What should I track and why do investors care?
(This is part three of a 9-part series on raising Seed capital in PropTech. For the rest of the series, check here.)
Three caveats before I dig into key metrics —
First, every investor is a little different. We all have unique track records and biases and scars from where we have been burned before. So, while I may focus on the ratio between CaC and LTV, another investor might really hone in on Gross Margin.
Neither of us is necessarily right or wrong. We just go where we’ve seen patterns and know some tricks.
So, while I’ll give you a basic outline here of the metrics I track closely, I’m not going to claim they are in order of importance or even completely comprehensive. This are just the most common ones you’ll get asked about from most investors.
Second, this is Seed round. All of your numbers are just investor-sanctioned nonsense. That’s what a proforma is. Proforma is actually the Latin word for nonsense (don’t Google it). We know that. And don’t care.
What I care about is the assumptions that go into these numbers and the financial vision you are casting for your company. Back those assumptions up with as much real customer data as your currently have and that’s all I can ask for at this stage. Be realistic, because you don’t have enough data to be precise yet. Mark Suster agrees.
Third, you have to know your metrics COLD. If you have to look one of these up, it’s a red flag. Regardless of your title, these numbers are where you make yourself (and us) money and not knowing one of these basic metrics is not okay just because you have a CFO and “it’s her job”. Nope. You have to know them. Put them on your wall and update them monthly. After the customer, they are your lifeblood.
OK, so here are the metrics we most closely track with our companies and what most of the other Seed VCs track as well.
Revenue — Duh. Be sure to break out Gross vs Net Revenue if it’s applicable to your model. Your company will probably exit on a multiple of Revenue, so we are backing into growth rates and realistic projections here. Hurdles for A Round and Private Equity investors are based off Annualized Revenue.
- ***Common Mistake — Pay attention to the delta (change) from year to year. I see too many companies say they will go from $100k to $10M in one year and I automatically know they don’t know what they are doing.***
Margins — both Gross and Net. SaaS models are great because they have great Gross Margins (60% ish). That leaves a ton of room for fluctuations in variable expenses. That’s music to the ears of investors betting their reputation on your profitability! Even non-SaaS and hardware-based models have some pretty well-defined standards for healthy margins and you will be compared against those.
- *** Common Mistake — Being too aggressive on Gross Margin. You’re going to build robots and still have a 60% Gross Margin? Well, no one in the history of humanity has ever done that, but I’m sure it will all work out for you!***
NOTE — For Revenue and Margins, be sure to be able to frame these in terms of Monthly Recurring Revenue (“MRR”) and Burn Rate. These are just shorthand calculations for how much money you make every month and how much you lose (“burn”). It’s a good trendline analysis for VCs to gauge your trajectory. Recurring Revenue is specifically important because it’s highly predictable. So don’t be surprised when you are asked to break out your revenue by standalone (one-time) transactions vs recurring.
COGS — Cost of Goods Sold. We have an acceptable range here. It will factor into Net Margin, so I have two ways of checking this from your metrics.
- ***Common Mistake — Most people underestimate these when they first start. Selling is expensive and there is no such thing as a product that sells itself. Get some good data and benchmarks or you look overly optimistic or naive.***
CaC — Customer Acquisition Cost — How much does it cost you to get a customer? This is pretty important. It can be high or low depending on your target customer, but you HAVE to know this number.
- *** Common Mistake — More often than not, startups just don’t know this. They claim they don’t have enough data and they usually don’t (“We aren’t paying for advertising yet.”). But, as I said before, it’s about the assumptions here. You need to start thinking about this in the Seed Round because the A guys care A LOT.***
LTV — Lifetime Value — How much is that same customer worth over the course of your relationship? This one is tough in AEC, because that world and its budget cycle are so project-based. More often than not, selling an architect on your product for one project usually means you are going to have to resell them on the next project. So a typical, “sticky” SaaS model may have a huge LTV because it will be 5 years before they turn off their auto-renew. We don’t usually get that with our project-based niche.
- *** Common Mistake — overestimating. See above. You have to sell them on every project . . . usually.***
LTV to CaC Ratio — This is really what I care about with these two metrics, because you may have a high CaC but a correspondingly-high LTV can counteract that. I see a lot of this from my FinTech friends who got bit by those round-up-to-the-nearest-dollar startups from a couple years ago. Those guys had a huge LTV but their CaC was also enormous and usually proved insurmountable. The ratio between the two will show that.
- *** Common Mistake — I actually don’t see this metric nearly as often as I would like. This is VERY important and I encourage you to always have it in your financial analysis.***
Breakeven — When will you have enough money to stop needing to raise capital? To be clear, this is a date. “I expect to breakeven in 14 months based off these assumptions _______.”
- *** Common mistake — Not including it. I’m shocked how few VCs ask this question. We care and we will ask. You’ve been warned.
Those are the basics and bare-minimum I would suggest for your metrics. Remember — You should be able to recite these from memory when you are not in front of your computer. Not only your current metrics, but your projections for the future. (“Burn rate will drop substantially in 2020 because of blah blah blah”.)
I’ll talk more about how to collect and present these in Part 5, but this should give you a decent road map for the financial metrics you will be asked for.