The Maze of Startup Metrics: Key Numbers You Should Know Before You Pitch

11 min readApr 24, 2023

TL;DR

This post covers the importance of some metrics VCs often analyse startups by: Revenue & growth projections; MRR & ARR; Gross margins; Churn rate; LTV — CAC; NPS; Burn rate.

Introduction

Navigating through the VC investment process can feel like a maze. Speaking to people in VC can be tough if you are unfamiliar with the jargon. Especially when metrics are involved. Especially when you are being judged by them. Founders that are entering the investment labyrinth of any VC want to get to the end, where the check is cut. Understanding the metrics VCs use to judge you can be like sign-posts to help you, and the investor, find their way.

As an entrepreneur, you’re always seeking ways to improve your startup’s chances of securing investment from VCs. With that in mind, we’ve compiled a list of some metrics VCs use to evaluate startups across different industries, such as tech, consumer goods, SaaS, B2B, and B2C. Not all metrics may apply to your business type, sector or stage, but understanding these key indicators may help you position your startup for success. Let’s start by taking a closer look at some metrics and their importance in the world of venture capital.

First, let’s talk about top line. How much money is coming in the door?

Revenues & Growth Rate Projections — Don’t Forget Scenarios!

VCs are attracted to high growth rates, as they signal market share potential and scalability. This is obvious.

In addition to understanding your startup’s historical and current revenue growth rates, creating various scenarios for future growth can help showcase your forecasting abilities, flexibility, and understanding of the market. By analyzing different factors such as market conditions, competition, product development, and customer demand, you can project multiple growth scenarios for your startup. Presenting these scenarios to VCs demonstrates your adaptability and preparedness for potential market shifts, which can make your startup more attractive to investors.

If you are a pre-product or pre-product market fit startup, these revenue projections can be a bit like licking your finger and sticking it up in the air. One method you could employ is to analyse revenues of a close competitor, then explain clearly why you think you can beat them. You could also take a top down approach by analysing the serviceable market size, and what different penetration rates would yield — then explain how you plan to achieve these penetration rates.

The important thing is to be very clear about what your assumptions and methods are, and be prepared to be challenged on them. Also be clear about what edge you have, and how you are going to exploit it.

Expect some hard questions. Hard questions ultimately yield good feedback.

Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR)

MRR and ARR are crucial financial metrics for evaluating the revenue potential and stability of subscription-based businesses. They provide investors and VCs with insight into a startup’s financial performance, sustainability, and growth prospects. Here’s why MRR and ARR are essential when assessing a startup’s investment potential:

Predictable Revenue: MRR and ARR offer a clear view of a startup’s recurring revenue, which helps investors gauge the predictability and stability of cash flows. Predictable revenue streams are attractive to investors because they lower the financial risk associated with the investment.
Growth Potential: Tracking the growth of MRR and ARR over time allows investors to assess the startup’s ability to acquire new customers and expand its market share. A strong YoY growth rate in MRR and ARR suggests a growing customer base and higher demand for the startup’s product or service.
Customer Retention: MRR and ARR can also help investors evaluate the startup’s customer retention and satisfaction levels. A steady increase in MRR and ARR may indicate strong customer loyalty and low churn rates, which are positive signs for long-term success.
Business Model Effectiveness: Comparing MRR and ARR with other financial metrics, such as CAC and LTV, helps investors understand the effectiveness of the startup’s business model. A startup with a high LTV-to-CAC ratio and a growing MRR and ARR is more likely to have a scalable and sustainable business model.
Identify and mitigate seasonality: If you see that your MRR numbers dip during the same month(s) each year, it’s worth looking into why. Perhaps that might be a good time to run campaigns, promotions or other methods for boosting sales. Conversely, if you see your MRR boom during certain months, that is also worth investigating to see how you can maximize your returns to take advantage of the upswell.

Now, let’s talk about efficiency, your business model and your processes. Gross Margin, Churn Rate, and LTV-CAC.

Gross Margin: Buy low. Sell High. Create and maintain value in between.

Gross margin is a measure of a company’s pricing power and operational efficiency. Startups can manage and increase gross margins by optimizing their pricing strategies, reducing production costs, and increasing operational efficiency.

