Early Investing

The Five Metrics Startup Investors Are Most Likely to Get Wrong

The Five Metrics Startup Investors Are Most Likely to Get Wrong
By Andy Gordon
Date December 4, 2019

My Twitter feed is always good for a laugh or two every morning. This morning was no different.

“You need to be able to say what your startup does in 2-4 words,” tweeted serial founder David Sacks. “No one has the time or attention span for an elevator pitch anymore.”

I guess Sacks is a very busy guy.

But we’re all busy, right? Heaven forbid a founder should dare to waste my time by taking up more than the requisite five seconds Sacks deigns to give to startup entrepreneurs.

I’m all for efficiency. But some things shouldn’t be rushed. Understanding a founder’s value proposition is one of them. Prioritizing speed leads to shortcuts, whether it’s in telling or listening. And shortcuts lead to oversimplification and confusion.

That’s the last thing early investors need. It’s hard enough to divine the upside of an early-stage company with so little to go by. Yet these seemingly straightforward statements from a founder can be easily misconstrued…

  • We grew revenue 200%.
  • We’ve proved product-market fit.
  • Total addressable market (TAM) is more than $1 billion.
  • We’ve bootstrapped growth.
  • Customer acquisition spend is low.

Sounds good, right? But these statements aren’t as straightforward as you might think. In fact, they’re often misinterpreted. Let’s examine them…

Revenue growth. Beware of the law of small numbers. It’s easier to go from revenue of $5,000 to $10,000 – doubling growth – than from $500,000 to $1 million. That’s also doubling growth – but many orders of magnitude more impressive. Another important question to take into account is this: How much does that growth cost? Imagine your product being a $1 bill, but you have to spend $1.50 for every bill you sell. Not exactly sustainable growth, is it? At the opposite end of the spectrum is viral growth, where spend ranges from nothing to negligible. It’s super fast and super cheap. Nothing beats that.

Product-market fit. Sorry founders, but just because your family and friends like your product doesn’t prove product-market fit. So what does? A founder just told me her product had a net promoter score of more than 80. That does it. Anything above 70 serves as proof.

Getting 100 customers to say they can’t imagine their life or job without it while beta-testing your product also gets the job done. Again, this can’t come from a founder’s besties.

Market size, or TAM. Pick a number: $1 billion, $50 billion, $100 billion. The biggest number doesn’t always win. Take the following scenario. What would you rather have: 20% of a $1 billion market, 1% of a $50 billion market or 0.1% of a $100 billion market? That would be $200 million versus $500 million versus $100 million. Neither the largest nor the smallest market wins in this example.

Market size in a vacuum is practically meaningless. What is projected market share? Is that projection reasonable considering competition, market barriers and the pace of new product development? Is the market dominated by huge and powerful legacy companies? Is it primed for disruption? How fast is the market growing? A final tip: Always find out where a founder’s market size numbers come from. There’s probably more than one estimate out there. And you should assume you’re being told the biggest one.

Bootstrapping. A founder confessed to me he’s taking “only” a $300,000 salary (his previous salary was three times that). Is that company bootstrapping? Another founder (who’s had several successful startups) told me he contributed $500,000 to the startup. Is that company bootstrapping?

Here’s the Investopedia definition of bootstrapping: Building a company from the ground up with nothing but personal savings and, with luck, the cash coming in from the first sales. It’s not a bad definition, although we’ve just seen that personal savings can amount to the equivalent of a common seed fundraise.

Whether the money comes from an angel investor, crowdfunders or a founder’s personal bank account, the point is the startup is growing while spending a fraction of the money its peers spend. Taking the above example, even though the founder was making $300,000, my research indicated that the company was spending roughly 50% to 60% less than its peers. Anything below 60% is bootstrapping in my book.

In general, I love bootstrapping. But it’s not for everybody. Despite the disappointing returns of excessively funded companies like WeWork and Uber, it’s worth remembering that NOT bootstrapping shouldn’t be considered a bad thing. This is not a black-and-white issue. Most startups fall somewhere in between bootstrapping and heavy spending.

Customer acquisition. Startups have two ways to spend wisely on gaining new customers: either lower acquisition costs or increase lifetime value. I don’t have any preference as to which one I like better (although, ideally, I like to see progress on both numbers). And I demand to see the ratio of lifetime value to customer acquisition costs increasing now, not at some projected point in the future. The lowest ratio I find acceptable is 4, although I’ve seen other investors accept ratios as low as 2.5.

I consider speed investing just as dangerous as speed dating. You could end up spending more time than you want with the wrong people.

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