There is a certain thrill when you, as a small business owner or entrepreneur, present your ideas to investors. But your pitch isn’t just about catchy phrases or colorful charts to paint a positive and promising picture. This presentation is an opportunity to convince investors that your startup deserves their attention and investment.
To persuade investors, you should always have solid numbers on your side. This guide will break down all those key startup metrics and illustrate why they matter to investors when scrutinizing your pitch deck financials and how to calculate them correctly.
What Metrics Matter to Investors?
Investors are primarily interested in numbers. Sure, they love the ingenuity and innovative ideas, but what really gets their attention are the financial metrics of startups.
As your business advances through funding rounds, these key startup metrics become pivotal to the narrative. They are the building blocks of your financial story, illustrating growth potential, operational efficiency, and more, aiming at capturing investors’ confidence in your venture.
The type of funds you’re raising defines the pitch type you’d need. We may base this on the idea of Andrew Chen, general partner at Andreessen Horowitz. Andrew says about delineated early-stage investment tracking with precision:
- Pre-seed – Entrepreneur-focused;
- Seed – Team-focused;
- Series A – Traction-focused;
- Series B – Revenue-focused;
- Series C – Unit economics-focused;
Although simplified, this shows the importance of numbers in your funding journey. As you advance, so does the emphasis on your key metrics. While seed investors might invest based on the founder’s credentials and vision, later-stage investors will focus more on financial diligence and the stories told by your figures.
When you pitch your startup to prospective investors, keep in mind the option to get financing, like a loan from the government to start a business. This knowledge can expand your financial arsenal and support the growth of your business.
What Metrics to Include in Your Investor Pitch Deck?
Total Addressable Market (TAM)
Total Addressable Market is the total market demand for a product or service. In other words, it’s the maximum potential revenue your business can generate by selling its product or service within a particular market.
It is rare for companies, except monopolies, to capture the entire potential market. Even with just one competitor in the market, it can be challenging to persuade all customers to purchase your product exclusively.
Smaller businesses often evaluate their Serviceable Available Market (SAM) and Share of the Market, two critical concepts different from TAM or Total Addressable Market.
The Serviceable Available Market (SAM) is a portion of the TAM that can be realistically reached by a company, given their marketing and sales channels. SAM is essentially the total sales opportunity available for your product or service, given practical business constraints such as geographical reach, market competitiveness, and distribution channels.
On the other hand, Share of the Market, also known as Market Share, refers to the percentage of the SAM already serviced or captured by your business. It provides a more realistic assessment of a company’s actual standing in the target market compared to competitors.
In summary, while TAM helps provide a broad overview of the entire potential market, SAM and Share of the Market offer more precise and practical insights into the part of the market your business can tap into and the portion it currently holds, respectively.
There are three approaches to calculating your TAM:
- Top-down approach uses industry data, market reports, and research findings, like those from Gartner or Forrester. However, this approach has limitations, so always consult a market research firm when picking this way.
- Bottom-up approach is based on prior sales and pricing data. To calculate your Annual Contract Value (ACV), multiply your average sales price by your number of current customers. Then, multiply your ACV by the total customer count to determine your TAM.
3. Value-theory approach looks at how much customers value your product and how much they would be willing to pay for it. If your product has better features than competitors, calculate how much more your customers would be willing to pay for this superior product.
Product-Market Fit (PMF)
Product-market fit reflects a stage where your product’s value proposition syncs seamlessly with target customers’ needs while encouraging steady market growth and referral purchases. It signifies the sweet spot where product utility and market demand converge, leading to an upward spiraling of market value and growth. At the core of PMF is the ability of a product to last long and make a profit in the market.
Measuring PMF isn’t a one-size-fits-all strategy. There are multiple metrics that align with Dan Olsen’s product-market fit pyramid. According to the pyramid, PMF is achieved by executing a value proposition that meets the needs of an underserved market. Here is how to measure PMF:
- Conduct market surveys to find out what customers need
- Test your product with real customers to get feedback
- Use conjoint analysis to uncover which attributes of a product are the most valued by customers
- Learn from your competitors’ mistakes and make changes to your offerings
- Make your user interface and user experience better for customers and address any issues
- Keep track of important metrics like customer retention and compare them to your competitors
Some important metrics you might consider are:
- NPS/Trust Score;
- Market share growth rate;
- Conversion Rate;
- Churn Rate;
- Customer Retention;
- Bounce rate;
- Growth Rate.
When presenting metrics to potential investors, make sure they are well organized and easy to comprehend. The best way is to visualize your data in graphs and charts. To remove manual work, you can use visualization tools that automatically collect data from your sales and marketing apps and organize them in simple reports. Here are a few sales dashboards examples you can follow.
