Bootstrapping, pitching, talking, planning—never mind all the newer sites that allow regular folks to invest directly in private companies. The capital raising process is exhilarating but exhausting.
It can feel like there are a million channels to keep up with when you’re trying to raise capital: Credit cards, friends and family, crowdfunding, angel investors, venture capital, private equity. What unites all of them? The desire to support entrepreneurs, generate returns, and potentially be part of the next big thing.
But with all the opportunities out there, how do investors decide which company to back? Sure the cachet of a charismatic founder, or the energy of a promising young team, can be huge draws. But the main driver of investment funding is pure numbers. To raise capital efficiently and effectively, you need to be able to prove what you’re doing.
Grow, the No. 1 analytics software for growing teams, and CampusLogic, a three-year-old startup well-versed in the capital-raising process, are here to help. Read on for 4 tips for using metrics to raise capital—and 8 metrics every CEO should be tracking indefinitely.
Tip 1: Understand the Investor Perspective
“An investor’s job is to find businesses that offer the highest return on investment with the least risk. Your job is to convince them that your business offers a greater return, with less risk, than all the other businesses they are looking at,” says Doug Hicken, VP of Operations at Grow.
Every investor wants a win, but that win looks different to every investor. Some seek numerous small wins (think: lots of triples and home runs) while others are only interested in investments promising big returns (they want the grand slam). Investors can be very focused on your stage, industry vertical, and/or region.
When investors consider a potential investment, they consider three types of risk:
Market Risk: This risk factor is a combination of three variables: size, competition, and volatility. The negative outcome of not properly assessing your market risk can include hours spent slaving away with little return, and a wonderful team feeling demoralized and looking for ways to leave. Misunderstand your market risk, and you’ll encounter funding roadblocks. Misunderstanding market risk can be a fatal business flaw. Things to think about:
- Market Size: If you’re going after a large market, how much of the market share will you need to gain? How will you gain it? Going after a smaller vertical market? How do you plan to grow your average revenue per customer over time?
- Market Competition: The last thing investors want to hear is that your market has no competition—they know that’s not true (so do you). A truer statement would be: “There’s no one doing exactly what we do, how we do it. But there are other companies who believe they can.” You need to have in-depth knowledge of your competitive space. Know who your competition is, how they think they’re a threat, and how you’ll manage that risk. Investors will have more faith in you when you can speak honestly and truthfully to your competition.
- Market Volatility: Be aware of perceived volatility in your market. Perception is reality, and your potential investors won’t be as well-versed as you in your industry. They may believe headlines and news snippets. Think about everything from changing regulations, potential political repercussions, changing demographics, being outpaced by newer technology, etc. And think about how you’ll minimize or mitigate that volatility—diversifying product offerings, awareness campaigns, and creating value from headlines.
Product Risk: Somewhat linked to market volatility, product risk is all about investors wanting to understand how you plan to stay on the forefront of innovation. How will you continually address your market’s changing needs, and defend your intellectual property? Investors will ask you these questions, and your answers will show how forward-thinking (or not forward-thinking) your company is.
Execution Risk (aka Team Risk): Investors need to know the likelihood of your company’s survival. They want to know that you’re planning for the future in terms of how you’ll acquire, retain, and scale new customers profitably.
“Creating transparency with investors around risk is key,” says Chris Horne, VP of Finance at CampusLogic. “You want to get their buy-in in terms of your market, product, and team. Metrics are a fantastic way to gain investor trust.”
Tip 2: Be Transparent with Stage-Relevant Data
Companies need to achieve a certain stage of growth before data will be considered valid by investors, but that shouldn’t limit knowledge sharing. Pre-revenue, sharing anecdotal information is a must: think ratio of Customer Lifetime Value (CLV) to Customer Acquisition Cost (CAC), for example.
“It’s true that you’re limited in what you can share with investors when you’re an early-stage startup,” says Horne. “See it as an opportunity to build on your transparency with investors by telling a growth story. ‘Today we’re at X, but we plan to be at Y by this date.”
As your company grows, you’ll have increased opportunity to use your data, not anecdotes, as stand-alone evidence of traction to share with investors.
Tip 3: Provide Proof of Traction
Maintaining investor trust hinges on data transparency. Focus on building engagement and driving excitement by capturing and sharing metrics that provide proof of your company’s traction.
Recurring Revenue Growth & Forecasted Revenue
- Burn Rate & Expected Runway
- Gross Profit
- Churn Rate (Best segmented by cohort)
- Customer Acquisition Cost (CAC) to Lifetime Value (LTV) ratio
- Key Value: Average Deal Size. But, if there’s a positive trend you want to show, break Average Deal Size growth into its own graph
- Engagement Score (daily/monthly active users)
- Leads by Source
- Conversion by Lead Source
- Key Value: Sales Cycle. How long does it take you to close a deal?
Tip 4: All the Cool Kids Have Dashboards
You’ve gathered your metrics, now you need to share them. The most powerful way to build and maintain real-time data transparency: Dashboards. “Our shareholders put their trust in us, and we take our duty to provide access to CampusLogic’s progress very seriously,” says Horne. “We use Grow’s real-time dashboards to help us keep the right people informed.”
It’s important to spend time strategizing who really needs access to your dashboard, and how you’ll plan to manage feedback.
The right metrics can help you source funding from great investors. But more importantly, they are critical to the life and health of your business. Track continuously. Share often. Because everything you need to know is in your data.
This article first appeared on January 19, 2017 on the Grow.com blog.