Measure what matters (part 1)
Seed Round Metrics
The following are the minimum metrics that DTC and SaaS companies typically need to meet in order to secure a seed round led by an institutional VC, which usually falls within the $1.5M-$4M range. While founders who have a proven track record may be able to raise funds prior to reaching these benchmarks, it's still helpful to keep them in mind as a reference point. However, it's worth noting that the early-2022 downturn has led to a significant market correction, which has resulted in fluctuating KPIs, so these should be considered as guidelines rather than rigid rules.
The metric you should focus on depends on your specific business
It's important to identify the one metric that is most crucial to your company's success and around which you can rally your team. This is your "North Star" metric. For example, Facebook's North Star is active users, while for WhatsApp, it is the number of sends, for eBay, it is gross merchandise volume, and for PayPal, it is total payment volume. Once you've identified this key metric, you can set success criteria, monitor it regularly, understand how to influence it, and drive it in the right direction.
It's important to focus on a single metric at a time, as having multiple metrics can be confusing and make it difficult to prioritize across your organization. When choosing between metrics, choose the simplest one that is measurable and set time-bound goals. Keeping it simple is key.
These metrics matter for several reasons
Investors need convincing that there is product-market fit and real growth, especially in a market with low barriers to entry and intense competition. Traction is critical, and inexperienced founders often make the mistake of relying on fluff and salesmanship rather than letting their metrics speak for themselves.
In 2022, there was a slowdown in valuation, pace, and round sizes in VC, so investors will be more cautious with their investments. Metrics will play an even bigger role in distinguishing successful companies from the rest. Founders will be under pressure to exceed expectations, as over-performance will become the new norm.
Top Seed Round Metrics
1.Monthly Recurring Revenue(MRR)
Monthly recurring revenue (MRR) is crucial for subscription-based businesses.
MRR includes all recurring revenue that is normalized into monthly segments.
To calculate MRR, multiply the number of customers by the average billed amount per customer.
An MRR of $30-40K (or more broadly $20-100K) is a good benchmark for raising a solid seed round.
To understand changes over time, it's helpful to break MRR down into its key components.
When examining MRR for a given period, it's important to consider the contribution of the following:
If your direct-to-consumer enterprise lacks a subscription element, it becomes essential to place greater emphasis on the K-factor and the frequency of repurchases (discussed further below).
2.Month-over-month (MoM) growth
Month-over-month (MoM) growth demonstrates the variation in a specific metric's value as a percentage compared to the value from the prior month.
MoM growth is commonly employed to gauge the growth rate of monthly revenue, active users, subscription numbers, or other crucial metrics.
MoM growth serves as an excellent indicator of achieving product-market fit. It is one of the first trends investors consider when determining whether to invest in a company.
Absolutes and MoM growth are distinct and apply to separate scenarios:
Announcing the addition of 500 monthly active users (MAU) per month (a linear growth pattern) might not make it easy to secure investor meetings.
Sharing a 20% compound monthly growth rate is exponential. If you began with 100 users in January 2018, maintaining a 20% monthly growth rate would result in more than half a million users by December 2022. This demonstrates your company's potential value and exemplifies the power of month-over-month growth.
An optimal approach to evaluating MoM growth involves using a Compound Annual Growth Rate (CAGR) calculator on a monthly basis. Merely examining month-over-month growth rates could result in irregularities. Instead, the Compound Monthly Growth Rate (CMGR) can be utilized.
Year-over-year (YoY) CAGR benchmarks:
Minimum Growth Rate: Historically, top-decile companies have experienced a 3x growth within 12 months after achieving $1M in ARR.
Exceptional Growth Rate: In recent years, top-decile companies have exhibited a 5x growth within 12 months after reaching $1M in ARR. This has become the new gold standard for growth at this level.
3.LTV to CAC
Monitoring this metric is crucial for maintaining awareness of your business's growth progress.
As your company enters its growth stage, you will gain more customer data insights, allowing you to start calculating Customer Acquisition Cost (CAC) and Lifetime Value (LTV).
