A compelling story with a clear vision plus the metrics to back it up. That’s the formula for a successful pitch to an investor.
On your first meeting with the investor, you will need to earn their confidence. To do that, you can try to wow them with a great narrative, but without sound metrics to support your claims, your story will lack substance and credibility.
So how do you choose the right metrics to convince your investor? Read on to discover which metrics are a must-have for investor pitches at each stage of the startup’s evolution.
What metrics do you need for a pre-seed investment?
The pre-seed stage is about finding your place in the market. The founders are still working on the product and trying to build a customer base.
At this stage of the startup’s evolution, the founders must present metrics that prove the startup has enough steam to finalize its product, find product-market fit, and get to a steady phase of growth where revenues support its operations.
Pre-seed metrics & benchmarks
First and foremost, investors want to find evidence of market validation, so:
1) Total Addressable Market (TAM) is an important factor. It defines the potential revenue of a company if 100% market share is ever reached. There are several ways to calculate TAM, but, ultimately, you figure out the number of potential customers and multiply that by an average revenue per customer a year:
TAM = number of targeted customers X average revenue per customer.
Benchmark for TAM: most angels and VCs prefer a TAM that is over $1 billion. Sometimes investors look at it from another perspective: can you prove that you can reach $100 million in annual recurring revenue (ARR) in 6-7 years? If your answer is yes, then by definition you have a product with a billion+ TAM.
Since at pre-seed, you haven’t reached this mark yet, investors will want to know:
2) How close are you to product-market-fit (PMF)? You can find this out through a dedicated survey of your customers.
Benchmark for PMF: at least 25% with proven plans (demonstrating actual methods and estimated figures) to reach 40% at the seed stage would sound promising.
Next on the list is your customer acquisition. Here’s what you want to show investors:
3) Daily Active Users (DAU): the number of users that use your product on a daily basis.
Benchmark for DAU: according to the Founder’s Institute's startup funding benchmarks, 5k+ DAUs is a good sign of traction for the pre-seed stage. This, however, depends on whether these users are monetizable and how large the annual revenue per user is. Freemium-based users might not be that convincing to investors. So, support your DAU metrics with customer acquisition costs, retention stats, and annual check size.
4) Daily Active Users / Monthly Active Users (DAU / MAU) ratio is another useful metric that demonstrates how active your monthly users are on a daily basis.
Benchmark for DAU / MAU: anywhere from 10% to 20% is a good sign of traction. For more engaging SAAS products like communication and social apps the ideal is 25% to 50%. A good tactic is to stack yourself up against your competition and show an upside.
5) Win Rate is another good metric for customer acquisition. It shows the amount of total opportunities in your sales pipeline that have been successfully converted into customers over a certain time period.
Win Rate = (converted opportunities / total number of opportunities) X 100%.
Benchmark for Win Rate: anything above 20% is impressive.
If you’re able to show early signs of growth in revenue at pre-seed, that’s a definite plus, and there’s another metric you could present to investors:
6) Monthly Recurring Revenue (MRR) Growth Rate = (Current MRR – Previous MRR) / Previous MRR X 100%.
Benchmark for MRR Growth Rate: 10% to 15% is what you should reach for at the pre-seed stage. If you’re still behind, show promising projections with a strong potential to grow to 15%-20% at the seed stage. Some investors have higher expectations and want to see 30% MoM growth.
What metrics do you need for a seed investment?
At the seed stage, the startup has a product that is in demand by the customer base. The founders managed to find product-market fit and entered an active growth stage.
At the seed stage, you need to present metrics that prove the startup is steadily growing into an established business.
Seed metrics & benchmarks
You can still use the metrics from the pre-seed stage to show traction, but you will need to provide more metrics showing evidence of real growth as well:
1) MRR growth rate should be much more significant than it was at the pre-seed stage.
Benchmark for MRR growth rate: 15-20%.
At the seed stage, you are now ready to show a significant annual growth rate as well:
2) Annual Recurring Revenue (ARR) Growth Rate can replace MRR growth if you think it’s formidable.
