This episode explains why metrics matter when raising investment and which ones founders should track. Its central message is that founders should keep a minimal, focused set of measurements appropriate to their company’s stage rather than tracking everything. It surveys the key SaaS metrics investors care about and warns that any numbers put into a pitch become targets for which a founder will be held accountable.
[Your North Star metric should be] the number that predicts revenue, the moment of value delivery.
Resources:
- Startup Metrics for Pirates (Dave McClure)
- Your North Star Metric: The full methodology (Michael Batko)
- SaaS metrics cheat sheet (Clare Capital)
- Default Alive or Default Dead? (Paul Graham)
Homework: Work out a set of metrics for your company. Which ones are most important to your business? Which will you focus on? Which do you think will impress investors, and convince them that you know how to grow the value of your business? What is your North Star metric, and how will you grow it?
The episode opens from the premise that you can’t control what you can’t measure, and that metrics sit at the heart of any investment thesis, since investors fund a startup expecting to grow its value by a significant multiple. The emphasis falls on focus and simplicity: there are countless things one could measure, but what matters depends on the business’s stage, and founders should avoid constantly switching between metrics. Revenue, particularly recurring revenue for SaaS businesses (reported as MRR and ARR), is highlighted as critical, since valuation is often a multiple of it.
We walk through specific frameworks and measures. Dave McClure’s “Pirate Metrics” (AARRR) track conversion across a customer’s lifecycle through Acquisition, Activation, Retention, Referral and Revenue. Other important measures include active users (DAU and MAU), the relationship between customer acquisition cost (CAC) and lifetime value (LTV)—where the LTV:CAC ratio should be at least 3x—and Net Promoter Score (NPS) for gauging customer loyalty. There’s a caution that founders who claim customer acquisition costs them nothing through word-of-mouth are rarely describing something that scales, and that investors care about acquisition costs at scale.
We introduce the idea of a “North Star” metric, drawing on Michael Batko’s argument that revenue is a lagging indicator and that founders should identify the leading number that predicts revenue and marks the moment of value delivery (hours listened for Spotify, nights booked for Airbnb, designs published for Canva). It closes on burn rate and runway, urging founders to reach “default alive” (burn rate zero) as quickly as possible, especially in the current market, and pointing to Paul Graham’s essay on the subject. The recurring warning is to set realistic targets, because missing them badly makes the next raise far harder. Several resources are referenced throughout, including Clare Capital’s SaaS metrics cheat sheet and the frameworks from McClure, Batko and Graham.
Transcript:
Kia ora koutou, hello and welcome to Episode 10 of nzangels.com – a guide to raising angel investment in Aotearoa New Zealand. I’m Dave Moskovitz, one of New Zealand’s most experienced angel investors.
This is Episode 10 – Metrics
There is an old saying, attributed to American software engineer Tom DeMarco – You can’t control what you can’t measure.
Metrics are a critical part of any investment story. The one key thing any investor wants to know is how you are going to use the investment capital to increase the value of your company by a significant multiple. This is at the centre of any investment thesis – nobody is going to fund your startup with the expectation that they’ll get less out than they put in. So valuation, or how much your company is worth, is a critical number that will greatly affect your investment rounds. But this episode is not about valuation – we’ll cover that later in the series.
There are a huge number of things that you could measure about your business, and a smaller number of things that you should measure, but what’s important to you at any given time will be dictated by the stage your business is at. One of the themes running through this series is focus – you need to retain your focus as a founder on the things that matter. And where possible, keep it simple. That means keeping a minimal set of metrics that you’re tracking at any given stage. You can change these as you evolve, but try to avoid thrashing between them.
Revenue, if you have it, is a critical metric and one that investors will always be interested in. In a SaaS product, recurring revenue is the most important – this is usually how you build value, and it’s normally reported as MRR (Monthly Recurring Revenue) and ARR (Annual Recurring Revenue). Valuation is frequently calculated as a multiple of revenue.
For SaaS companies, 500 Startups founder Dave McClure came up with the “Pirate Metrics” framework – you’ll find a link to this on the episode page on nzangels.com. Pirate Metrics measure the conversion points in the lifecycle of a SaaS customer. These points are Acquisition, Activation, Retention, Referral, and Revenue, Or, “AARRR” for short, hence the moniker Pirate Metrics.
