4 Key Metrics for VCs in Series A
If your company is looking to begin its second or third official round of fundraising, or Series A, then you’re already in the 30-40% of companies that do make it to Series A. Around 60% of companies that garner pre-seed and/or seed funding fail to make it to this round, but then around 65% of those that do will get Series B funding. So, there’s a higher chance of making it to the next round, where you can achieve incredible growth if you raise that all-important Series A funding.
It’s a critical and challenging time. For many startups, it’s the first time they’ve had to gather and share metrics with investors. Potential investors want to see proof that they’re going to get a return on their investment in quantitative measures. Your pitch needs to demonstrate your capacity for growth, stability, and performance in no uncertain terms. But which metrics will those investors want to know?
Knowing exactly what metrics your investors will want to see is a vital first step in putting together a successful fundraising pitch. As a starting point, here are the four key metrics that VCs and investors will want to hear about in your Series A pitch.
1. Compound Annual Growth Rate (CAGR)
Company Annual Growth Rate is the measure of an investment’s annual growth rate over time, taking into account the effect of compounding. It’s typically used to measure and compare the performance of an investment and to predict what the returns will be in the future.
How to calculate the CAGR
The formula only requires these three parts to calculate the return: the ending value of the investment, the beginning value of the investment, and the number of compounding years. To achieve it, the end value is divided by the beginning value, then raise the result to an exponent of one divided by the number of years, then subtract it by one. And finally, multiply it by 100 to convert the result into a percentage.
EV: Ending value
BV: Beginning value
N: Number of years
2. Customer Acquisition Cost (CAC)
The customer acquisitor cost, or CAC, is a crucial business metric to know for your company and for your investors. It’s the average amount of money that you spend on acquiring the average customer, from sign up incentives, to discounts, to marketing and advertising. Essentially, it helps businesses spend money more efficiently. It’s a highly nuanced metric, with various expenses to include, but if you want to expand your customer base and demonstrate your stability to investors, it’s important to know.
How to calculate the CAC
Firstly, you should choose a timeframe to evaluate – month, quarter, year. Then, add your total marketing and sales expenses and divide it by the number of new customers gained during that timeframe. The result should be the estimated cost it takes to acquire a new customer.
Here’s the formula:
CAC = (Cost of Sales + Cost of Marketing) / New Customers Acquired
For example, if a company spends £10,000 on marketing and £5,000 on sales and acquires 200 new customers, then the CAC is:
CAC = (£10,000 + £5,000) / 200 = £75
3. Lifetime Value (LTV)
The Lifetime Value is the total revenue a company can expect to earn throughout a customer’s lifetime, or the lifetime of their relationship with the business. It measures the value of the customer to the company. Lifetime Value, or LTV, measures the growth of a company, so it’s one of the most important metrics that VCs will take into account. The calculation accounts for operating expenses, customer acquisition costs, as well as the cost to produce the product or service that the company is making. While some companies might overlook their own LTV, it really helps companies gain and retain hugely valuable and consistent customers.
How to calculate the LTV
There are several ways to calculate the lifetime value, but this is one of the most comprehensive methods. Before calculating if your customer relationships are profitable, there are a few things that you must know beforehand:
- Average purchase value:
This is the average value of what the amount a customer spends. It can be calculated by choosing a timeframe, typically a year, and diving the total revenue from that time by the total purchases made during that time period.
- Average purchase frequency:
This is the average number of transactions a customer will make over a certain time period, again it’s typically over a year. It can be calculated by dividing the average number of purchases during that time by the customers that made those purchases. To give a straightforward example – for a monthly subscription service, like Netflix, the average purchase frequency made over a year is twelve.
- Average gross margin:
This tells you how much of a purchase is profit and how much is cost. The formula is as follows: Gross Margin = (Total Revenue – Cost of Sales) / (Total Revenue)
- Average customer lifespan:
This is how long a typical customer would purchase a company’s products or services. The average customer lifespan will vary depending on the company, a finance company might have a different lifespan to a SaaS company that relies on fixed contracts.
- Customer acquisition cost:
We’ve gone into customer acquisition cost, or CAC, in the previous metric. In order to calculate the lifetime value, you need to know your company’s CAC.
And finally, once you have all this information, you can calculate the lifetime value of a customer. Simply multiply the average purchase value by the average gross margin, purchase frequency, and customer lifespan. Then, subtract the cost of acquisition.
- The formula is as follows:
LTV = (Average Purchase Value x Gross Margin x Purchase Frequency x Customer Lifespan) – CAC
For example, if a product was £10 a month via subscription service with an average gross margin of 75%, you spend £21 to acquire a customer with a lifespan of 3 years, your calculation would look like this:
LTV = (£10/month x 0.75 x 12 months/year x 3 years) – £21 = £249
4. Net Revenue Retention (NRR)
The Net Revenue Retention, or NRR, is a vital metric that investors will look out for. To calculate the NRR, we look at a specific timeframe, usually a year. Then, we work out the percentage of recurring revenue that’s been retained from existing customers over that year. It helps you (and your investors) know how good your business is at sustaining its existing customer base as well as how well it generates more revenue from those customers. It directly depicts growth – if your company has an NRR rate above 100%, then it’s successfully compounding year over year. To investors in your Series A round, this indicates that your company is stable and has good growth potential.
How to calculate the NRR
Before can get into calculating the NRR, you need to know a few things:
- Monthly/Annual Recurring Revenue (MRR/AAR)
This encompasses all recurring revenue either monthly or annually.
- Expansion Revenue (ER)
This includes cross-sells and upsells from the time period used in the calculation, again either monthly or annually.
- Contraction Revenue (CR)
This includes revenue shrinkage for an account.
- Revenue lost through churn
The customers that fail to become repeat customers are lost through churn. Find the value of how much revenue has been lost through churn during the timeframe.
And now, we can calculate the NRR using this formula:
NRR = ((Value of MRR + Value of ER) – (Value of CR + Value of Churned Accounts)) / Value of MRR x 100%
We’ve used MRR here, but remember to change to ARR if you’re calculating the annual NRR rather than monthly.
For example, if the ARR was £100,000, the ER was £15,000, the CR was £1500, and the churn was £5000, here’s how it would look in the formula:
NRR = ((£100,000 + £15,000) = (£1000 + £5000)) / £100,000 x 100% = 109%
We support many businesses during their Series A as well as other funding stages. If you need support get in touch with our team and we will organize an introduction call to find out how Finerva can help you grow.