Early-stage start-ups can be messy, especially during the times when the startup is in the “valley of death,” i.e., still generating negative cash flow. Therefore, early-stage VCs look at key growth metrics that help them put more quantitative value into potential investments. These growth metrics are also crucial indicators to the founders themselves because they help navigate uncertainties, track progress and make informed business decisions. There are many different growth metrics that startups can track, and these vary depending on the nature of the business. Here are some common growth metrics that startups may want to consider:
This metric measures the cost of acquiring a new customer, and it is important for startups to keep this cost as low as possible in order to maximise their profitability. To calculate CAC, divide the total cost of acquiring new customers (marketing and sales expenses, including salaries) by the number of new customers acquired during a specific period of time.
This metric measures the total value of a customer to a business over the course of their relationship with the company. This metric is mostly hypothetical in the early stage of a startup, but it is important to keep in mind as it relates closely to the CAC. As a startup matures, it can collect data on customer revenue to calculate a more accurate CLV. A startup should aim to have a CLV that is greater than its CAC, which means that the revenue generated by a customer over their lifetime should be greater than the cost of acquiring them.
When the average purchase value of a customer is 50, the number of transactions per year is 2, retention time is 4 years and with a gross profit margin of 40%, CLV = 50x2x4x40%=160.
A minimum CAC:CLV ratio of 1:3 is considered a healthy sign.
For startups that offer subscription-based products or services, MRR / ARR are key growth metrics. They measure the total amount of recurring revenue that a startup generates monthly and annually. It is also important for tracking the stability and predictability of a startup’s revenue stream. MRR and ARR are most commonly used for subscription-based companies. It is important to note that the RR (Recurring Revenue) is actually recurring; hence, it should not include one-time fees, such as installation fees and other similar fees.
This metric measures the percentage of customers that stop using a company’s products or services within a given period of time. A high churn rate is a sign that a startup is having difficulty retaining customers, which can be a major obstacle to growth. By tracking churn rate, startups can identify the root causes of customer churn and take steps to improve retention. The churn rate is also a factor when calculating the CLV.
This is a broad term that refers to the extent to which users interact with a company’s products or services. There are many different ways to measure user engagement, including the amount of time users spend on a website or app, the number of actions they take (such as clicking on links or making purchases) and the frequency with which they return to a company’s platform. Tracking user engagement is important for startups because it can help them understand how their products or services are being used and identify areas for improvement.
If you are an FS student interested in exploring entrepreneurship and developing your own business ideas, we recommend visiting the Entrepreneurship Centre. The centre offers a range of resources and support to help you get started on your entrepreneurial journey.