WEBVTT 00:10:00.000 --> 00:00:15.180 Kia ora koutou, hello and welcome to episode 10 of nzangels.com, a guide to raising 00:00:15.180 --> 00:00:20.240 angel investment in Aotearoa, New Zealand. I'm Dave Moskovitz, one of New Zealand's 00:00:20.240 --> 00:00:25.520 most experienced angel investors. And this is episode 10, Metrics. 00:00:26.520 --> 00:00:30.520 There's an old saying attributed to American software engineer Tom DeMarco: 00:00:30.520 --> 00:00:37.519 You can't control what you can't measure. Metrics are a critical part of any investment story. 00:00:37.519 --> 00:00:42.519 The one key thing any investor wants to know is how you are going to use the investment capital 00:00:42.519 --> 00:00:47.519 to increase the value of your company by a significant multiple. 00:00:47.519 --> 00:00:52.519 This is at the center of any investment thesis. Nobody is going to fund your start-up with the expectation 00:00:52.520 --> 00:01:01.520 that they'll lose money. So valuation, or how much your company is worth, is a critical number that will greatly affect your investment rounds. 00:01:01.520 --> 00:01:06.520 But this episode is not about valuation. We'll cover that later in the series. 00:01:06.520 --> 00:01:13.520 There are a huge number of things that you could measure about your business, and a smaller number of things that you should measure. 00:01:13.520 --> 00:01:19.520 But what's important to you at any given point in time will be dictated by the stage that your business is at. 00:01:19.520 --> 00:01:26.520 One of the themes running through this series is focus. You need to retain your focus as a founder on the things that matter, 00:01:26.520 --> 00:01:33.520 and where possible, keep it simple. This means keeping a minimal set of metrics that you'll be tracking at any given stage. 00:01:33.520 --> 00:01:39.520 You can change these as you evolve, but try to avoid thrashing between them. 00:01:39.520 --> 00:01:45.520 Revenue, if you have it, is a critical metric and one that investors will always be interested in. 00:01:46.520 --> 00:01:55.520 In a SaaS product, recurring revenue is the most important. This is usually how you build value, and it's normally reported as MRR, 00:01:55.520 --> 00:02:05.520 or monthly recurring revenue, and ARR, annual recurring revenue. Valuation is frequently calculated as a multiple of revenue. 00:02:05.520 --> 00:02:12.519 For SaaS companies, 500 Startups founder Dave McClure came up with the "Pirate Metrics" framework. 00:02:12.520 --> 00:02:16.520 You'll find a link to this on the episode page on nzangels.com. 00:02:16.520 --> 00:02:21.520 Pirate Metrics measure the conversion points in the life cycle of a SaaS customer. 00:02:21.520 --> 00:02:38.520 These points are acquisition, activation, retention, referral, and revenue, or AARRR, for short, and hence the moniker pirate metrics. 00:02:39.520 --> 00:02:43.520 Acquisition: how many visitors did you get to your landing page? 00:02:43.520 --> 00:02:46.520 Activation: how many signed up and became users? 00:02:46.520 --> 00:02:52.520 Retention: (the inverse of churn) what percentage of users came back? 00:02:52.520 --> 00:02:57.520 Referral: how many users successfully referred other new users to the app? 00:02:57.520 --> 00:03:01.520 And Revenue, how many users turned into paying users? 00:03:01.520 --> 00:03:06.520 You should have a good handle on the conversion rates at each stage of this funnel. 00:03:06.520 --> 00:03:14.520 If you're not measuring these stats, it's awfully hard to figure out how to progress users along the life cycle to paying customers. 00:03:14.520 --> 00:03:16.520 Active users is an important metric. 00:03:16.520 --> 00:03:19.520 How many people actually use your product? 00:03:19.520 --> 00:03:26.520 This is usually expressed as daily active users, DAU, or monthly active users, MAU. 00:03:26.520 --> 00:03:30.520 You'll want to show investors your ability to grow these numbers. 00:03:30.520 --> 00:03:35.520 Are you actually making money on each customer you bring onto your app? 00:03:35.520 --> 00:03:39.520 To know this, you need to know how much it costs to attract an onboard a new customer. 00:03:39.520 --> 00:03:44.520 That's your customer acquisition cost, C-A-C, or CAC. 00:03:44.520 --> 00:03:50.520 And how much revenue the customer will bring in, the lifetime value, or LTV. 00:03:50.520 --> 00:03:57.520 You'll want the LTV to CAC ratio to be a healthy multiple, generally at least 3x. 00:03:57.520 --> 00:04:01.520 As my friend and fellow early stage investor Bob Aholt says, 00:04:02.520 --> 00:04:06.520 Anyone can stand on a street corner and sell a $100 bill for $80. 00:04:06.520 --> 00:04:09.520 You don't want to be that person. 00:04:09.520 --> 00:04:15.520 I've heard many early stage founders say it costs us nothing to bring on new customers, 00:04:15.520 --> 00:04:20.519 as they've done word of mouth or social campaigns, but this scales only very rarely. 00:04:20.519 --> 00:04:25.520 Investors will be most interested on what acquisition costs will look like at scale, 00:04:25.520 --> 00:04:31.520 not when all the users of your app are friends, family, and two-degrees-of-separation acquaintances. 