Author: Shweta Saxena
If you have received the seed funding, I am sure you must be doing a happy dance. Believe me, I had no intentions to halt it, but there is a bad news to share. In my article 5 Bad News for startups in 2015 we talked about the choking point in funding journey, and that is Series A round. Seed stage funding has increased to 622 over 340 in 2014, but VC funding has seen a slower growth of 132 over 71 in 2014. This means that startups that have been given a chance to prove potential have not been successful enough to lure investor’s money for the next round and hence a choke point. Less than 25% of the angel-funded startups are able to raise series-A funding.
Many of the startups had been lucky enough to get the seed funding, but most of them are stuck at the next level. It is comparatively easier to raise funds at the seed stage as everything goes on the face value. But as you move up the ladder of funding, things start getting more professional, decisions are taken based on numbers and projections and thus, difficult for the founders. (Read: What investors look for in a business before investing).
You need to know your sh*t in and out, and there is no alternative for this. You may not like investor’s nose poked in every shitty area of your business, but they can’t sponsor your irrational adventures. The data that is to be asked from you should not come as a surprise. Founders need to understand that finance is a very lucrative game and investors are serious. They don’t want the founders to fail on their dime. No doubt they are looking out for the winning horse, and you cannot be one if you do not have your numbers on the tip of your tongue.
Don’t panic if you don’t know what the terms like CAC, CLTV mean. Getting the traction or revenue could have been the most bothering jobs on the earth for you till now, and you might not have gone into the technical definitions and startup jargons. But be prepared for some brainstorming on your numbers. Investors are interested in knowing the answer to their pet questions, of course, backed by numbers this time and not only hunches.
How do you measure the engagement of your customers?
The investor wants to know how many customers you have acquired and what percentage of it have you been able to retain. Acquiring customers is definitely easier then retaining them. E-commerce companies have spent millions of dollars just to acquire new customers but now their challenge is to improve customer loyalty, which is least in this segment as there is minimal human interaction (Please read my article “Will the growing e-commerce bring an end to offline retail”). The above question could be answered well if you know 4 metrics: the Acquired Users, Retention Numbers, Referral Numbers and the Conversion Rate Metrics.
1-Acquired Users: Anyone visiting your website is your User. You have acquired them or made them visit your website through various ad campaigns or marketing channels. Impress the investors with digits long numbers (if you have).
But sadly, that is not the end. The user base is the most superficial figure for any investor to bet his money on. His expressions will tell you – ‘tell me more!’
2- Conversion Rate: You might have been successful to make users click on your website but what next? What do you get if they do not purchase your product, or subscribe to your newsletter? All your efforts to bring them on site goes in vain, and the number of users in your metric is just a number.
Not just you but the investors also want to see the result. How well have you been able to convert your users? Typically there are two types of conversion rates- Micro and Macro. Companies generally set -completing a purchase as their Macro conversion. Sales are not the only goal of the companies. Many a times users come to visit your site for product information, price comparison may be to read your blog or search for job opportunities. So, are these unique visitors of no use to the company? No! They are equally useful. If they subscribe to your Newsletter/ Magazine or submit resume, etc. you can set them as micro conversions and use this data for target marketing and thereby approaching them to make a purchase from your site. Thus micro conversions could be converted into macro, apart from that you have a bigger conversion percentage number to show to the investor.
3- Retention number is the number or the percentage of total user who made a repeat purchase. This number becomes important because it represents customer satisfaction and product superiority. The more, the merrier!
4- Referral number shows an even deeper level of relationship between you and your customers. It shows that the customers have considered your product too good to refer it to their friends.
Both above mentioned numbers displays your relationship with your customers. Although, it could be a result of cash backs and referral rewards but that is just a strategy to achieve results. I will come back to it later in this article.
If you have bulky figures to flaunt, I am sure you must be on the cloud nine till now. Hold on! There’s lot to know. Be prepared for the scariest queries of the investors.
Just keep in mind; investors want to see your metrics growing. No matter you are making small profits, but it has to show an upward trend. They want to see your Average Transaction Value (ATV) growing month on month. Your annual revenue might be an estimated figure (if you have not completed 12 months in business) based on data of past months.
