Chris Mossa, Chief Strategy Officer at Graphite
Startup founders are thrown immediately into the deep end when it comes to investor expectations. Investors are sophisticated financial sleuths and founders have vision and deep expertise in their field, but often, limited understanding of how the outside world will evaluate their business.
When pitching new investors or reporting to existing ones, you need to tell a tight, metric-driven story that excites and explains.
Investors are metrics professionals—they’re in the data analysis business full-time. First-time founders don’t have that level of mastery. Nor should they. The difference in experience and understanding combined with a misalignment of expectations can sour the relationship from the start.
The metrics that matter most for investor reporting will vary between organizations, depending on the exact industry you’re in and your business model. But some are timeless and widely applicable.
Key Metrics to Include in Your Investor Reporting
Before you start building investor reports, keep in mind that metrics are nothing more than mile markers in your startup journey—small, but relevant indicators of how the company is progressing, growing, struggling, etc.
The first decision you’ll make is which metrics to report.
This will depend on your industry, stage of business, and most importantly, what story you want to tell. For example, SaaS companies focus on a litany of metrics that are irrelevant to ecommerce businesses, and vice versa.
Second, choose metrics that you can reliably report. If you can’t accurately capture, measure and regularly report a metric, skip it.
Below are a few examples of metrics, a SaaS company will want to track and report to investors.
ARR and MRR
Annual recurring revenue and monthly recurring revenue (ARR and MRR) are particularly important metrics for SaaS startups. This metric gives you a quick look at how much revenue the organization expects to earn on an annualized basis based on contracts in place today.
To calculate ARR and MRR, look at the established, recurring contracts you have in place for the next month or the next year. If your business has a fixed-cost, subscription-based business model, this will be straightforward.
However, if you have a consumption-based business model, this is more complicated since you’re revenue is variable based on usage. There is some flexibility here—some startups use their most recent month of financials to reflect what they expect going forward, while others use averages based on months of previous performance.
Your churn rate is the amount of revenue lost from customers who have left during a given period of time.
You can either look at customer churn rate or revenue churn rate. Both of these are calculated by dividing your lost customers or revenue over each of their beginning balances. For example, if you started the year with 100 customers, gained 10, and lost 5, your business grew to 105 customers, but you still have a churn rate of 5%.
If your prices don’t vary much between customers, then customer churn and revenue churn should be similar. But if your customers generate significantly different amounts of revenue, meaning one customer may spend $1,000 and one may spend $50,000, then revenue churn will reveal more about your growth.
This metric is so important for investors because it illustrates your ability to retain customers and build brand loyalty. Even if you’re great at selling to new customers, high churn indicates that something is wrong in the customer experience—they’re not finding value in the product or service.
But on the flip side, if your growth far outweighs your churn, your investors can be confident that your growth is sustainable.
ACV (Average Contract Value)
Average contract value, or ACV, is the average dollar amount of your current contracts. To calculate this, take your total ARR or MRR and divide it by the number of contracts you currently have. For example, if you have an ARR of $500,000 and 100 customers, your ACV is $5,000.
This metric is particularly informative when tracked over a long period of time. Investors want to see you expand ACV, indicating that you’re moving up the market with more value or expanding existing customer relationships by selling them more stuff. Both tell a strong story.
Start Impressing Investors With This Financial Model Template
Net Revenue/Dollar Retention
Net revenue retention is the amount of revenue from an initial customer base, tracked over a period of time. Ideally, these customers will increase their spend, resulting in a net revenue retention of over 100%.
This metric is important because it illustrates your ability to offset churn and expand sales with your existing customers.
Say you have 100 customers starting the year spending $500,000 with you.
If you end the year with that same group of customers spending more than that, you’d have positive net revenue retention. However, if that revenue drops below $500,000, you’ll have negative net revenue retention. The key to Net Revenue Retention is low churn and a heavy focus on expanding existing customers.
The top SaaS companies on the market today aim for net revenue retention of 100-120%.
Gross margin is the one metric on this list found on your financial statements.
It’s an accounting metric, but what it really shows is the direct profitability from servicing your customers. It shows an investor exactly how much money you keep from a dollar of revenue after paying only the costs necessary to deliver that product or service.
Keep in mind that this metric does not count your sales, marketing, and administration costs.
CAC (Customer Acquisition Cost)
Customer acquisition cost, or CAC, is the amount of money you spend to acquire a new customer. To calculate this metric, divide your sales and marketing spend over a specific period by the number of new customers acquired during that period.
A high CAC is often a concern for investors, as these hefty sales and marketing costs could eat into your profitability.
LTV (Lifetime Value)
Lifetime value (LTV) is the average amount of money customers spend during their time with you.
To calculate this metric, you’ll need to determine how much money your customers are spending with you as well as how long they stay with your organization, which you can calculate using your churn rate.
An LTV to CAC ratio gives investors an idea of the return on investment based of your sales and marketing spend.
This metric is extremely valuable because it helps contextualize the two metrics mentioned above. And this potentially removes a red flag from a high CAC or a low LTV.
If your customers cost a lot to acquire but spend a lot over their lifetime, or if your LTV is on the lower side but your customers cost almost nothing to acquire, then investors can feel more confident.
To calculate this ratio, simply divide your LTV by your CAC. For example, if your LTV is $500 and your CAC is $200, your LTV:CAC would be 2.5. Top SaaS startups have an LTV:CAC ratio higher than 3.
The Final and Most Important Step of Investor Reporting
Understanding your metrics is just the first step to building your investor reports. You also need a system to capture your data and accurately calculate your metrics.
The final and most important step is reporting these metrics in context. The metrics need to be displayed in a way that cohesively connects the dots for your investors.
Graphite’s Financial Health Dashboard helps startup founders navigate investor reporting while supporting their overall financial journey.
Our financial dashboard is built not just to display your metrics but also to interactively tell your story and illustrate your startup’s growth and potential. We’ve built robust financial dashboards for founders of growing SaaS startups and CPG startups, and we’re happy to help you as well.
Reach out to our team if you’re ready to start building more sophisticated investor reports.
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