3 Secret Growth Metrics That Matter Most To Investors
Don't misjudge what they're looking for -- it could mean missing out on a potential match.
Hundreds of startups applied for growth support within days of recently launching my new venture capital platform, Fearless Adventures. And of course, around the world thousands of entrepreneurs pitch investors every day for money. Many of those entrepreneurs want to know the metrics that really matter to investors like my partners and I. They are surprised when I tell them I'm not looking for the clichés they've read about in countless advice articles: rates of churn, burn and turn(over).
In fact, love, perfect fit and relationships aren't the sorts of keywords founders tend to associate with winning over investors and raising money, but they matter to me. Indeed, it's on the basis of those buzzwords that I've built successful companies and invested in many more. So I want to share what growth indicators really count. But for those obsessed with pure numbers, the following might surprise you.
Don't get me wrong, it's normal for new entrepreneurs to obsess over numerical details: revenue generation, cost per acquisition, average revenue per user and so on. But if they can't see the beauty of the forest for the trees, if they fail to see the big picture and engage investors emotionally, they'll misjudge what many of us are looking for. And that could mean kissing goodbye to a potential investor match. However, that's not to encourage you to get too woo. Indeed, beware of companies that call their renting office space business as really being about elevating the world's consciousness. You can be authentic, businesslike and inspire investors emotionally. So here are the metrics that help you do just that.
1. The most important pre-investment metric is product love
We don’t obsess over run rates, churn rates, burn rates and ARPU. In fact, from a metric perspective, the most important one is that the customer, whether that's a consumer or a business customer, is going to really love the product (be it an actual product or a service).
Genuine customer passion for the product is far more important than revenue or traction. Not only does evidence of excitement answer the critical product-market fit question, but it also addresses the profitability point to a degree. Look at some of the most successful innovations in the world, and you’ll see almost cult-like followings. Whether it’s Peleton, Tesla or AirBnB, customer zeal for the product clearly demonstrates perfect product-market fit.
2. Gross margin is a better indicator than pure profitability
Sticking with pre-investment metrics, customer passion for a product is a good indicator of sales and loyalty. But, it's vital that the gross margin is right for profitability. You might not be profitable at a net level, but at a gross level I ask: Is this a business model where you can make money? That’s what I’m looking for as an investor.
Some businesses that my company invests in might be pre-revenue. So understanding the business model is all-important. Scaling affects profitability, as does the cost of goods (will they reduce over time or with scale). You need to have a clear line of sight on the route to profitability to secure external capital.
3. Post-investment engagement
Another significant, if more vague, measure is engagement. I don’t have a specific metric for this; it’s more of an imperative but post-investment it’s absolutely mission-critical. Here’s why. Investors sign up to the plan presented by the start-up. But the reality is the company they’ve funded will probably pivot or at least change tack several times. YouTube started life as a dating site, Twitter as a podcast subscription app and Instagram as a Foursquare-like location service. Their dramatic pivots brilliantly rewarded early investors who stuck with them.
As an entrepreneur, you and your team will have to make big choices with real world consequences; you’ll switch directions and adapt quickly. So you need an investor that understands how the original plan — the one they committed money for — will likely change in unforeseeable ways post-investment. Engage them as if they’re a partner so that you stay aligned on those changes and agree on the way forward together.
Given how crucial this agreement on the company’s evolution is, investor engagement is in fact key to your company's growth. Look at how Facebook’s first external investor, Peter Thiel, kept his investment for eight years and still has a seat on the board today. But the significance of this investor dialogue needn’t mean formality. I'm a great believer in informal conversations rather than official board meetings. After all, we’re all on the same growth mission.
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