I asked Paul questions about reasonable valuations for seed rounds, and what makes a startup compelling to early investors. The result of that conversation was:
Here are the 7 metrics:
1. Lead with Your Traction
There were several discrete lessons that I gleaned from our conversation, but the biggest was: lead with your traction.
Intellectually, I knew that was true before our conversation. But I didn’t fully comprehend how true it is. If you have 4 or 5 figure MRR (monthly recurring revenue) as a SaaS startup in a reasonably exciting niche, that’s something to shout from the rooftops!
2. LTV (Customer Lifetime Value)
After leading with your recurring revenue, be prepared to follow that with your CLTV.
My favorite CLTV resource was from this article by David Skok. I recommend reading it, but if you’re an immediate gratification sort, click here to download the CLTV calculator spreadsheet. It offers 3 different models for making the calculation. I found the 2nd tab, “Real World Calculation”, to be the most clearly explained and its calculation the best for our startup.
3. CAC (Customer Acquisition Cost)
CAC is the simplest of the metrics to calculate, but it’s incredibly important to track and get right. Here’s a great blog post about CAC, including a spreadsheet that you can customize a bit to make its cost structure match your own.
4. CAC to LTV
No brainer here: to have a prayer of survival, your startup must spend considerably less to acquire your customers than you’ll earn from the lifetime value of your customers.
Investors like to see a CAC to CLTV ratio of 1-to-8 or better, and ideally, it’s continuously getting better.
5. Churn Rate
Churn rate is the percentage of your customers who leave over a month, year, or whatever time period. Right? Turns out it’s a lot more complicated than that. I had a hard time finding a resource that I liked, but this article on acceptable SaaS churn rates does a great job of explaining why it’s important, while this article offers a simple approach to calculating churn rate (after telling you there are at least 43 publicly used models to calculate churn — ack!).
6. Negative Churn, or Account Expansion
Account Expansion (the smiling, dimpled twin of the more angst-ridden term Negative Churn) is the percent of your revenue in a given period that comes from increasing revenue from existing customers. Here’s a great article on Account Expansion.
7. Month Over Month MRR Growth Rate
You don’t need a spreadsheet for this statistic — your phone or laptop calculator should be able to produce it very easily. Here is my favorite resource for calculating MoM MRR Growth. Use the “Compound Annual Growth Rate” method, about mid-way down the page. But instead of years, you’ll use months.
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