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Focus on These 5 Series A Metrics for Fundraising Success

Friday, February 25th 2022 (3 months ago)

Raising Series A funding is a critical and challenging stage for any startup. For many new companies, this is the first time in their financing lifecycle when they’re required to share their actual metrics with investors.

When evaluating Series A funding opportunities, investors want to see quantitative proof that your idea and business model have merit, traction, and the potential for significant growth.

One way investors can get that proof is by measuring your company’s actual performance to date against industry benchmarks and specific targets.

But which metrics will your investors want to see?

Knowing which metrics you should share first is an important part of making a successful Series A pitch.

The metrics discussed below are a good starting point. These five metrics provide investors with insight into your company’s accomplishments and performance, without getting too far into the weeds.

These metrics were curated specifically for early-stage startups, but each of them is also valuable for established companies that are raising additional capital for continued growth or acceleration.

Table of Contents

Choosing the Perfect Set of Metrics

Every business is different, and your business might have unique metrics that are critical to measure and present during your Series A funding round. 

The perfect set of metrics for you to use will depend on your business model, your competitive landscape, and your marketplace niche.

We’ll dive into some of the unique requirements for SaaS, marketplaces, and ecommerce companies below.

For now, we’ll start with five general Series A metrics that apply to most startups.

When you’ve got these five nailed down, you can sit down and create a list of any other specific metrics that are uniquely relevant to your company.

Illustration: Series A metrics

5 Fundamental Series A Metrics

Metric #1 – Run-Rate Total Revenue

Total revenue in period ✕ # of periods in one year

Run-rate total revenue is a good indicator of a company’s current performance. It shows how much revenue your company is currently generating, with a simple projection to annualize the number.

Your Series A investors will want a solid understanding of where you are at today, and this metric gives them an objective baseline.

This is also a key metric for you to follow internally, as it’s a primary factor in your runway and time to profitability.

Metric #2 – Revenue Growth

(Current period revenue ﹣ Previous period revenue) ∕ Previous period revenue ✕ 100

Revenue growth is the percent increase in revenue from the previous period. It’s a good measure of your company’s current trajectory.

Investors will look to this metric to understand your company’s traction and immediate growth potential.

You can use this metric in your pitch to demonstrate product/market fit, competitive viability, and your ability to expand into new markets.

To create an annual growth metric, you can compare this year’s projected revenue (via run-rate total revenue) against last year’s actual results.

Metric #3 – Gross Margin Percentage

(Total revenue ﹣ Cost of goods sold) / Total revenue ✕ 100

Gross margin percentage shows investors how much money is left after covering the costs directly associated with producing your product or service.

Cost of goods sold should include only direct costs like materials and labor. It should exclude any indirect expenses like overhead, salaries, and marketing.

If your margin is low relative to the industry average or key competitors, investors may assume that you have emphasized growth at the expense of profitability, or vice versa.

If your margin is significantly different than your investors’ expectations, you should be proactive and transparent about addressing this. Explain the factors that are driving the discrepancy and share your plans for addressing it.

Metric #4 – LTV:CAC

(Customer lifetime value) : (Average customer acquisition cost)

Your LTV:CAC ratio is the ratio of lifetime value to customer acquisition cost. This figure is essential for your Series A funding round because it shows investors how much it costs you, on average, to acquire a customer – an important gauge of your scalability.

Established companies with significant brand equity and existing distribution channels can acquire customers at a lower CAC, but your early-stage startup may have to pay a premium. Investors want to know how wide that gap is.

A high LTV:CAC ratio is a good indicator that your company is positioned for sustainable growth. 

If your business relies on subscription-based or recurring revenue, your investors will want to see that you’ve done your homework on this one.

Metric #5 – Gross Churn

(Cancelled MRR + Downgraded / MRR at the end of the previous month) ✕ 100

Gross churn is the percent of revenue lost due to clients canceling or downgrading. 