For example, a software startup might increase its gross margin by offering tiered pricing plans, enabling customers to choose the features they need and pay accordingly. This approach can attract a wider range of customers and drive higher revenues. Finding the right approach can be a function of A/B testing, asking your customers, or going freemium first and seeing what features your customers are willing to pay for, and how much.

A consumer goods company has more or less flexibility depending on which market segment they are operating in. Luxury goods tend to have higher margins. Low cost, not so much; the floor is too close.

There is a delicate balance that has to be struck between maximising your margin and offering quality to the end consumer. Go too much in one direction, you’ll fail.

Industry benchmarks for gross margins vary, but here are some general guidelines:

SaaS: 70–90%
Consumer goods: Over 50%

Be very aware of which segment you are in, and tie your gross margin figures to your secret sauce and competitive advantage over others. This signaling goes a long way to showing potential investors your upside potential.

Churn Rate: Understanding Factors That Contribute to Higher and Lower Churn Rates

Churn rate is the percentage of customers who stop using your product or service within a given time frame. Factors that contribute to higher churn rates include poor customer service, lack of product-market fit, strong competition, and inferior product quality. On the other hand, lower churn rates can result from excellent customer service, strong product-market fit, limited competition, and high product quality.

For example, a SaaS company with a high churn rate might struggle with user experience issues or lack essential features, causing customers to switch to competitors. To reduce churn, the company should focus on improving its product, addressing customer concerns, and staying ahead of market trends.

Is your customer service terrible? If something is wrong, your customers will tell you. Believe me. Use this feedback as ways to improve your processes and offer. Give something back to people (within reason) who complain to avoid negative reviews, bad word of mouth, or they simply vote with their wallet and leave.

For example, Lenny’s Newsletter gives some solid benchmarks for SaaS companies:

For B2C SaaS: Between 3% and 5% monthly churn is good, and less than 2% is considered great.
For B2B SMB + Mid-Market: Between 2.5% and 5% is good, and less than 1.5% is considered great.
For B2B Enterprise: Between 1% and 2% is good, and less than 0.5% is considered great.

The Importance of LTV-to-CAC Ratio — Vital for SaaS and Consumer Goods Startups…and all other startups too.

The ratio between Customer Acquisition Cost (CAC) and Customer Lifetime Value (LTV) is a vital metric for assessing the sustainability and scalability of a startup’s business model. Ideally, a startup should have a high LTV compared to its CAC, indicating that it can generate significant revenue from each customer over time, without spending too much on acquiring them. A higher LTV-to-CAC ratio suggests that a startup has a more sustainable and profitable business model.

For example, a startup with an LTV of $300 and a CAC of $100 has an LTV-to-CAC ratio of 3:1, which is considered good. Having at least a 3:1 LTV/CAC ratio in 24 months is a solid benchmark to aim for.

In contrast, a startup with an LTV of $100 and a CAC of $66 has a ratio of less than 2:1, indicating that the company may struggle to scale efficiently and maintain profitability in the long run.

Another consideration is how long the CAC payback period is. Ideally, you’ll want it to be shorter than 12 months. That means that within a year, the cost you spend on acquiring any given user is paid back by the amount of money they spend at your company in that same year.

LTV and CAC are often discussed together, so be clear about what their relation is, and how this ratio compares to your competition and industry benchmarks. A lot of a startup’s “secret sauce” can directly be ascribed to its impact on this ratio. What edge do you have? How do you translate that edge into recurring sales? How much are you spending or not spending vs your competitors to keep and upsell your existing customers?

Having the answers to these questions and anticipating them goes a long way towards selling your narrative and business to potential investors.

Coda: Did you forget to build rapport?

People are humans. Or did you forget that in your pitch?

As an aside, we’ve been in many meeting with startup founders who launch straight into metrics, funnels, KPIs, numbers and how awesomely they are hitting their goals. We’ve also passed on projects because we didn’t have confidence in the founders. Building rapport and connecting with the people you are pitching to not only shows the human side of founders, but it also sheds light onto how well you might potentially build and motivate teams, create and maintain company culture, and act in conferences and networking events–all things that you can lump under “soft skills”.

