Your startup needs funding to grow and scale. In most cases, fast scalability and appropriate funding are the key ingredients required for the growth and development of a startup. Without proper cash flow management and other key input from essential stakeholders, most startups are distant to fail.
To take your startup to the next level, you might have to collaborate with advisors, mentors, or investors to maintain the necessary funds to sustain your business operations.
The business of starting any company or investing in a revolutionary and dynamic startup is to make some profit from it. Investors use specific metrics to determine which startup to invest their resources in to increase future value. This article sheds light on the metrics that matter to investors and the difference between vanity and actionable metrics. It concludes with notable metrics validations that indicate that your startup is experiencing healthy growth.
Must-Have Metrics for Your Investors
Your startup’s investor trades their funds for some ownership in your startup for future profit and value. Before proceeding to invest funds in a startup, investors need to get complete details of specific metrics. These metrics are essential to determine the future valuation and growth projection of any startup.
The first indicator an investment looks at is how profitable a startup is in its business. An investor will want to know how you are solving the customer’s problem and if your startup is worthy of the financial commitment. In addition, some Key Performance Indicators (KPI) are helpful for financial analytics purposes for calculating a startup’s profitability.
However, there is no right way to be entirely sure which startup will scale and reach its potential and not rise. One go-to strategy for identifying startups and businesses that will become profitable in the end is via financial ratios. Using this strategy provides analysis for identifying stocks with little value but can become more valuable in the future.
For investors to use financial ratios to calculate profitability analysis, the KPIs below are must-have indicators that evaluate and share actionable information about your startup.
1. Sales Revenue
Revenue from sales is probably one of the most important metrics that an investor is interested in seeing. This metric indicates how the solution and service offering is performing in the marketplace. The evaluation of the startup’s sales highlights the success of the product or services of the startup. This metric is helpful to plot and monitor the growth and performance of the startup.
Calculating the revenue from sales is as easy as subtracting the cost of returned products or undelivered goods from overall sales income.
2. Gross Margin
This measures how much of the revenue from sales goes towards profits and other associated costs. Gross margin indicates how profitable the startup is declaring to its investors and how much it’s reinvesting within itself. This metric also highlights the possibility of startup profitability from selling its products or services. It highlights how efficient the startup’s production processes are and what its current pricing power dictates.
If a startup has a high gross margin, it is retaining a high percentage of its sales revenue. It is vice versa if it has a low margin.
3. Net Profit Margin
Predicting the long-term growth of a startup is possible via the net profit margin metric. This metric is vital to investors as it points out an organization’s ability to generate profit after removing all the associating expenses from the revenue. This figure is a percentage expression of profit generation for every $1 in sales. The larger the net profit margin, the more profit is kept.
4. Operating Profit
Operating profit is another important metric that indicates whether a recent trend is continuing or not. Operating profit means the remaining profit when the operational cost is subtracted from the gross profit, which helps gauge the efficiency of a startup in producing its goods or services and the cost requirements. Security analysts use this metric to determine future figures and the valuation of a company.
5. Retention Rate
The retention rate of a startup speaks volumes to its investors. Their active users are significant for repeat purchases and revenue generation. Asides from that, organic marketing via customer retention is seamless. This is because happy customers tend to recommend and advertise the company’s products or services that they are comfortable using. This results in more repeat purchases and more sales.
6. Customer Acquisition Cost
Marketing and strategic advertisement to create awareness towards the services of the company cost money. Businesses take some measures and strategic initiatives to acquire new customers. The targeting of the customer base they desire is the customer acquisition cost. The figure for the customer acquisition cost shows how much your startup is spending on its marketing to gain new customers during that period.
7. Customer Lifetime Value
The Customer Lifetime Value indicates the customer’s revenue for a startup when they remain a returning buyer. This mainly applies to startups using a subscription or membership model for their solution. If your startup uses a subscription product, calculating the lifetime value of your customer is an essential metric for your investors to see. This metric helps investors understand how much a lifetime value is worth, how much needs to go into customer acquisition, and your startup’s profitability projection.
8. Churn Rate
It is a standard expectation to expect some of your startup’s customers to drop off at some point. The rate at which your startup’s paying customer drops off is your churn rate. This metric helps investors understand how your startup retains its paying customer. This figure should be as low as possible.
Metrics Validation to Highlight Healthy Startup Growth
Performance metrics are figures and measurable information that is useful to track the growth of a startup. The measurement of specific metrics gives validation to the development and possible scalability of a startup. For this valuation type, measuring key performance metrics can help a startup highlight healthy growth. This is achievable using the activity types, productivity, employee behavior, and others as crucial measurements.