Churn is an important gauge of the stickiness of your offering, and it can also be an indicator of product/market fit. 

If you expect a high volume of cancellations, you should show investors that this has been built into your revenue and profit projections.

Monitoring this metric internally is critical for early-stage startups as it can provide an early warning flag for problems with client satisfaction and perceived value.

Extra Credit – Net Revenue Retention Rate

MRR at the start of the month + Expansions + Upsells ﹣ Churn ﹣ Contractions / MRR at the start of the month

Net revenue retention rate is the percent of recurring revenue your business carries over from one month to the next.

Revenue retention is a powerful health metric that takes into account new customers won, existing customers lost, and existing customer upsells and expansions.

This metric can help investors understand how your revenue is spread out among your customer base, and it can expose when a small percentage of customers contribute a large portion of revenue. 

Match Your Metrics to Your Business Model

As we mentioned earlier, different metrics may be more critical than others depending on your business model.

As an example, a company that sells physical products will likely focus heavily on gross margin, along with inventory turnover rate. In contrast, a service-based company might prioritize lifetime value and churn rate above margin, and they might entirely disregard inventory.

It’s essential for you to understand which metrics are most relevant to your industry and model and then follow those metrics closely so that you can verify they are indeed providing the signals you want to share with investors.

Below, we’ll take a closer look at three common business models and discuss which Series A metrics are the most relevant for each.

Illustration: Different metrics for different founders

SaaS

SaaS companies should focus on the lifetime value of their customers. You are trying to demonstrate your value to investors, and your strongest evidence is the real money that real customers are currently spending on your service.

As you would expect, gross churn rate is critical in this space. Investors will look to your churn as a warning flag to expose problems with user experience and client satisfaction.

Investors will also want to see metrics around margin and expenses related to revenue growth rate & monthly active users (MAU), respectively. They’ll be looking for signs of unsustainable growth, and unforeseen cost issues that can arise as the company scales.

Marketplaces

Marketplace companies are often judged on their ability to grow gross merchandise value (GMV) – which is the total dollar value of all products and services sold through your platform.

GMV indicates the level of demand for the products in your marketplace. Investors will measure GMV against revenue growth rate to understand how well you’re monetizing the existing demand.

Profitability metrics like EBITDA margin and net income margin are also important. These metrics show how much money you’re retaining after the costs associated with running your marketplace have been taken into account.

Ecommerce

Ecommerce investors will focus on your ability to convert shoppers into buyers. This metric is called conversion rate (CR), and it’s calculated by dividing the number of people who completed a transaction by the number of people who visited your site (or a specific page). 

If you can show that your conversion rate is growing over time, investors will see that you’re on the right track.

If you have repeat customers, you can highlight this with a customer lifetime value (LTV) metric. LTV shows how much money a customer will spend with you throughout their relationship with your company. It’s essential to have a solid reading on LTV because it can help you make better decisions around CAC.

You can impress ecommerce investors with social engagement metrics like views, shares, likes, and engagement rate (ER) that demonstrate public interest in your product or service.

If you can prove that your offering resonates with people on a large scale, that alone might be enough to win an investor over.

Summary

In conclusion, the perfect set of Series A metrics for your business will be determined by the industry you’re in and the business model you’ve chosen.

Most companies should include the five general metrics above or some variation of them, and additional metrics may be required to suit your company’s unique situation.

The key is to show that you have a solid understanding of the metrics that drive your business’s success. You want to demonstrate that all key metrics are headed in the right direction. And you want to share your plans for addressing any areas of concern.

The single best thing you can do as a founder is to have a solid working financial model that accounts for all of your assumptions and expected outcomes. 

A great pitch deck captures an investor’s interest and sets you up to provide more details. A financial model lets you provide those details quickly and accurately. And, perhaps most importantly, it shows your investors that you have a thorough and detailed understanding of the metrics that drive success for every aspect of your business.

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