Building rapport also helps you be more memorable. In a sea of pitch decks, 30-minute meetings, zoom calls, and other networking events, being memorable might be your edge. If we don’t remember you, chances are you aren’t getting investment.

Some extra metrics to also pay attention to:

Net Promoter Score (NPS): Tips to Increase NPS

A high Net Promoter Score (NPS) indicates strong customer satisfaction and loyalty, which can lead to positive word-of-mouth and referrals. To increase your startup’s NPS, consider the following tips:

Listen to customer feedback and address their concerns promptly.
Improve your product or service based on customer needs.
Provide exceptional customer support.
Offer personalized experiences to your customers.
Continuously innovate and stay ahead of market trends.

Getting on sites like Trust Pilot will help you to augment your sales and lower your CPA, as building trust is expensive. Encourage and incentivise your customers through discounts and exclusive deals in exchange for their feedback, shares on social media, and other campaigns designed to boost your NPS.

You can use NPS tools SaaS to get a better vision on your customer feedback. There are several providers out there that offer free versions, free trials, and robust customer support via live chat and email.

Burn Rate

Startups with lower burn rates and longer runways are in a better position to achieve profitability before running out of cash. VCs prefer startups with more financial stability, as it reduces the risk of investment. In the current market the expected runway for a company after raising should be at least 24 months.

Burn rate is the rate at which a startup spends its cash reserves, usually measured on a monthly basis. A lower burn rate and longer runway give startups more time to achieve profitability or secure additional funding before running out of cash. VCs are particularly concerned about startups running out of money before the next round of investment, as it can lead to a distressed financing situation such as down rounds or flat rounds or, in the worst case, the failure of the startup. Here are some reasons VCs look into burn rate:

Runway and Investment Timing: VCs want to ensure that a startup has sufficient runway to reach key milestones and demonstrate traction before raising the next round of investment. A lower burn rate increases the startup’s runway, allowing it more time to achieve product-market fit, grow its customer base, and improve its financial performance. This, in turn, makes the startup more attractive to investors in the next funding round.
Valuation and Exit Multiples: To make an investment attractive, VCs typically seek exit multiples in the range of 20–25x or higher on their initial investment, depending on the risk profile, stage of the company, and market dynamics. A startup with a lean burn rate is in a better position to negotiate a higher valuation in the next funding round, as it demonstrates financial discipline and efficient use of resources. Higher valuations in subsequent rounds can result in better exit multiples for initial investors, making the investment more appealing.
Reduced Dilution: A startup with a lower burn rate can often raise additional funding on more favorable terms, reducing dilution for existing investors. Lower dilution means that initial investors maintain a larger ownership stake in the company, which can lead to higher returns when the company eventually exits.
De-Risking the Investment: A lower burn rate reduces the financial risk associated with a startup, as it demonstrates that the company is more likely to survive and thrive in the long run. By efficiently managing its cash reserves, a startup can mitigate the risk of running out of money before achieving its growth objectives or raising additional funds. This de-risking makes the startup more attractive to VCs and increases the likelihood of securing investment in subsequent rounds.

Looking for more on burn rate? Check out the concept of the burn multiple.

Conclusion

Understanding these metrics will help you better prepare for meetings and pitches with VCs. Keep in mind that not all metrics may apply to your business type or sector, but having a solid grasp of these key indicators will help you position your startup for success. It’s also important to know how all these metrics hang together and build a narrative about your startup. Being able to piece them all together to create a compelling investment thesis is a key competency of founders who are able to secure funding.

These metrics, should they apply to you, should be top of mind. Meaning that you have practiced your answers and the most common challenges to them.

Pitching is just as much about the founder as it is about the company.

Now that you’re equipped with this knowledge, we invite you to pitch your startup to us at invest@bynd.vc. Our team is always on the lookout for innovative and promising startups, and we’re excited to learn more about your venture. Let’s work together to take your startup to new heights!

Want some advice on your pitch deck? Look no further:

Thanks for reading!

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