Before even considering a pitch to prospective investors, company leaders must have a strong sense of how their company is faring including its anticipated trajectory. The numbers must be crunched and the data meticulously analyzed to ensure that those involved in the pitch presentation can speak intelligently on operational and financial matters. The pitch deck must be prepared well in advance and polished to near perfection, and any potential questions or concerns should be considered and discussed beforehand to avoid mid-pitch flubs. Investors will be interested in understanding a company’s goals and vision, how it intends to use the funds it is seeking, and particularly keen to gather information relating to performance. Here are five key performance indicators to master before making that pitch:
To determine whether a company is operating in an efficient manner, investors will want to know the company’s overhead, meaning its fixed expenses, which is usually evaluated on a monthly basis. The overhead is the money that must be spent regardless of how well the company is or is not doing. These are the standing costs to operate the business and include things like rent, utilities, supplies, taxes, and fees for professional services, among other fixed expenses. The higher the overhead, the harder it is to make a decent profit. Thus, these expenses must be kept as low as possible while still maintaining the quality and integrity of the business, and investors will not be impressed if the company cannot keep a handle on its expenses.
For many startups, it takes a bit of time before the company becomes profitable. As a result, younger companies generally have to spend the capital they manage to raise early on to pay the company’s overhead. The rate at which this money is spent is generally known as the burn rate. Given that company budgets are usually broken down into monthly expenses, the monthly burn is the amount of cash that is spent each month prior to the company having a positive cash flow. Of course, once a company begins to see positive cash flow, there should no longer be a monthly burn, but until that happens, prospective investors will definitely want to see how much is being spent to keep things running.
Sometimes companies have to spend money fairly consistently for several months or even years before they will generate positive cash flow. Although this is not ideal, it is often inevitable and the key is for companies to be smart about how they are spending their precious cash. A company’s runway is the length of time they can continue to operate based on the amount of cash they have available to them. Obviously, runway is dependent on a company’s monthly burn, as runway equates to total cash divided by monthly burn, which tells investors the number of months the company can survive. A longer runway is clearly better given that it allows a company to continue its operations, but having the runway and actually using it are clearly different things.
In addition to understanding the fixed expenses associated with running a business, investors will need to know the costs associated with the company’s production of its goods and/or the delivery of its services. Of course, they will also want to know how much the good or service is sold for so that they can get a sense of the profit margin. This important metric says a lot about whether the company’s business model is profitable, scalable, and ultimately, sustainable, and these are key indicators for any savvy investor.
Customer Acquisition and Retention
There are a lot of costs inherent in running a business, and a good deal of money is usually invested in acquiring and retaining a steady customer base. The costs associated with this generally relate to advertising and marketing. Fortunately, technology has cut these costs drastically, but investors still want to know how much a company spends on acquiring each new customer, as well as the percentage of those customers who remain over various periods of time, often six months to a year. Companies spending exorbitant sums on customer acquisition with poor retention rates clearly will not be able to survive for long, and investors will not be keen to pour money into a weak or failing system.