mastering repeatability and protectability are all essential elements of a startup that’s well prepared for fundraising. Of course, there are always exceptions to each of these attributes — we love non-conventional companies. Regardless, a founding team that can demonstrate some or all of these elements will be in a good position to raise money.