Pitching in front of investors takes a lot of effort and courage. Furthermore, you will need to be firm about the facts of your company. Investors focussing on start-ups know that they take risks. However, they still want to take calculated risks by understanding all aspects of your company. One dimension is the financial indicators which offer insights into the future of a venture.
If you are just starting out with raising funds or contemplating to do so, this article is for you. I have put together this guide to prepare you for the key performance indicators which are most often covered in pitch meetings with investors. This guide serves as an overview to get a first understanding of the metrics. If you want to dive into more detail, I have linked the relevant articles throughout the text and you can also find further reading at the bottom of this article.
One of the first questions in investor meetings is about your company’s valuation. What does this mean? It means what your business is worth today. “How would I know,” you may ask. It seems like a really abstract concept but there are ways to calculate this indicator.
Why do investors want to know your valuation? First and foremost, they want to know how much the business is worth before they invest. It is basically the same as when you look at investing in shares in a company. You will check their share price today and in the past and then compare it to other companies in the market and decide if it is interesting for you.
Furthermore, it is very important to know your valuation when you give away shares to investors. For example, if an investor offers you USD 100,000 as an investment in exchange for 10% of your company, it means that they value your company at USD 1 million (USD 100,000*10). If they offer you the same amount for 25%, it means that they value it at USD 400,000 (USD 100,000*4).
I have written a detailed article about how to calculate your company’s valuation. The whole concept may seem a bit daunting at first, but I have broken it down in small bits and explained it in a simple way so that you can get the concept without being a finance pro.
Use of Funds
When you raise money, it is crucial to present an overview of how you will use the funds. There is nothing more embarrassing in a pitch meeting than an entrepreneur asking for capital without having a clear idea of why they need it and what they are using it for. (Yes, I am not making this up, it does happen a lot!)
Prepare a chart which illustrates how you plan to use the funds: how much do you need for paying salaries, marketing, product development, etc. (You can find more details here about how to calculate the use of funds here.)
Once you have provided information about HOW you plan to use the funds, the investors may ask you for how long this capital will last. How many months can you cover your costs with the amount of capital you want to raise?
The burn rate sounds complicated but is actually something really straightforward: take the cash you receive and divide it by the monthly costs for which you plan to use it. You will then get the number of months for how long the money will last. This is your burn rate.
Anyone who invests in anything wants to know how much money they will make. When you open a savings account, the bank tells you the interest rate which is basically the return you make over a certain period of time. Similarly, if someone invests capital in your company, they do that because they expect (or at least hope) that this investment will grow over time.
The Return-on-Investment (ROI) is quite a broad concept and there are many ways to calculate it for startup investments. I will go into more detail in an article which I will publish soon. For now, let’s go for the easiest way to understand the basic concept of the ROI:
You take your company’s expected valuation in let’s say 5 years and deduct the current valuation. Then, you divide the result by the current valuation and multiply the number by 100.
Your company’s future valuation is closely linked to your expected growth. The growth rate is also an indicator investors will look into separately as well.
Growth is one of the most important factors for a business. If you have been operating for some time and if you have made sales already, investors will want to know the growth rate over the past months/years.
Even if you have not made any sales yet, investors will expect forecasts, i.e. calculations about expected sales in the future. You have to make assumptions about the expected growth. This growth forecast is a bit tricky and subjective, because for most businesses it is difficult to look into the future. Some startups “exploded” at a certain point after only little growth, others grow more steadily. I always tend towards the steadier model, because the “explosion” is really difficult to anticipate. Try to find a balance between your past growth (if you already have some) and the future. Look into the information about your competitors or comparable companies in your field and analyse how they grew. Then you can apply similar growth rates to your own business.
In addition to details about your product/service, investors need an understanding about your market. Only then can they assess if the business has potential to invest. One of the first basic indicators you will need is the size of your target market. To be able to calculate this, you need to have a solid understanding of who is your target market (demographics, age group, interests, etc.).
Once you know the size of the target market, investors want to know what you expect to be your market share. How many percent of the total market can you capture?
Customer Acquisition Cost and Retention Rate
If your business is already making sales, you should know your customer acquisition cost. This is basically an indicator which shows how much it costs you to draw attention of potential customers to your product/service and make them buy it. It is calculated by adding up all the costs of marketing and sales and then dividing them by the number of customers your company has acquired.
If you already have data about long-term customers, another important insight is customer retention: How many customers stayed with your company or came back and made repeat purchases? Let’s take a year as an example: Take the number of customers at the beginning of January. Then take the number of customers at the end of December. Deduct the new customers from the December figure. Then divide it by the number in January and multiply by 100.
If your business is already making profits, investors want to see your profit margin. For example: It costs you USD 20 to produce your product and you sell it for USD 50. Your profit marking is then USD 30. In percent, this is 30 divided by 50 times 100, so 60%.
I hope this brief overview gives you a first idea of the key indicators investors want to know about your business. If you need more information, you can head to the “Let’s Talk Business”-section of this website. Of course, you can also leave a comment below or get in touch via email or my social channels.