When you’re reviewing startups for potential investment opportunities, you can look at various aspects of the business to guide your decisions. You may be interested in the founder’s story, have a special interest in the target market or demographic, or want to see hard data points that reflect on performance. Key performance indicators (KPIs) are outcome measurements you can use as part of your assessment of a startup’s current performance and future potential. Below we’ll explore some of the KPIs that startups might track.
Marketing and Customer-Value KPIs
The customer acquisition cost (CAC) can show the level of efficiency of a startup’s marketing efforts by revealing the average cost of obtaining a new customer through various marketing channels and sales efforts. The CAC is obtained by choosing a time period and then dividing the total cost spent on acquiring customers by the number of customers acquired in that period.
You can calculate the CAC for all marketing expenses, or you can calculate more specific numbers based on a single channel or group of marketing efforts. A few factors that may skew a CAC is an investment in search engine optimization (SEO) or similar efforts that have a higher initial cost of implementing and are designed to become more effective over time.
A related KPI to consider is the startup’s CAC recovery time. This is the amount of time it takes for your net profit from a customer’s purchases to exceed the cost of acquiring that customer. This metric can be closely tied into a customer’s lifetime value (LTV). The LTV is the average revenue generated from a customer over the course of the customer’s relationship with the company.
Customer retention is likewise a related measurement that can help you understand a startup’s ability to retain customers. Retention is the percentage of customers that make a repeat purchase, renew a subscription-based service, or otherwise continue their paid business relationship. Higher retention rates lead to higher LTV. Retention can reflect on the quality of the startup’s product or service, how well it is meeting a market need, and how well the business model engages customers. A poor-quality product or a product that misses the mark on meeting the customers’ needs or expectations will likely lead to lower customer retention.
Churn, or attrition, is the opposite of retention and is the number or percentage of customers lost over that given time period. For business models with apps, subscriptions, or similar, another relevant KPI is the number of monthly active users.
When assessing the effectiveness of a startup’s marketing efforts and how well it has targeted a market need, you can also look at the conversion rate. The conversion rate measures how many of a website’s visitors complete a desired action. This may be enrolling, making a purchase, or performing any other action that is a set goal in the customer acquisition or retention pipeline.
Profit, Expenses, and Cashflow KPIs
Gross profit measures how much revenue the startup is bringing in. While this is obviously an important number, it should also be viewed in light of other financials. Profit margin, for example, is a pivotal KPI as it can offer insight into a startup’s ability to be (or become) profitable. The profit margin is calculated as revenue over expenses. A startup could have what looks to be a great gross profit, but if the expenses to bring in that revenue are really high, the profit margin will be low. As with other KPIs, looking at various metrics together will paint a more comprehensive picture of how well a startup is performing.
Other KPIs to look at could include overhead, monthly burn, and runway. These numbers reflect outgoing cashflow irrespective of the number of customers. Overhead encompasses fixed business expenses incurred on a (typically) monthly basis. Monthly burn refers to the negative cashflow a startup experiences due to expenses. Runway is how much money is left to keep the business going, and this KPI is expressed in months. Runway is the number of months left when a startup’s remaining cash is divided by monthly burn.
Weighing What KPIs Mean
Investing in a startup is never a sure thing—it’s inherently risky. Not all KPIs will be applicable or important for every startup, but the ones that are applicable can help give you a picture of how a startup is functioning and how well its business model is working. KPIs without a benchmark have the potential to be meaningless, but some might be compared to a startup’s competitors to help put these data points in context.
While KPIs can be useful elements in assessing a startup, they might not be the full picture. It’s a good idea for potential investors to consider all aspects of a startup before investing. If you’re interested in angel investing or joining a regulation crowdfunding raise, check out the offerings currently live on the MicroVentures platform.
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.