Unit Economics
Unit economics shows how much your company makes and spends for each unit. For instance, in a SaaS startup, the unit is usually a customer or subscription. In an e-commerce business — it could be a physical item. When you clearly see your unit economics, you can predict profits, select products, assess changes, and gauge company performance.
There are two ways to calculate unit economics:
- The “One Customer” Model: This ratio shows how much is spent to acquire a customer and how much value they bring to their relationship with the company. It is particularly common for SaaS businesses.
To calculate unit economics, consider these metrics:
- Lifetime Value (LTV): Average revenue per customer over the entire customer relationship. LTV = Total Revenue / Number of Customers.
- Customer Acquisition Cost (CAC): Investment required to acquire one customer. CAC = Total Cost of Sales and Marketing / Number of Customers Acquired.
- The “One Item Sold” Model: This model is often utilized in businesses dealing with tangible goods and focuses on calculating the Contribution Margin. It is especially applicable when the business wants to understand the profitability of individual units sold.
In this model, we consider variable costs, the expenses for each unit produced and delivered. These costs include materials, packaging, delivery, salaries, taxes specific to the startup location, etc. By subtracting these variable costs from the selling price of the product, we get the Contribution Margin. This is the profit per unit, which helps cover the fixed costs and ultimately contributes to the net profit.
This model is often used alongside the LTV:CAC model, especially for physical businesses in retail, manufacturing, or e-commerce industries. While LTV:CAC helps us understand customer value compared to the cost of acquiring them, the “One Item Sold” Model helps businesses understand the profitability of each individual product.
In simple terms, the “One Item Sold” Model helps us determine if a product is financially feasible and if each sold item contributes positively to the overall financial health of the business.
Other Financial Metrics for Startups
- Gross Margin (GM) measures how effectively a company uses its resources to produce and sell products. Formula: (Total Revenue – CoGS) / Total Revenue, where CoGS stands for Cost of goods sold.
- Operating Margin indicates a company’s profitability and efficiency after paying variable production costs. Formula: Operating Income / Net Sales
- Return on Investment (ROI) measures the profitability of an investment. Formula: (Net Profit / Cost of Investment) * 100%
- Net Promoter Score (NPS) measures customer satisfaction and loyalty, although it is not a financial metric. Formula: % of Promoters – % of Detractors
- Churn Rate measures the number of customers who stop doing business with a company within a specific period. Formula: (Number of Customers at the Beginning – Number of Customers at the End) / Number of Customers at the Beginning
- Burn Rate measures the rate at which a company spends its capital before generating positive cash flow. Formula: (Starting Balance – Ending Balance) / Number of Months
- Average Revenue per User (ARPU) determines the revenue generated per user or unit. Formula: Total Revenue / Number of Users
- Cash Conversion Cycle (CCC) shows how long it takes for a company to convert invested capital into cash flows. Formula: Days Inventory Outstanding + Days Sales Outstanding – Days Payable Outstanding
Financial Projections
Financial Projections are estimates of your business’s future income and expenses. You can get them by analyzing past financial data and making assumptions about future trends. These projections provide an overview of how your business may perform, helping you decide on investments, budgeting, strategy, and inventory management.
There are two types of financial projections: short-term projections (one year, broken down into monthly or quarterly targets) and long-term projections (cover 3-5 years, used for strategic planning and attracting investment).
Financial projections rely on three pivotal financial statements:
- Income Statement: An overview of revenues, expenses, and net income. Formula: Income = Revenue – Expenses
- Balance Sheet: Captures assets, liabilities, and equity for a specific period. Formula: Assets = Liabilities + Equity
- Cash Flow Statement: Monitors cash inflows and outflows. Formula: Cash at the end of the period = Cash at the beginning + Cash inflows – Cash outflows
Financial projections require: sales forecast, operating expenses, payroll expenses (if applicable), amortization and depreciation, cost of Goods Sold (COGS), and break-even analysis (formula: Break-Even Point = Fixed Costs / (1 – (Variable Expenses / Sales))
Apart from financial numbers and valuable tools, adjust to new trends using AI (like conversational AI chatbot) for business growth. Also, stay updated about the economic situation for startups. Keeping track of small business lending statistics and trends can help you prepare better for pitching.
Conclusion
You can captivate investors with your pitch when you clearly understand the key startup metrics, demonstrate your product-market fit, and present compelling financial projections alongside pitch deck financials.
By incorporating essential elements into your presentation and sharing crucial metrics, you can grab investors’ attention and increase your chances of securing funding.
