At Déjà Partners, we get to meet with a lot of entrepreneurs who are looking for advice on how they can find success with funding, scaling and building a successful business. During those discussions, we are presented with all kinds of numbers, measures and metrics that illustrate the potential of each and every startup venture...
All too often however, the metrics that are presented may not be industry standard, may not be the best measure for the performance of a business, or are being used in an inconsistent way.
In this article, written by the team at Déjà Partners, we have listed the key startup metrics that every investor wants to see and that every startup company should track. These metrics provide a roadmap for how to raise money from institutional investors and importantly, how to run the business. Our approach is to focus on eight common business models and their associated metrics; we have found that most startups will adhere to one of these business models, irrespective of what industry they operate in.
Let’s begin by explaining what a business model is. The team at Déjà Partners will simply say that the business model is how a company makes money! However, let us drill a little further into this and say that the business model is the set of activities that a company engages in to create, deliver and capture value.
A company’s business model is a core component of its strategy. The business model includes the processes it uses to turn raw materials (or intellectual property) into a final product or service, how it charges for these products or services, and how it manages its relationships with customers, suppliers, employees and other stakeholders.
Business models are often classified as either “high-value” or “low-value”, depending on the level of investment required to produce a unit of output. For example, a high-value business model might involve expensive research and development while low-value might involve outsourcing production.
For each business model, we are going to describe three to four key metrics that a startup business will need to track for every month. Any more than that is overkill for a startup. Here goes…
#1 SAAS MODEL
A Software as a Service (SaaS) company sells subscription-based licenses for a cloud-based software solution.
Examples include Salesforce, Microsoft Office 365 and Google Workspace.
Metrics:
- MRR (Monthly Recurring Revenue): Revenue recognised for recurring services provided in each month
- ARR (Annual Recurring Revenue): ARR = MRR * 12
- GROSS MRR CHURN (Gross Monthly Recurring Revenue Churn): Monthly recurring revenue lost in each month / monthly recurring revenue at the beginning of the month
- PAID CAC (Paid Customer Acquisition Cost): Cost per customer acquired through paid marketing channels (total sales & marketing spend in each month / total customers acquired by paid channels)
#2 ENTERPRISE MODEL
An Enterprise company sells services or software to other business users on a license basis. These contracts have fixed terms, specified contract values and are subject to renewal.
Examples include Zoom, BambooHR and SAP.
Metrics:
- BOOKINGS: Value of all signed customer contracts
- TOTAL CUSTOMERS: Number of unique contracted customers as of today
- REVENUE: Recognised revenue when the service is provided
#3 SUBSCRIPTION MODEL
A Subscription company sells a product or a service to a consumer on recurring basis.
Examples include Amazon Prime, Birchbox and Dollar Shave Club.
Metrics:
- MRR (Monthly Recurring Revenue): Revenue recognised for recurring services provided in each month
- MRR CMGR (Compound Monthly Growth Rate): Implied compounded MRR growth rate between two disparate months. Percentage increase (or decrease) = ((Month 2 – Month 1) / (Month 1)) * 100
- GROSS USER CHURN: Total lost customers (cancelled subscriptions) in a month / prior month total customers
- PAID CAC (Paid Customer Acquisition Cost): Cost per customer acquired through paid marketing channels (total sales & marketing spend in each month / total customers acquired by paid channels)
#4 TRANSACTIONAL MODEL
A Transactional company enables a financial transaction on behalf of a customer and collects a fee (typically a percentage of the value of the transaction).
Examples include Visa, Stripe and Coinbase.
Metrics:
- GTV (Gross Transaction Volume): Total value of sales processed in a month
- NET REVENUE: The portion of the GTV that the company recognises as revenue for the services it provided
- USER RETENTION: Percentage of customers who go on to make at least one purchase in the following month
- PAID CAC (Paid Customer Acquisition Cost): Cost per customer acquired through paid marketing channels (total sales & marketing spend in each month / total customers acquired by paid channels)
#5 MARKETPLACE MODEL
A Marketplace company provides a platform where buyers and sellers interact and trade. The company collects a fee (typically a percentage of the value of the transaction).
