2019-10-11 06:00:12Thought LeadershipEnglishhttps://quickbooks.intuit.com/blog/us_blog/uploads/2019/10/Equity.jpghttps://quickbooks.intuit.com/blog/thought-leadership/5-metrics-that-could-help-you-clinch-an-equity-investment%EF%BB%BF/5 metrics that could help you clinch an equity investment

5 metrics that could help you clinch an equity investment

3 min read

As much attention as venture capital gets, investors fund fewer than 1 percent of the deals they consider. The great majority of small businesses take on debt, either via banks, private individuals, or alternative lenders.

What if you’re set on equity funding? Know that venture investors look for a specific set of factors. They bet on high-risk, high-reward companies that appear poised for hockey-stick growth. In exchange for the cash infusion, they receive a stake in the company and, typically, a seat or two on its board. If that describes your company — and you can accept someone else’s hands on the wheel — then be patient. Keep pitching investors, growing your business, and building your deck. Although you need historic and projected revenue and expense data, of course, venture capitalists  also want to see these figures.

#1: Monthly recurring revenue

Investors love recurring revenue, not only because it makes projections more accurate, but also because it means the company doesn’t need to spend a fortune on sales or marketing. Blue Skies Ventures Founder Phil Stover recommends startups looking for $1 million or more show no less than $50,000 in monthly recurring revenue. Better yet, Stover says to show that you’ll be at the $80,000 mark within six months.

Although one-time sales still bring money in the door, they don’t signal a long-term commitment from customers. Annual recurring revenue (ARR) is an even better way to show that, but venture investors realize that few startups have been in business long enough to post ARR figures.

#2: Total contract value

One of Andreessen Horowitz’s favorite metrics to look at when evaluating startups is total contract value (TCV). Whatever the duration of your customer contracts, TCV describes how much revenue they bring in. Be sure to build in one-time and recurring service fees when calculating yours.

Remember to distinguish TCV from annual contract value, which measures how much your contracts are worth across a 12-month span. If at all possible, also share growth over time; investors are more willing to accept a low contract value if they see it increasing as your company grows.

#3: Churn rate

Compared to TCV and MRR, churn rate is less self-explanatory: Churn refers to the proportion of total customers lost over a given time period. Churn matters because it can undercut strong sales figures and contract values. Although churn is typically calculated on a quarterly basis, it’s sometimes computed across 90 days or annually.

If many accounts leave shortly after they sign a contract, the company may have a hidden product-market fit issue. Unrealistic sales pitches or poor service could also be to blame. Investors are very sensitive of these issues so it can influence them in a negative way.

#4: Burn rate

Rhyming with, but unrelated to churn rate, is burn rate, or the pace at which a company is spending money. Investors care about burn rate because it signals how much money the company needs to keep operating. Although there’s no hard-and-fast benchmark for this metric, businesses should strive to keep at least six months’ worth of expenses in the bank. 

Mark Suster, managing partner at Upfront Ventures, notes that startups need to know their burn rate for another reason: to determine how much leverage they might have with investors. Startups in a rush for capital have less room to dictate terms than those that can afford to wait for the perfect deal.

#5: Customer lifetime value

Especially in the software sector, customer lifetime value (LTV) is a key metric. Calculate it by taking your average MRR per account and multiplying that by your average customer lifetime. Better yet, divide it by your customer acquisition cost — how much you spend to sign the average account — to make sure your customers are worth what it takes to sell them. Longer LTV has been been shown to improve the net promoter score of your customers. Knowing this number will help you evaluate all aspects of your business.

What if your company is too new to know the total value of its customer relationships? Redpoint Partner Tomasz Tunguz has developed an alternative: expected customer lifetime value (ECLV), a more complex metric that requires you to assume renewal rate increases and customer lifetime lengths. If you’re not sure how to predict those, ask an experienced entrepreneur.

If you still can’t seem to woo investors after adding these metrics to your deck, don’t despair. Venture investors pass up on promising companies for all sorts of reasons. Alternative lenders are more flexible, especially with small businesses that know their metrics.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.
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