This is What Investors Care About When Looking at a Startup
This is What Investors Care About When Looking at a Startup
A comprehensive list of imperatives.
Happy Friday folks! :)
I’m an angel investor in 10+ startups. So having been both a founder and an investor, there are some ground basics that we look for while evaluating a startup.
Understanding what investors care about is crucial for anyone seeking to secure funding for their startup.
Let’s discuss:
Engagement Metrics
Know Your Customer
Investors love to see that you have a clear understanding of your ideal customer. Who are they? How do they use your product? It's not just about having users but having users who engage with your product in meaningful ways.
Usage Patterns
Are your customers using the product as you envisioned? Organic growth within your user base is a positive sign. If your product requires a lot of customer success efforts, be ready to explain why and how you're managing it.
Growth Metrics
Customer Acquisition
Numbers matter.
How many customers do you have? How fast are you growing? Customer
Acquisition Cost (CAC) is a critical metric. It shows how efficiently you can bring in new users. Also, consider how you acquire these customers—are your current users helping you attract new ones?
Growth Rate
A solid growth rate indicates potential. Investors are interested in how you plan to scale. Your strategy for the next stage of growth is just as important as your current numbers.
Financial Metrics
Revenue Growth
Investors are looking for a steady increase in revenue. Show them your growth trajectory and explain how you plan to maintain or accelerate it.
Profit Margins
Gross and net profit margins indicate your efficiency and profitability. Be transparent about these numbers and what they mean for your business.
Churn Rate
Why are customers? Understanding churn and having a plan to reduce it is essential. It shows that you're in tune with your customers and proactive about solving issues.
Customer Lifetime Value (LTV)
This metric predicts the total revenue you can expect from a customer over their lifetime. A higher LTV relative to CAC is a positive indicator.
Market Metrics
Market Size and Share
Your Total Addressable Market (TAM), Serviceable Available Market (SAM), and Serviceable Obtainable Market (SOM) are crucial. We want to know how big the opportunity is and how much of the market you can realistically capture.
Recurring Revenue
Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR) reflect financial stability and predictability.
Particularly important for SaaS businesses.
Financial Health
Burn Rate and Runway
Your burn rate directly impacts your runway—the time you have before needing more funds. Investors look for a balance between aggressive growth and prudent financial management.
Cap Table
A healthy cap table, with clear equity distribution, is essential. It ensures founders have enough skin in the game and that the company is attractive for future investments.
Deal Numbers
Valuation and Terms
Understanding your pre-money and post-money valuations helps investors see what they're getting for their money. Be clear about how much you're raising, from whom, and under what terms.
Closing Tip for Founders
Be Data-Driven.
In conclusion, these numbers and KPIs are part of a broader evaluation process. Investors also value a strong founding team, a compelling vision, and the potential for significant market impact.
But, it’s important to internalise how important sticking to data is. Investors appreciate founders who know their numbers. If you don't know something, be honest and commit to finding out. That is the one thing that builds trust and credibility.
Focus on these metrics and demonstrate a comprehensive understanding of your business to make a compelling case to potential investors.