5- AR (Annual Revenue): Annual revenue is the company’s total revenue in last financial year (ending March 31). If you are in the middle of year then definitely interim quarterly numbers will be also be asked for. Investors are interested to see the growth trend in your revenue annually and quarterly. This trend helps them in projecting your future sales and thus estimating your company’s valuation.
6-Average Transaction Value (ATV): ATV is the average amount of money spent by users within a single transaction. It is considered to be one of the Key Performance Indicator (KPI) and the bottom line to success. You might have a good user base, but than might be due to the aggressive marketing campaign where you have spent generously. This user base is a virtual footfall unless you monetize this footfall to recover your marketing expenses.
ATV is the total transaction value in a month divided by the number of transactions in that month
There are many ways to increase ATV- upselling, providing flexible payment options, reward points. These days’ cash back, discounts and ease of payment through mobile wallet are used to increase ATV and ARPU (I am coming to it).
Since investors have become more interested in Unit Economics here are a set of metrics that helps you understand the same.
7-Customer Acquisition Cost (CAC): You must know how much you are spending on each customer to acquire him/her. One simple way is to divide the total cost incurred on acquiring more customers by the number of customers acquired in that month.
But this method has some limitations; some of your strategies like spending on SEO or marketing in a new region might not have the immediate impact. Like, although you spent $ 1000 this month, which gave you 100 new orders, meaning $ 10 is the CAC, but the effects of this marketing campaign does not end with the month. You might have more orders in future because of this $1000 spent last month.
For this, you will have to see the bigger picture. Which is the lifetime value of your customer- Customer Life Time Value(CLTV).
8-Customer Life Time Value (CLTV): Although you might have incurred a cost of $10 to acquire a new customer who is purchasing a product that gives you a profit of only $2.5. You may say that it is a bad deal, but it depends on your product and CLTV. You can easily cover your CAC even if the person makes 4 such purchases in his lifetime. Thus, it is the frequency of purchase and the lifetime value that decides CAC is justified or not.
On the other hand, if your product is a heavy one and you can easily make up a margin of $125 after spending $ 10 on acquisition, you may not have to bother about CLTV, as you have monetized your marketing cost in the first deal itself.
Be aware if your customer lifetime already looks as if it’s only a few months that would communicate that something is wrong with your product itself. Although your CLTV would be an estimate at this point but it should be in years unless you are selling heavy margin products like Mercedes-Benz.
With CAC and CLTV together investors can quickly see how much money is it going to take to grow your user base to a huge size.
9-Cash Burn Rate – If you had approached a VC earlier he might have asked your cash burn rate. You must be feeling happy to say ‘zero, instead. I am profitable’, but as a surprise he did not invest in you. Why?? Brother, with time there has been a greater acceptability of “cash burning” concept in startups ecosystem, as there is a trade-off between profitability and growth. Although high cash burn rate does not promise you investment because VCs are quite vigilant as to where, why and how you are burning cash. That has to be logical and indispensable to achieve your milestones.
VC Scott Nolan, a partner at Founders Fund, “At Founders Fund we avoid investing in companies unless they are consuming cash. We’re here to invest when doing so will bring about positive progress faster, which often manifests as the conversion of cash into assets and increased burn. Cash-flow-positive businesses are usually past this inflection point, or simply don’t have enough ideas about what valuable things to do with more money.”
Hence, cash burning has its own pros and cons. If you are able to achieve the desired result and defeat your competitor with high cash burning rate than you are the winner. Take an example of Oyo Rooms, how they became the leader in budget market segment by doing aggressive marketing and making it difficult for their competitors (Zo Rooms).
10- Cohort Analysis– Now that you have achieved the hygiene factor of knowing all your metrics, in and out, its time to impress your investors. With this analytical tool called, “Cohort” you can form the groups (cohorts) of users and compare them at the same point during their lifecycle. A typical cohort analysis compares the behavior of all the users who registered in a given month with the users in another month. It allows you to present a growing trend month on month. As said investors are interested to see your numbers growing, show them through these kinds of analytical methods.
You might have been doing great business but still not receiving funding fuel to gear up your startup further might be bothering you. Well! Investors look at startups through an entirely different lens than founders. Investors are playing the number game. They are looking for outliers. Most of the startups that they have put their money on are not going to give returns, only 15 out of every 200 generates 97%, so they are looking for those 15.
Now I believe you know enough of your data to impress your favorite investors. All the best! And Happy Funding!