Today I was reading a great set of recommendations from Andreessen Horowitz on the business and financial metrics used by investors to assess the health of a business (baseline size, future growth and profitability).
As it appears, there are 16 metrics that start-up businesses need to concentrate on to win VCs’ hearts. These metrics are summarized below.
First, start-ups must differentiate their sources of revenue based on the business model they are implementing. Bookings for services, term, perpetual, subscription or recurring revenue for products, unearned revenue, deferred revenue, and billing are all relevant metrics that are utilized within the most relevant context. Then, information on contract values (total vs. annual) can provide a longer-term perspective on growth.
A comment was made on being clear and consistent on the way usage was assessed. Indeed, start-ups should present statistics that show that active users are actually using their product, rather than focusing on downloads.
Second, profitability is a key metric to demonstrate that a business can manage its cost base responsibly. Companies fail when they are running out of cash, and this often occurs because they are burning too much of it.
Third, Customer Life Time Value (CLTV) provides a view on longevity and sustainability. I remember designing CLTV models years ago to help businesses determine the long-term value and profit margin they could achieve from their customer portfolios. This was implemented by applying acquisition, retention, up-sell/cross-sell strategies, and ideas to increase such value through adequate customer engagement.
Fourth, customer acquisition costs need to encompass absolutely all costs, including marketing and campaign costs.
Fifth, understanding all the nuances affecting the way attrition is estimated is necessary to prevent misleading your intended audience.
So, while some of this may be obvious to many of you who live and breathe these metrics all day long, we compiled a list of the most common or confusing metrics. Where appropriate, we tried to add some notes on why investors focus on those metrics. Ultimately, though, good metrics aren’t about raising money from VCs — they’re about running the business in a way where founders know how and why certain things are working (or not) … and can address or adjust accordingly.