Performance metrics are helpful for validation as they are measurements within a business area that measures against established objectives and goals. This provides valuable information concerning things that are working and things that do not work. It also helps to drive profit and growth up for scalability. It is also helpful for strategic planning and improvement, precise adjustments, and business processes to achieve goals in time.
Below are some of the performance metrics helpful in validating a healthy startup’s growth
1. Business Performance Metrics
This metric type tracks some specific business processes. These processes include sales, marketing, and general profitability of the business. The records from measuring the figures from these business areas are helpful for analysis against business objectives and goals. The result of this measurement helps a company make adjustments around its plans and set objectives.
Business performance metrics are bound around three main measurements. These measurements include profitability metrics, productivity, and Return on Investment (ROI) indicators. Profitability metric measures a business’s profit margin. It compares the figure against the set figure. This figure helps adjust and reorganization of sales strategies for the generation of more sales revenue.
Furthermore, the productivity metric produces the ratio necessary to measure the operation resources and the work output. It is helpful to validate and project for efficiency and management of resources. Lastly, ROI indicators validate if an investment will return a profit or not. ROI indicator validates a startup’s growth to both the founders and the investors that invest their time and funds in your startup.
2. Employee Performance Metrics
Further measurement of productivity is employee performance metrics. This metric type is an effective measure of employees in achieving the set benchmarks for the growth of the business. The performance metric is also helpful in managing employees reaching their target and trimming efficient company areas.
Measuring the efficiency of employees can be around core areas like quality of work, efficiency at reaching benchmarks, workplace productivity, and quantitative output. Of course, these metrics may vary for different startups and business processes. These metrics are helpful for appraisals to individual employees and increase work efficiency for your startup’s growth.
3. Sales Revenue Performance Metrics
Cash flow is king! Using sales metrics as a performance measure is a confirmation that investors look forward to seeing. Your startup’s performance in generating revenue from its sales activity is helpful for comparison against revenue projections. The total revenue at the end of a period is a good metric for validating your startup’s growth.
Sales and revenue generation have standard sales performance metrics like sales actions, retention rate, lead generation, and total revenue for a given period. Measuring these sales metrics as it compares to the company set target will validate your startup’s growth. These metrics are also helpful for reorganization and strategic planning for sales metrics that are not reaching their set goals.
Sales metric like lead generation is essential to track the acquisition of new sales target. This shows the latest market and returns on investment on marketing and advertisement. Sales productivity metric helps measure the rate at which a salesperson or a team can reach its sales revenue goals. The period it takes, the sales revenue goal to be achievable determine the productivity of the salesperson or sales team.
4. Project Management Performance Metrics
Your startup needs to handle specific projects for the profitability of its business. The measurement of the effectiveness and efficiency of your startup’s business to be profitable is an important metric that validates your startups’ growth. Project management methodologies and all their phases set goals and targets to meet during and after completion. These targets should be comparable to some objectives and goals to experience growth.
Different metrics can point towards a positive performance of projects for proper performance tracking. The project’s productivity indicates the resources the scheme used to complete the project and the effort required to achieve this feat.
Quality assurance and quality gate are metrics that help track project satisfaction and measure the quality of deliverables after specific projects. Depending on what your startup is about, quality assurance and satisfaction can vary depending on market demands and customer satisfaction.
The cost of deploying some project is another valuable key metric for understanding how efficient your startup is with executing projects. The cost accounts for what the project requirement had to spend on and shows if a project overshot its budget or not.
The different gross margins show the cost requirement for completing projects and the revenue from these endeavors. Gross margin metrics are usually outlined at the beginning of a project, and they are helpful performance measurements for comparing results.
Your startup requires monitoring and constant maintenance. The measurement of specific metrics for your startup will help determine its profitability, the return on investment for your investors and help your startup strategize appropriately for growth. When tracking these metrics for your startup, recognize the vanity metrics but focus on the actionable metrics to make proper decisions for your startup.
As a startup, deadlines for achieving set metrics are essential for investors to consider. Startups’ vision and mission statements help them understand the purpose and what they are trying to achieve. Those deadlines tell the story of how productive a startup is, how the business is meeting expectations, the number of milestones, and the potential of the company to scale.
Keeping your investors and major stakeholders informed about your metrics progress is a crucial communication skill that we at Fundrs.VC value the most. Stay tuned for our platform that will help you ace those communications while keeping an eye on what’s important the most.