Since the start of 2022, the startup fundraising space has substantially changed. The Russian invasion of Ukraine, the continued high levels of inflation across the world, and gathering fears of a coming global economic downturn have made investors a lot more cautious when making investment decisions. Moreover, the Federal Reserve, European Central Bank, and others such as the Bank of England, have embarked on a cycle of monetary policy tightening, which has further driven the widespread startup investment pullback.
While these key factors have combined to create a more difficult competitive environment for startup companies, business owners and their companies continue to have options when it comes to fundraising. Investors still want to invest. They are simply more cautious about allocating capital because of the common threads of market volatility. With this in mind, there are specific key company valuation metrics that investors will be considering over the next 12 months. By focusing on these startup valuation metrics, organizations can improve their fundraising campaign success.
What are the best metrics for valuing a company?
Business valuations have always been a complex topic. Many market observers have reacted in disbelief at some of the multi-billion-dollar valuations of some tech companies in recent years. In 2015 there were 80 companies valued at over $1 billion. This figure ballooned to some 900 companies valued at over $1 billion by January 2022. Much of this apparent valuation is tied directly to a company's growth prospects. However, even the most famous of valuations examples indicate that putting an accurate figure on a company is much easier said than done. In 2019, SoftBank valued WeWork at $47 billion. Just two years later, its value plummeted to $9 billion.
There are so many calculations and seemingly endless types of startup financial metrics for investors to consider when reviewing a company. Therefore, it's very easy to get overwhelmed. In such situations, keeping it simple with time-tested metrics is generally a good rule of thumb. However, in this particularly investor-cautious market, startups must respond in kind to this sudden shift by focusing on what investors want to see.
Funding multiples for startup investment
Investors typically use a selection of startup valuation metrics to determine the financial performance and feasibility of a business. This multiple-analysis method provides investors with the key insights that they are looking for when deciding to invest.
1. Growth analysis
Growth analytics can include a variety of key metrics. These typically include total revenue, year-over-year revenue growth, and quarterly growth, and for older startups, can include the compound annual growth rate for a period of years.
2. Gross margin
The total revenue after deducting the cost of goods sold (COGS), expressed as a percentage. For instance, $1,000,000 minus COGS of $300,000 = $700,000, expressed as a gross margin of 70%.
3. Net dollar retention (NDR)
This metric helps active investors understand how the business performs with existing revenue sources. It is particularly important to establish a strong NDR for SaaS startups, as they are often subscription-based.
It measures annual recurring revenue to generate insight into how much a business has shrunk or grown. It is important as it can highlight problematic customer churn rates or show how well a company retains its customers. An NDR of over 100% is much more attractive to investors.
4. Customer acquisition cost (CAC) payback
The period of time that a company needs to recoup the investment required to acquire a new customer. The lower the CAC payback figure, the better. A strong CAC payback typically falls between a four to six-month timeframe but should be no more than 12 months.
5. Burn multiple
This company valuation metric indicates how adept, or not, a startup is at using its cash to generate growth. The lower the burn multiple, the better. It calculates the amount a company spends for each incremental dollar of annual recurring revenue (ARR).
To calculate a burn multiple, a startup must first know two metrics.
- Net burn: Cash revenue minus operating expenses
- Net new annual recurring revenue (ARR): New ARR plus expansion ARR before subtracting churned ARR
The burn multiple is then worked out by dividing net burn by net new ARR.
6. Lifetime value (LTV)
An estimate of the total revenue that a customer will generate for a business.
Lifetime value can be calculated by multiplying the average value of sales by the number of transactions. The number of transactions is determined by factoring in the average retention rate of each customer.
7. Revenue per employee
A simple calculation achieved by dividing the total revenue by the number of employees. It can be particularly helpful to ascertain any difference in revenue relative to the employee number when comparing year-over-year figures.
These seven startup valuation metrics together form a robust, detailed overview of your company's financials. They are going to be essential for demonstrating your organization's appeal to investors.
What is value investing?
There are two main types of investing: value and growth investment. Value investing refers to the identification and funding of companies that are viewed to be undervalued. Growth investment refers to companies with a strong potential for high growth and to outperform the market.
Value investment metrics include P/E, book value, sales figures, debt-to-equity ratio, and any others that can indicate if a company's valuation is lower than it should be.
What is a good market value ratio?
As shown above, there are many ways to get an idea of your company's market value. However, because no single ratio can be completely accurate, investors tend to use a number of startup financial metrics in conjunction. This enables them to view your company from different angles and understand it in greater detail.
Top tips for attracting investors in difficult market conditions
Many early-stage startups make the mistake of thinking that potential investors simply don't want to invest when market volatility and uncertainty persist. This is not true. Most investors do still want to invest. They are simply more cautious about where they put their money. They tend to take extra precautions to assess your company before deciding. Here are some tips to put your company in a strong position to continue to receive funding during difficult market conditions.
1. Have a clear understanding of your financial position
Investors want to know key financial metrics. By having these ready to go, you will be able to provide prompt, informed communication and data to would-be investors. To do so, you must have a full and clear understanding of your company's financial statements.
2. Establish an efficient financial reporting process
Using the right financial automation technology can ensure that your company is able to keep track of its financials and update them in a timely manner. This can ensure that the data gathering, fundamental analysis, and interpretation steps are fast and comprehensive and that the investor reporting process is highly detailed and precise.
3. Focus on your leadership team
Investors will focus on leadership teams whatever the state of the market is, but this will especially be the case during less predictable conditions. More than ever, they will want to invest in people they believe in. Typically, investors will want to see strong competence, market knowledge, and synergy between business owners that lead your company - the founders, executives, and department heads.
Drive your fundraising campaign success with the right approach and support
By adapting to changing active investor preferences, you put your company in the best position for fundraising success. The alternative of having your own defined way of showcasing your company and expecting angel investors to adapt to you may place you at a disadvantage.
Now is the time to get your company in as best shape as possible and have a clear view of its financial position. To do so, look for a fifinancial planning and analysis software that harnesses leading technological capabilities in automation, data management, and collaboration to accelerate your performance.
Abacum can empower your company to exceed investor expectations with unrivaled performance tracking, investor reporting, and detailed financial forecasting to drive your business growth and enable precise measurement in real-time.
If you are looking for a solution to help streamline your data into a centralized platform, Abacum is your cutting-edge, cloud-based platform. To see how Abacum equips your team to keep track of crucial KPIs and metrics, request a demo today.