The Top 5 Metrics Every Startup Investor Should Know
When it comes to investing in startups, making informed decisions is crucial. With countless metrics to consider, it can be overwhelming to determine which ones truly matter. Let’s dive into the five most important metrics that every startup investor should know, along with the formulas to calculate them. By understanding these key indicators, you'll be better equipped to evaluate a startup's potential and make sound investment choices.
1. Monthly Recurring Revenue (MRR)
Monthly Recurring Revenue (MRR) is a critical metric for subscription-based businesses. It represents the predictable and recurring revenue that a company generates each month. MRR provides insight into a startup's growth and stability, making it a key metric for investors
To calculate MRR, use the following formula:
MRR = (Number of Customers) x (Average Revenue per Customer)
Ex: if a startup has 100 customers paying $50 per month, the MRR would be
MRR = 100 x $50 = $5,000
2. Customer Acquisition Cost (CAC)
Customer Acquisition Cost (CAC) measures the cost of acquiring a new customer. It takes into account all the expenses associated with sales and marketing efforts. Understanding CAC helps investors gauge the efficiency of a startup's customer acquisition strategy and its potential for profitability
To calculate CAC, use the following formula:
CAC = (Total Sales and Marketing Expenses) / (Number of New Customers Acquired)
Ex: if a startup spends $10,000 on sales and marketing in a month and acquires 50 new customers, the CAC would be:
CAC = $10,000 / 50 = $200
3. Lifetime Value (LTV)
Lifetime Value (LTV) represents the total revenue a customer is expected to generate throughout their relationship with the startup. It helps investors understand the long-term value of a customer and the potential return on investment
To calculate LTV, use the following formula:
LTV = (Average Revenue per Customer) x (Average Customer Lifespan)
Ex: if a customer generates an average of $100 per month and stays with the startup for an average of 12 months, the LTV would be:
LTV = $100 x 12 = $1,200
4. Burn Rate
Burn Rate is the rate at which a startup is spending its cash reserves. It helps investors understand how quickly a startup is using its available funds and how long it can sustain operations without additional funding
To calculate Burn Rate, use the following formula:
Burn Rate = (Total Monthly Expenses) - (Total Monthly Revenue)
Ex: if a startup has total monthly expenses of $50,000 and generates $30,000 in monthly revenue, the Burn Rate would be:
Burn Rate = $50,000 - $30,000 = $20,000
5. Revenue Growth Rate
Revenue Growth Rate measures the percentage increase in a startup's revenue over a specific period. It provides insight into the startup's ability to scale and its market traction
To calculate Revenue Growth Rate, use the following formula:
Revenue Growth Rate = (Current Period Revenue - Previous Period Revenue) / (Previous Period Revenue) x 100
Ex: if a startup generated $100,000 in revenue in the current quarter and $80,000 in the previous quarter, the Revenue Growth Rate would be:
Revenue Growth Rate = ($100,000 - $80,000) / $80,000 x 100 = 25%
Putting It All Together
While these five metrics provide valuable insights, it's important to consider them in the context of the startup's overall business model and industry. No single metric tells the whole story, and investors should analyze a combination of metrics to make well-informed decisions.
Additionally, it's crucial to track these metrics over time to identify trends and patterns. Consistent growth in MRR, a decreasing CAC, an increasing LTV, a manageable Burn Rate, and a steady Revenue Growth Rate are all positive indicators of a startup's potential.
Conclusion
Investing in startups can be a thrilling and rewarding venture, but it requires a keen understanding of the metrics that matter. By focusing on Monthly Recurring Revenue (MRR), Customer Acquisition Cost (CAC), Lifetime Value (LTV), Burn Rate, and Revenue Growth Rate, investors can gain valuable insights into a startup's performance and potential.
As you dive deeper into the world of startup investing, you'll encounter additional metrics specific to different industries and business models. The key is to continuously educate yourself, stay curious, and make data-driven decisions.
By mastering these five essential metrics and their calculations, you'll be well on your way to making informed investment choices and potentially discovering the next unicorn startup.
