10 key metrics early stage investors want to know about your start up
You've decided it's time you raised some capital for your start up or early-stage business so you can put your growth plans into action.
Whether you've bootstrapped up until this point or have received investment previously and are now looking to raise further growth capital, the process isn't that different.
From conducting an online equity crowdfunding campaign to approaching a bank for a loan, or presenting at a live pitching event, raising capital requires structure, preparation, and supporting documentation. That documentation usually includes a business plan, executive summary, and financials.
Each is used to give potential investors an insight into your company, in terms of past performance, present standings, and future plans.
Whilst every investor has their own set of criteria when it comes to what they look for when making an investment decision, there are some key metrics which usually attract careful consideration.
Here, we'll look at the 10 metrics investors look for when examining your start up business.
1. Gross Margin
This indicates how expensive it is to make your product or offer your service. Expressed as a percentage, this is calculated either by taking the business' total sales revenue and subtracting the cost of goods sold (then diving by the total sales revenue) or the selling price of an item, less the cost of goods sold.
2. Revenue Growth
Also known as the "top line", this metric indicates the growth or expansion potential of a business through the illustration of increasing and decreasing sales over a period of time. Rather than simply being a snapshot of revenue, it is able to convey trends.
3. Net Income
Also known as the "bottom line", "profit attributable to shareholders", or "burn rate". This shows the business' total earnings and is calculated by taking all costs incurred (including cost of doing business, depreciation, interest, taxes, and other expenses) away from the revenue amount.
4. Contribution Margin
This metric shows the profitability of individual products. The Contribution Margin is used to determine whether variable costs for your product can be reduced, or if the price of the end product should be increased.
Depending on the sector your business operates in, this margin can range from 5% to 25%.
5. Churn Rate
A metric which shows the revenue potential of each of your individual customers. The larger churn your business experiences, the more difficult you will find Revenue Growth.
In order to expand your customer base, your number of new customers needs to exceed your churn rate.
6. Customer Acquisition
The cost associated with attracting customers to your business. As you work to engage potential customers, you spend money on producing the product or service you offer, research, and marketing - the less you can spend on customer acquisition, the better.
7. Sales Quotas
Including your goals and how closely you've achieved them indicates how well your product is selling and whether or not your sales team is performing efficiently.
This is the single biggest expense for most start ups and a lot of more established businesses too. Potential investors will be interested to see whether you pay low salaries (which could raise employee-retention questions in the future), or excessive salaries (which will reduce your company’s runway very quickly).
9. Revenue Per Employee
A metric which indicates how efficient your business is in using your employees. In general, relatively high Revenue Per Employee suggests that your team is producing more sales, which is a positive sign.
Some sectors and products seem to just need more people in order to generate higher sales, which is worth keeping in mind.
10. Non-Personnel Marketing Spend
This is perhaps the only variable metric on the list, as it can be controlled, month-to-month. Typically, it refers to money spent on advertising and events, which can be increased or decreased as your other marketing efforts progress.
It is a good indicator of how well your business understands marketing and reacts to the analysis of sales results.