Angel investors generally invest early in a startup’s life, meaning that if they identify successful investments, there is potential for huge returns. One of the key steps for angels to assess investment opportunities is looking at metrics and benchmarking against other similar companies.
To be clear, every sector, and indeed every startup, will have different relevant metrics, but these should be of use as a starting point:
Churn rate
A company’s churn rate is the percentage of customers that cancel in a given period. It’s of particular importance, in that acquiring new customers is typically considerably more expensive than acquiring new customers.
Furthermore, if a company has a high churn rate, it can be a sign that there are issues with the product, or potentially that the service does not provide long term value for the customer.
Liquidity on the Balance Sheet
Looking at a company’s balance sheet to determine the spending power of a company gives a number of important insights: how long the company can cover expenses and continue to operate, a company that is overextended, for example, may give cause for concern about their management style, consequently having an impact on whether you wish to invest.
Monthly Recurring Revenue (MRR)
Particularly relevant to subscription businesses that will have new customers signing up, as well as existing customers cancelling (churning). MRR gives you an effective way of evaluating the growth of a company and projecting ahead.
MRR is calculated by multiplying the number of customers on a monthly subscription by Average Revenue Per User.
Customer Acquisition Cost
Customer acquisition cost (CAC) is the cost to acquire a new customer. Typically for new companies this will be high, as they only have limited insights as to how to target their customer and have yet to fully optimise their conversion funnel.
However as they start to scale, there will be a competing factor, as you start to bid for more traffic in auctions on platforms such as Facebook and Google Ads, it will become more expensive on a per user basis to get more users.
EBITDA
EBITDA is defined as earnings, before interest, tax, depreciation and amortisation are subtracted. EBITDA is a profitability metric that strips out expenses that might obscure how a company is actually performing and therefore gives a cleaner interpretation of how a company is actually performing.
A higher EBITDA margin (EBITDA divided by total revenue) indicates a more financially stable company with lower risk.
Customer Lifetime Value (CLTV)
By measuring customer lifetime value (CLTV) in relation to customer acquisition cost (CAC), you can estimate the length of time it takes to recoup an investment to acquire a new customer.
Customer lifetime value is calculated by taking the average purchase value and multiplying it by the average number of purchases that the company in question obtains.
A predictive customer lifetime value model will take account of the fact that customers’ future behaviour might change, i.e their purchasing may become more frequent in the future due to certain factors.
Break-even
Getting to break-even is the point where total revenue reaches total costs. When a startup reaches break-even point, any money earnt above that is profit. As such, the startup becomes less reliant on raising future investment to keep growing. From an investment perspective, if the company is likely to achieve break even quickly, then it has the effect of de-risking the investment.
Net Promoter Score (NPS)
Net Promoter Score is a measure of the overall customer experience. NPS is calculated by asking ‘On a scale of 0-to-10, how likely is it that you would recommend our service to a friend or colleague?’. Customer that score a 9 or 10 are classified ‘promoters’, those that score 0-6 are classified detractors. NPS is the total number percentage of promoters – the total percentage of detractors.
NPS provides an insight into how happy customers and is therefore a leading metric that can be used to understand the potential for revenue and value capture in the future.
Keen to hear more
As your investment journey continues, you will become more familiar with the investment metrics that you should pay close attention to. If you are looking to learn more about investing, you can read our investing guides here.