Examples include Amazon, Alibaba and eBay.
Metrics:
- GMV (Gross Merchandise Value): Total value of sales transacted in a month
- NET REVENUE: The portion of the GMV that the company recognises as revenue for the services it provided
- NET REVENUE CMGR (Compound Monthly Growth Rate): Implied compounded monthly net revenue growth rate between two disparate months. Percentage increase (or decrease) = ((Month 2 – Month 1) / (Month 1)) * 100
- USER RETENTION: Percentage of customers who go on to make at least one purchase in the following month
- PAID CAC (Paid Customer Acquisition Cost): Cost per customer acquired through paid marketing channels (total sales & marketing spend in each month / total customers acquired by paid channels)
#6 ECOMMERCE MODEL
An eCommerce company sells goods and services online.
Examples include IKEA, Memebox and Shutterstock.
Metrics:
- MONTHLY REVENUE: Total revenue in each month
- REVENUE CMGR (Compound Monthly Growth Rate): Implied compounded monthly revenue growth rate between two disparate months. Percentage increase (or decrease) = ((Month 2 – Month 1) / (Month 1)) * 100
- GROSS MARGIN PERCENTAGE: ((Difference between revenue and the cost of goods sold (COGS)) / revenue) * 100
- PAID CAC (Paid Customer Acquisition Cost): Cost per customer acquired through paid marketing channels (total sales & marketing spend in each month / total customers acquired by paid channels)
#7 ADVERTISING MODEL
An Advertising company offers a free service to consumers while generating revenue from advertisers.
Examples include Google, Facebook and Twitter.
Metrics:
- DAILY ACTIVE USERS (DAU): Total number of unique users active in a 24-hour day, averaged over a month
- MONTHLY ACTIVE USERS (MAU): Total number of unique users active at least once in the last 28 days
- PERCENT LOGGED-IN: (Total MAU with a registered account (“logged-in”) / the total unique visitors (inclusive of both “logged-in” and “logged-out” during the same 28-day window) * 100
#8 HARDWARE MODEL
A Hardware company sells physical devices to consumers or businesses.
Examples include Garmin, Apple and Sony.
Metrics:
- MONTHLY REVENUE: Total revenue in each month
- REVENUE CMGR (Compound Monthly Growth Rate): Implied compounded monthly revenue growth rate between two disparate months. Percentage increase (or decrease) = ((Month 2 – Month 1) / (Month 1)) * 100
- GROSS MARGIN PERCENTAGE: ((Difference between revenue and the cost of goods sold (COGS)) / revenue) * 100
- PAID CAC (Paid Customer Acquisition Cost): Cost per customer acquired through paid marketing channels (total sales & marketing spend in each month / total customers acquired by paid channels)
In conclusion, we have listed the key startup metrics for eight business models that every investor wants to see and that every startup company should track. It is fine to present the metrics for your business in any order while telling your story. However, it is important to understand that investors want to see that a company is growing and making money. So, when they are first evaluating a company, investors will often look at the standard metrics for your business model because they are an indicator of how well the company is doing.
Thank you for reading!
How We Help Entrepreneurs
At Déjà Partners, we’re passionate about helping the best entrepreneurs and early stage companies succeed. We can work closely with you on a pro bono basis (at no cost) by providing mentorship, guidance, and support in order to get your new business started and be ready to rise to the challenge of building that ‘special’ something from scratch. We can then help you prepare for a successful fundraising with institutional investors. And over the longer-term, we are here to help navigate the challenges of scaling your business to create value and achieve your goals. Given our long careers in building businesses – “been there, done that” – we can help you mitigate against the prospect of failure so that you can approach your business journey with growing confidence and optimism.
Contact us today to learn more about how we can help.