Acquisition: how many visitors did you get to your landing page? Activation: how many signed up and became users? Retention (the inverse of churn): What percentage of users came back? Referral: How many users successfully referred other new users to the app? Revenue: How many users turned into paying users? You should have a good handle on the conversion rates at each stage of this funnel. If you’re not measuring these stats, it’s awfully hard to figure out how to progress users along the lifecycle to paying customers.
Active Users is an important metric – how many people actually use your product? This is usually expressed as Daily Active Users (DAU) or Monthly Active Users (MAU). You’ll want to show investors your ability to grow these numbers.
Are you actually making money on each customer you bring onto your app? To know this, you need to know how much it costs to attract and onboard a new customer (your Customer Acquisition Cost, or CAC) and how much revenue the customer will bring in (the Lifetime Value, or LTV). You’ll want the LTV:CAC ratio to be a healthy multiple, at least 3x. As my friend and fellow early stage investor Bob Aholt says, anyone can stand on a street corner and sell a $100 bill for $80. You don’t want to be that person.
I’ve heard many early stage founders say, “it cost us nothing to bring on new customers” as they’ve done word-of-mouth or social campaigns, but this scales only very rarely. Investors will be most interested on what acquisition costs will look like at scale, not when all the users of your app are friends, family, and two-degrees-of-separation acquaintances.
NPS, or Net Promoter Score, is a useful tool for measuring customer loyalty by asking them a simple question: On a scale of 0 to 10, how likely are you to refer the product to a friend? A score of 9 or 10 is a “promoter”, a 7 or 8 is a “passive”, and 6 or less is a “detractor”. Add a point for each promoter, subtract a point for each detractor, divide the sum by the number of data points, and multiply by 100 to get your NPS. When you’re collecting NPS data, you’ll typically ask “Why did you answer that way?” so as to be able to use qualitative feedback to improve your product or customer service. Investors will be impressed to see that you know how to grow your NPS score.
Michael Batko, who ran Startmate, probably Australasia’s most successful startup accelerator, recently wrote an excellent piece on how to select a “North Star” metric. He argues that revenue is a lagging metric – it’s the result of other things you do successfully in your business. What you need is the number that predicts revenue, the moment of value delivery. So for example, for Spotify (the attention game) this would be hours listened; for Airbnb (the transaction game) it would be nights booked; for Canva (the productivity game), this would be designs published. He presents a methodology for arriving at your own North Star metric. See the link on the episode page, and have a read. It’s going to be part of your homework.
New Zealand investment bankers Clare Capital have an excellent “SaaS metrics cheat sheet” with the definitions of many of the metrics that investors use to evaluate SaaS performance. See the link on the episode page. While you’re there, subscribe to their weekly Tech Insights report. It will give you a good perspective on how investors evaluate companies, and the industry as a whole.
Burn Rate – the difference between what you’re earning in revenue and what you’re spending in expenses, is a critical metric – this ultimately determines your runway, or how much time you have to either complete another capital raise or even better get to cash-flow-positive. Ideally, and especially in the current market environment, you want to get to “default alive”, or Burn Rate Zero, as quickly as you can. Paul Graham, the founder of YCombinator, has an excellent essay on “Default Alive or Default Dead?” Read it.
Which metrics are right for your company? Only you can answer that question, and it’s likely to change as your business evolves. Investors will be very interested to know what you think is important, and how you’ll grow the numbers. And critically, if you put numbers into an investment pitch, your investors will likely hold you accountable for achieving the targets you’ve set for your company. 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. If you miss your targets by a country mile, you’ll find it much harder to raise money in your next investment round. And if you’re not default alive at that stage, you’ll be default dead.
Homework time. Work out a set of metrics for your company. Which ones are most important to your business? Which will you focus on? Which do you think will impress investors, and convince them that you know how to grow the value of your business? What is your North Star metric, and how will you grow it?
For today’s pithy quote, I’ll turn back to Batko: [Your North Star metric should be] the number that predicts revenue, the moment of value delivery.
Our next episode will cover your Go To Market strategy. You have a great product – but how are you going to sell it, and to whom? These are critical questions, and having reviewed thousands of pitches from New Zealand startups, this is typically the weakest part of a founder’s story. We still have a “Field of Dreams” mentality – “if you build it, they will come”. That worked in the movie, but it’s extremely rare in real life. You need a very intentional plan.
So until then, ka kite!