Many entrepreneurs can tell an amazing story. But what about the hard numbers you need to back it up?
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Here are the type of figures that get me salivating:
1) Revenue growth. I like to see startups signing up customers at a rapid clip.
Companies I invest in usually are growing their revenue at least 20% month over month. These represent the cream of the crop of seed stage companies.
As startups mature, that benchmark goes down. For a company at Series A or later, 10% month over month growth is excellent.
You can calculate your growth using a tool like this.
Growth is critical because the best startups tend to catch on fast. Google, YouTube, PayPal and countless others grew at incredible rates shortly after launch.
2) Gross Margin. It’s not hard to grow if you’re selling a dollar for 90 cents. Knowing your Gross Margin makes sure that doesn’t happen.
Here’s how to calculate it: take the money left over from a sale after variable costs (marketing, etc.) and divide it by the revenue from the sale.
A SaaS business should shoot for a Gross Margin of at least 75%.
3) Burn Multiple. Many startups lose money to fund growth. But how do you know if you’re losing too much?
That’s where the Burn Multiple comes in. It measures how much money you burned in the prior month divided by how much new revenue you signed.
Seed stage companies should have a Burn Multiple of 3 or less. More on the burn multiple here and here.
4) Runway. This is how long you have until you run out of cash.
If you’re burning $50,000 a month and you have $300,000 in the bank, you have 6 months of runway.
I want a startup to have a bare minimum of 18 months of runway after the round closes. In today’s down market, I’d prefer to see at least 30 months runway.
This way, you have plenty of time to wait out a difficult market.
And if you’re “default alive” (break even or better), congrats! Burn Multiple and Runway don’t apply to you and you’re in an exceptionally strong position.
Is it hard to hit all these benchmarks? Absolutely!
That’s why I have to look at 150-250 companies to find a single investment. Performance at this level is rare.
But if you can hit these hurdles, you’ll find investors breaking down your door. And I’ll be one of them. 🙂
What key stats do you track as a founder or investor? Leave a comment at the bottom and let me know!
Have a great weekend everyone! 👋
More on tech:
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The Founders: The Story of PayPal
Midas Speaks: Sequoia’s Don Valentine at Stanford GSB
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