It can be difficult sometimes to know what to make of an early-stage startup. You won’t necessarily read about the company in the news or in your favorite VC’s blog. In the absence of industry analysis, sometimes all you have to go by are the cold, hard numbers.
Here are seven metrics we find useful when we’re sizing up a young company:
Revenue is the go-to metric for many investors – how much revenue is the company recognizing today, this month, this quarter? While revenue doesn’t equate to profit, these numbers can give you a sense of the company’s current size as well as its rate of growth. But not all revenue is created equal. For example, does the company receive recurring revenue, such as from a subscription-based product, or is each sale a one-and-done? It’s also important to know whether the company is reporting revenue on a cash basis or an accrual basis, as that has a direct impact on cash flow.
2. Gross Margin
Gross margin is the company’s revenue minus the cost of goods sold (COGS), and it provides visibility into the company’s potential for profit. It’s important to know what a company is including in their COGS figure, as it generally should include all costs associated with the manufacturing, delivery, and support of the product or service. Some business models have naturally higher or lower gross margins than others, but as the company scales over time, gross margin should ideally go up.
3. Burn Rate
Burn rate is essentially how much money the company is spending every month. Monthly burn rate may not be a constant figure, but it’s an important number to track for several reasons. Not only does it tell investors how much runway the company has before they have to raise more money or turn off the lights, it also sheds light on the timeline for breaking even and for becoming cash-flow positive.
4. Customer Acquisition Cost
The lower the customer acquisition cost (CAC), the more profitable a company is likely to be. But CAC is one of the slipperiest metrics a startup can report. By default, you have to assume that CAC is a “blended” number – a total that reflects both traditional customer acquisition costs and the low or no cost associated with organic customer acquisition. For a more accurate view of how much a company may spend to acquire a customer, look specifically for “Paid” vs. “Unpaid” CAC.
5. Total User Base
The number of registered users or total users a company has can be a particularly useful indicator to investors, especially for businesses that are designed to capitalize on network effects, or for those with freemium business models that need a strong user base in order to convert a percentage to paid customers. This cumulative number is often reported in conjunction with its associated growth metric – compounded monthly user growth rate.
6. Active Users
When determining user traction, the number of active users is often an even more relevant number than total user base. The total user base will necessarily include users who have come and gone, or users who are only mildly interested or invested in the product or service. While the number of active users may be significantly less than the total user base, it gives investors a clear picture of how many users are engaged with the company over a given timeframe – whether monthly or daily – and should be calculated using criteria for “active use” that the startup has clearly defined.
7. Engagement Metrics
In addition to the number of active users, startups have other ways of reporting user engagement with their product or service – behavioral metrics that will vary depending on the industry and business model. It could be monthly unique visitors, user impressions, session duration, shares, pins, referrals, or app downloads. Engagement metrics are generally not standardized and therefore can’t easily be compared from one startup to another. But a relevant metric tracked over time can show investors how much impact a company is having on its target market.
There are many other metrics you could look at – and should look at – when evaluating a startup. But these seven provide a great starting point. While a young startup may not have had time to make headlines – or profits – they still have ways of showing you where they’re headed.
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