For private market startups, evaluating startup metrics can make up a significant portion of the due diligence process. By their nature, startups are typically ambitious and founders are optimistic, which can sometimes lead to overemphasized metrics, growth opportunities, or existing traction. In this blog, learn more about assessing startup traction metrics to determine which ones might be overinflated and which ones accurately represent the startup’s market position.
Assessing Inflated Startup Metrics
Forward-Looking Statements
Since startups typically have limited operational periods, many of their metrics are forward looking. One common area to find inflated startup metrics is sales and partnership pipelines. Investors should carefully consider the language that startups are using to represent their sales and partnership pipelines and request documentation in order to validate the startup’s claims.
Broad statements like “discussions with industry leaders” or “exploring opportunities” represent opportunities, not tangible commitments. Alternatively, language like “signed letter of intent (LOI)” or “executed memorandum of understanding (MOU)” indicate a contract between the startup and the customer/partner, marking a higher level of commitment and seriousness. However, even these “more serious” documents need to be scrutinized by investors. Consider the percentage of agreements that turn into signed contracts and the potential timeline for onboarding. Assessing which potential sales or partnership opportunities are likely to come to fruition instead of looking at every potential conversation the startup has had may be a way for investors to assess startup metrics.
Analyzing Historical Performance
While looking to the future can show growth opportunities and positive outlooks, looking at the past can help provide evidence of a team’s ability to execute at the early stage of startup investing. However, the quality of metrics should also be interpreted. For example, revenue from a one-off customer project can be less valuable than longer term customer involvement that generates recurring revenue.
Some telling indicators for investors to analyze are customer acquisition cost (CAC) and customer lifetime value (LTV), or how much does it cost to acquire a customer, and what value can the startup expect to draw from the customer through its entire lifecycle. If it takes a long while for a startup to generate enough value from a customer to repay the cost of originally acquiring that customer may signal an inefficient business model.
Validating Technological Progress
For technology-driven products, the possession of a patent may not be synonymous with a viable product. While patent traction is important to assess as it can be a positive traction metric, the transition from prototype to commercial solution is important. Investors should assess the challenges of manufacturing at scale, achieving consistent quality, and integrating into existing customer systems. An announced pilot program with a major company can be a positive step, but what could come from the pilot program is more important. Some key questions investors may want to ask include whether the partner is financially contributing to the trial and what the specific, measurable success criteria are for moving to a full commercial agreement.
Final Thoughts
Private market due diligence not only involves assessing startup traction metrics but also understanding which ones might be overinflated. Knowing what sources and research to ask for in order to validate claims is an important part of due diligence. While startups can be overly optimistic in their views of future growth and potential, looking at historic performance and validating technological progress can help investors understand how a startup is performing.
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Want to learn more about investing in startups? Check out the following MicroVentures blogs to learn more:
- Assessing Startup Financial Health
- Going Digital: The Rise of HealthTech
- Using Alternative Data to Assess Startups
- Startup Consolidation: The Rise of M&A in 2025
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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.
