Hey,
Dragos here, from Project Arrow, where we mentor founders about how to build from 0 to 1 and get their startups investable in the process.
The KPIs (key performance indicators) are the most important pieces of data startup founders need to consider when building a business. That is because, first and foremost, they show your progress and whether your work as an entrepreneur makes economic sense.
Good founders know their KPIs by heart and are able to have a cogent discussion around them. They will also help getting to an intrinsic number when you want to quantify the value of a startup and, not surprisingly, they are some of the strongest signals for investors. Any investor talk will include a numbers talk - naturally they may differ from company to company, from vertical to vertical and from industry to industry, but there is a set of standard ones that will quickly indicate the business potential.
Here’s a list of 10 generic KPIs you will be likely asked about by anybody evaluating your investable potential:
Operations related:
The growth rate - the rate at which you grow revenue, number of customers or users. This is the most valuable in the eyes of an investors - the faster you grow, the crazier they’ll go chasing you to take their money. If you are still very early-stage, focus on weekly growth rates whereas if you’re more established, yearly growth rates are more relevant.
The annual recurring revenue (ARR) - the amount of recurring revenue generated by customers within a calendar year. This is a metric often tracked by startups selling SAAS but applies to any vertical - repeat customers providing business periodically is a strong signal that your operation is sustainable. A version of it is the MRR (monthly recurring revenue); the ARR is the annualised form of it.
The cost of acquiring a customer (CAC) - the name says it all, the CAC indicates how profitable your sales process is and how much you spend convincing a potential customer to buy what you sell. At early stages the CAC can be very high, as the more you progress with scaling your business, the more efficient your sales efforts can become.
The lifetime value of a customer (LTV) - how much money you expect to make during the whole future relationship with one customer. This KPI shows the long-term health of the customer relationships and may provide an upper limit on spending to acquire new customers, useful for calculating payback of advertising spent in your marketing mix.
Market related
The total addressable market (TAM) - that is the total volume of how much you can sell to all vendors on the market within a geography in a given year. That’s the how big can this startup become metric, the indicative number investors use for quickly evaluating whether you are likely to become an unicorn (i.e. get to a $1 billion valuation).
The serviceable addressable market (SAM) - how much realistically you can sell out of your TAM, based on whatever resources you plan to have available. It’s used alternatively with SOM (the serviceable obtainable market).
Business related
The burn rate - how much you spend on monthly basis for running the business. Conventional thinking says that any startup should have a burn rate covering at least six months of cash runway.
The runway - the number of months until the company runs out of money.
Fundraising related
The ask - how much you are looking to raise from investors. Always have that number prepared in a range combining the milestones you will achieve with the money.
The pre-money valuation - how much money a startup is worth before anything is invested into it. Pre-Money Valuation + The Ask = The Post-Money Valuation. Another way to look at this number is knowing how much equity you want to sell for the money you want to raise.
Please note that the list is generic - KPIs differ by vertical, industry or business model, and professional investors will judge them against their respective benchmarks. If your startup is established, you will likely have a broader context to explore how they fit to the story you sell to investors. If you’re too early to have a KPI record, you should be prepared to have a scenario discussion, based on your go-to-market strategy and other specifics of what you build.
The KPIs are an important part of your story and any investors will grill you on them. If they’re strong, you should lead by them. If they’re not your forte yet, you should be able to demonstrate how you plan to achieve strong ones. Not an easy talk to have, as early stage is mostly theory, but doing proper homework will provide investors with a risk assessment for the money you ask for. Helping with that is what we do at Project Arrow every week.
- Dragos
PS. On Monday evening we’re running a workshop with practical advice on what to do when looking for investors. Let me know if you want to join.