Benchmark for ARR growth rate: you would impress with 200%. Many investors are fond of the T2D3 approach for early-stage SaaS growth, with 3X growth the first two years and 2X growth the following three years. Lay out your strategy for T2D3 and present it to your seed investors. You are bound to get a good impression.
At the seed stage, you need to dig a little deeper into your customer acquisition model with the following metrics:
3) Customer Lifetime Value (LTV) vs Customer Acquisition Cost (CAC). These are two important metrics that indicate how effective your customer acquisition strategy is.
There are two ways you can determine your LTV:
LTV = average revenue per customer X average lifetime of a customer
LTV = average revenue per customer / user churn
Startups have to pursue an LTV that is greater than the CAC in order to survive and grow. That’s where the LTV / CAC ratio comes in.
Benchmark for LTV / CAC ratio: 3:1
At the seed stage, you should have reached PMF (40% and higher). In addition, another vital metric here is:
4) Net Promoter Score (NPS) shows how many customers would recommend your product. By making an NPS survey, you find out the number of supporters and detractors of your product. Then you calculate the score:
NPS = supporters - detractors.
Benchmark for NPS: to be above average, you need 50 and higher.
Another customer success metric:
5) Customer Satisfaction Score (CSAT) shows how satisfied customers are with your product:
CSAT = number of satisfied customers / number of survey responses X 100%
Benchmark for CSAT: 80% or higher will impress the investors.
To demonstrate that you maintain a loyal customer base that is growing and not dwindling, you also need to show your levels of churn and retention:
6) Annual Churn Rate is the number of customers you lost in a year.
Annual Churn Rate = (amount of customers at the start of the year / amount of customers at the end of the year) X 100%.
Benchmark for Annual Churn Rate: should not be higher than 5% to 7%.
7) Customer Retention Rate (CRR) shows how effectively you engage your audience to become loyal customers.
CRR = ((number of customers at the end of the period - number of new customers during the period) / number of customers at the beginning of the period) X 100%.
Benchmark for CRR: 35% or higher over a 90-day period is a good sign.
To demonstrate how equipped you are to reach milestones, use:
8) Pipeline Coverage indicates the ratio between the number of sales opportunities in your pipeline and the milestones you set for a given period.
Pipeline coverage = pipeline size / milestone target.
Benchmark for pipeline coverage: 3x - 4x is generally regarded as an industry standard. But you can go another way and show how good you are at setting and reaching your milestones with figures to prove it.
What metrics do you need for a Series A investment?
When the founders reach the Series A phase, they have an established brand with an in-demand product that brings in significant revenues. This is the moment when the startup is ready to scale and expand into other markets.
When it comes to Series A investments, you need financial metrics that show what you’ve accomplished and prove you have great potential for further expansion.
Series A metrics & benchmarks
Growth metrics are welcome here as well (those used at seed and pre-seed), but, most of all, you have to present figures that emanate confidence and indicate financial stability. Here are the recommended metrics and benchmarks:
1) The essentials:
ARR: $5 million.
ARR Growth Rate: 250% and higher.
ARR run rate (projections): $5 million - $20 million.
MRR: over $200,000.
MRR Growth Rate: 25% and higher.
Gross Margin: 70%-80%.
Burn Rate and Runway (how many months of cash will the funding give you?): should be 18-24 months.
Other important metrics for Series A include:
2) CAC payback period shows the time it takes to regain the money invested into acquiring a new customer.
CAC payback period = CAC / ( average revenue per customer X Gross Margin )
Benchmark for CAC payback period: 4 to 12 months. Generally, startups need to strive for less than a year.
3) Revenue churn shows how much revenue is lost to customers abandoning your product
MRR churn = (start-of-month MRR - end-of-month MRR) / (start-of-month MRR)
Benchmark for MRR churn: to impress investors, you should aim for less than 5%.
Alternatively, you can show MRR Net Retention which should be 95% and higher.
Conclusion
By showing impressive traction and growth you can do more than just land the investment. Demonstrating strong metrics gains a startup a better valuation and a fair investment deal. Having laid out the metrics we provided, a founder can impress investors with a compelling background story based on verifiable data that gathers trust.