Let’s say you have a brilliant idea for a startup.
You know your Hats-for-Cats app is going to take the world by storm. And while you may be half-starved, you have a whiteboard and a T-shirt with your logo on it, and the energy, guts, and grim determination to make it happen.
But the funds scraped together from friends, family, and savings for market research and a demo are now completely exhausted. The credit cards are completely maxed out. You’ve realised it may be time to find an angel investor who can lay enough runway for a developer and the go-live phase.
The good news is: angels want to give you money. That’s their job.
The bad news is: unlike the Bank of Mum and Dad, angels need more than a few vague promises of light at the end of the tunnel.
The average early-stage angel investor has heard hundreds of pitches – maybe just that month alone. This is where it pays to have some solid metrics and data down pat.
And while there is an almost endless selection of figures and projections you could include in your pitch deck, the following 10 figures are a great place to start.
1. Potential and Active Customers
While the definition of “active and potential” can be a moving target, being very clear about the types of customer groups you have will say a lot about how well you know your addressable market and your consumer. In other words: if you’re going to use this figure, make sure you have a clear and consistent definition for it.
For example，active users can vary across social sites, e-commerce, and content sites. They are usually reported as daily or monthly, and don’t include one-time users. This metric will help you (and your investors) understand how popular and useful your product or service really is.
2. Sales and revenues
Sales is one of the main components of revenue. Of course, your company could also bring in money from other sources like royalties, fees and endless donations from your parents. But revenue is the money you bring in from sales and is recognised when the service is provided, or over the life of a subscription.
Revenue is the lifeblood of your business and how your potential future partners will get paid. Revenue growth is your “top line” highlighting the business potential for expansion based on sales trends over time. It’s worth noting that unless you’re Amazon, who has zealously focused on revenue growth over profits for 20 years – you may also need to understand your profitability potential when speaking of revenue too.
3. Revenue per customer
This is basically the profitability of your business on a per-customer basis that can be used as a comparison with other companies in a similar industry. It’s one of those metrics that could mean a great deal lot or very little, depending on how it’s used. The typical formula will use average revenue per customer, which is your total revenue divided by average subscribers.
Thanks to the law of averages, it only takes one or two big customers to distort this number. But it can still be a good way to show investors which products, services and promotions boost revenue on a per-user basis. More importantly, you can gauge how to maximise revenue from existing customers, instead of focusing solely on new customer acquisition.
4. Gross margin
This is basically how expensive it is to make your product or offer your service, i.e. a measure of operating profitability, generally expressed as a percentage. To find this figure, take your revenue and subtract the cost of goods sold and see how you stack up against typical gross margins for your industry.
As an aside: as with all figures listed here, if you don’t have revenue yet and are using projections, you’ll obviously need to justify your numbers.
Once calculated, you’ll get a sense of how effective your management, sales, and customer teams are at driving the business. Any money left over from sales can hopefully be invested back into operations.
5. Customer Acquisition Cost (CAC)
This is how much you spend to get a new customer and one of the key metrics to watch in the early stages of startup growth. It’s the full cost associated with attracting and acquiring new users, on a per-customer basis, including expenses like marketing, sales reps, overhead, discounts and PR over a given period. If your CAC is too high, you may need a crash course in optimisation.
6. Payback period
This is a measure of sales efficiency, or how long it takes to pay off your customer acquisition costs. The longer the payback period, the greater the risk of customer churn, and of losing all those marketing dollars spent acquiring that customer.
Payback periods can range between six (very efficient) and 12 months, depending on the industry. Longer periods, say 18 months, are warning signs. Having a long payback period requires you to raise more capital to fund the deficit period. So if raising capital is an issue (because you may not be Uber, and if you’re reading this then you probably aren’t), you may have a problem.
7. Capital required
Basically, you need to be able to run your company until you achieve positive cash flow, that is, until revenues exceed expenses. Until then, you’ll need enough capital to cover all necessary general administrative expenses, development, marketing, salaries, facilities and equipment cost. Get used to saying: “We are targeting to raise $X at pre-money valuation of $Y.” In fact, it’s largely why you’re putting together this presentation.
Valuing your startup can sometimes feel like putting a price on a child. Since you don’t have a great deal of financial performance to speak of at this stage, you’ll need to rely on factors like supply and demand, comparisons to companies in a similar industry, and financial projections (discounting future cash flows and all that). The stage of your startup will also determine how much you can realistically hope to raise.
At the end of the day, valuations can come down to what the market says you’re worth, so be ready to defend your numbers.
9. Predicted future users/clients/sales
Projections are by nature a tricky thing. Investors will not only look at your forecasts, but your underlying assumptions.
Many new businesses build their financial projections based on a top-down approach, which can be summed up as: “We can capture 1 per cent of the market.”
Sometimes a bottom-up approach can be more realistic: “How do we capture our first customer and scale from there given our web or street traffic, inbound leads and marketing activity?” While forecasting your revenue goals based on users and sales, don’t forget to adjust your expenses.
10. Break-even point
Your break-even point is when total revenue equals total costs or expenses: there is no profit or loss and you are “breaking even”.
The simplest way to calculate your break-even is to take your fixed costs (rent, wages, insurance, and so on) and divide them by your gross profit margin (metric #4). This calculation is a useful tool in analysing key profit drivers like sales volume, production costs and sales prices, as it can tell you how reducing price or sales volume will impact your profits, or how far sales can fall before you start losing money.
The material and opinions in this article are those of the author and not those of AP Group. The material and opinions in the article should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests or resort to professionals for assistance.