LTV: The Lifetime Value (LTV) represents the total gross profit contribution (minus CAC) from an average customer within a cohort. LTV takes into account CAC, Dollar Retention, and Gross Margin to reveal the overall health of a company. If Dollar Retention is greater than 100%, LTV can keep growing indefinitely. However, if customers churn, LTV will plateau and cease increasing. Healthy cohorts surpass the $0 LTV mark before the 12th month and display LTV growth of at least 3x the initial CAC over time.
CAC: Customer Acquisition Cost (CAC) is calculated by dividing the Sales & Marketing (S&M) expenses from the previous period (month or quarter) by the number of new customers in the current period. The lag is meant to account for the time required for S&M investments to translate into new sales. Depending on the sales cycle's length, a longer or shorter lag might be more suitable.
Generally, an ideal LTV to CAC benchmark is a 3:1 or 4:1 ratio.
If the ratio is too low, you lose money per sale.
If it's too high, you may not be investing enough in marketing.
CAC calculation can be approached in various ways. The value may depend on your customer conversion cycle, new vs. returning customers, and user support costs. CAC is simply employed to ascertain the cost of acquiring a new customer.
CAC is determined by dividing the total marketing and sales expenses by the number of customers acquired during that period.
Costs are often segmented into cohorts (since sales cycles and channels can vary). More detailed analyses can help you establish an efficient CAC strategy for your organization.
LTV represents the expected revenue generated by customers throughout their lifetime. "Lifetime" can have different meanings but is typically calculated over a 36-month period.
Several methods can be used to compute LTV. In essence, LTV is the Total Customer Value multiplied by the Average Lifespan of a Customer.
Various approaches can be taken to enhance LTV, with focusing on customer satisfaction and customer retention being the most accessible options.
Integrating LTV and CAC provides insight into the incremental value generated by customers, taking into consideration the expense of acquiring them.
For consumer businesses, LTV:CAC is assessed at the initial stages.
3:1 signifies a healthy ratio, 5:1 is exceptional, while 8:1 may indicate underinvestment in marketing.
It is prudent to analyze CAC:LTV as a combination of blended, unpaid, and paid metrics, along with cohort analysis.
In the cloud sector, gross margins evaluate the efficiency of companies in providing software to their clients. Throughout a company's lifetime, margins typically range between 65% and 70%.
Although Cost of Goods Sold (COGS) mainly consists of variable expenses, leveraging operating costs such as Research & Development (R&D), Sales & Marketing (S&M), and General & Administrative (G&A) should be anticipated.
5. Repeat Purchase Rate
The repeat purchase rate is the proportion of customers who have returned for additional purchases, which serves as a measure of customer loyalty.
For non-SaaS startups, the Repurchase Rate functions as the (M)RR metric.
Retaining an existing customer is more cost-effective than acquiring a new one. Customer acquisition is at least five times more expensive than customer retention.
For cash-constrained emerging consumer brands, enhancing repeat rates is one of the most effective ways to reduce expenses and boost capital efficiency.
Repurchase rate refers to the percentage of a cohort that makes another purchase within a specified time frame. This rate is usually calculated at intervals of 30/60/90/180/360 days from the first order. Selecting the "appropriate" repurchase rate intervals depends on your business vertical.
Increasing CAC and compounding repeat purchase rates imply that a single repeat customer is often more valuable than several new customers.
Desirable repeat purchase rates vary depending on the industry your company operates in. For example, a business that sells high-priced durable products may naturally have a lower repeat purchase rate compared to one offering a wide range of low-cost supplementary services.
Excellent: >50% (consumer transactional)
Attractive: >20% (minimum level that excites investors)
An appropriate repurchase metric is contingent on the specific business vertical. Consider comparable companies to determine what success looks like in your industry.
For instance, in social media, retaining at least 80% of users is necessary. In eCommerce, having 20-30% of customers return each month for purchases is a reasonable target.
To estimate a suitable repurchase period, contemplate the likely duration before a satisfied customer places another order. The time frame depends on the product (e.g., toothpaste: 3 months; socks: 1 year). Although there is no definitive answer, the chosen period should be logically sound.