00:04:31.520 --> 00:04:39.520 NPS, or Net Promoter Score, is a useful tool for measuring customer loyalty by asking them a simple question: 00:04:39.520 --> 00:04:44.520 On a scale of 0 to 10, how likely are you to refer the product to a friend? 00:04:44.520 --> 00:04:52.520 A score of 9 or 10 is a promoter, a 7 or 8 is a passive, and 6 or less is a detractor. 00:04:53.520 --> 00:04:59.520 Add a point for each promoter, subtract a point for each detractor, divide the sum by the number of data points, 00:04:59.520 --> 00:05:03.520 and multiply by 100 to get your NPS. 00:05:03.520 --> 00:05:08.520 When you're collecting NPS data, you'd typically ask, why did you answer that way? 00:05:08.520 --> 00:05:14.520 so you can be able to use qualitative feedback to improve your product or customer service. 00:05:14.520 --> 00:05:19.520 Investors will be impressed to see that you know how to grow your NPS score. 00:05:19.520 --> 00:05:25.520 Michael Batko, who ran StartMate, probably Australasia's most successful startup accelerator, 00:05:25.520 --> 00:05:29.520 recently wrote an excellent piece on how to select a North Star metric. 00:05:29.520 --> 00:05:36.520 He argues that revenue is a lagging metric, it's a result of other things you do successfully in your business. 00:05:36.520 --> 00:05:41.520 What you need is the number that predicts revenue, the moment of value delivery. 00:05:41.520 --> 00:05:48.520 So for example, Spotify, who are in the attention game, this would be the number of hours listened. 00:05:48.520 --> 00:05:54.520 For Airbnb, who are in the transaction game, it would be number of nights booked. 00:05:54.520 --> 00:06:00.520 And for Canva, who are in the productivity game, this would be the number of designs published. 00:06:00.520 --> 00:06:05.520 He presents a methodology for arriving at your own North Star metric. 00:06:05.520 --> 00:06:11.520 See the link on the episode page and have a read. It's going to be part of your homework. 00:06:11.520 --> 00:06:16.520 New Zealand investment bankers Clare Capital have an excellent SaaS metrics cheat sheet, 00:06:16.520 --> 00:06:22.520 with the definitions of many of the metrics that investors use to evaluate SaaS performance. 00:06:22.520 --> 00:06:27.520 See the link on the episode page and while you're there, subscribe to their weekly Tech Insights report. 00:06:27.520 --> 00:06:35.520 It will give you a good perspective on how investors evaluate companies and the industry as a whole. 00:06:35.520 --> 00:06:40.520 Burn rate, the difference between what you're earning in revenue and what you're spending in expenses, 00:06:40.520 --> 00:06:48.520 is a critical metric. This ultimately determines your runway or how much time you have to either complete another capital raise 00:06:48.520 --> 00:06:51.520 or even better, get to cash flow positive. 00:06:51.520 --> 00:07:00.520 Ideally, and especially in the current market environment, you want to get to default alive or burn rate zero as quickly as you can. 00:07:00.520 --> 00:07:07.520 Paul Graham, the founder of YCombinator, has an excellent essay on default alive or default dead. 00:07:08.520 --> 00:07:10.520 Read it. 00:07:10.520 --> 00:07:18.520 Which metrics are right for your company? Only you can answer that question and it's likely to change as your business evolves. 00:07:18.520 --> 00:07:24.520 Investors will be very interested to know what you think is important and how you'll grow the numbers, and critically, 00:07:24.520 --> 00:07:32.520 if you put numbers into an investment pitch, your investors will likely hold you accountable for achieving the targets you've set for yourself. 00:07:32.520 --> 00:07:40.520 While we all need to be optimistic to stay sane in this business, you'll need to be realistic to ensure you're not making a rod for your own back. 00:07:40.520 --> 00:07:46.520 If you miss your targets by a country mile, you'll find it much harder to raise money in your next investment round. 00:07:46.520 --> 00:07:52.520 And if you're not default alive at that stage, you'll be default dead. 00:07:54.520 --> 00:07:56.520 Homework time. 00:07:56.520 --> 00:07:58.520 Work out a set of metrics for your company. 00:07:59.520 --> 00:08:03.520 Which ones are most important to your business? Which will you focus on? 00:08:03.520 --> 00:08:08.520 Which do you think will impress investors and convince them that you know how to grow the value of your business? 00:08:08.520 --> 00:08:12.520 What is your North Star metric and how will you grow it? 00:08:13.520 --> 00:08:16.520 For today's pithy quote, I'll turn back to Batko. 00:08:16.520 --> 00:08:22.520 Your North Star metric should be the number that predicts revenue, the moment of value delivery. 00:08:24.520 --> 00:08:27.520 Our next episode will cover your go-to-market strategy. 00:08:27.520 --> 00:08:31.520 You have a great product, but how are you going to sell it and to whom? 00:08:31.520 --> 00:08:39.520 These are critical questions, and having reviewed thousands of pitches from New Zealand startups, this is typically the weakest point of a founder's story. 00:08:40.520 --> 00:08:45.520 We all have a field of dreams mentality. That is, "if you build it, they will come." 00:08:46.520 --> 00:08:50.520 That worked in the movie, but it's extremely rare in real life. 00:08:50.520 --> 00:08:53.520 You need a very intentional plan. 00:08:54.520 --> 00:08:56.520 So until then, ka kite.