April 20, 2022 | CFO Posts
Numbers That Explain Your Startup’s Potential
If you are running a startup business and seeking investment, one of the most important things to know is what numbers investors will be analyzing to determine your company’s potential. It’s also important for you to understand your own potential so that you can make adjustments to your business as necessary. Here we will discuss the key numbers that will be evaluated to determine your company’s real potential for growth.
You’ve probably done a market analysis, but within that market analysis you need to include industry benchmarks. These include things like the average gross and net profit margins for the industry, and other key metrics including the P/E ratio, and debt-to equity ratio.
Essentially, investors will compare your numbers to industry benchmarks. If you fall short of those benchmarks, they may question the viability of your business model. If you significantly exceed the benchmarks, they will question how realistic your model and projections are.
For example, if your projected net profit margin greatly exceeds the industry benchmark, your anticipated price might be unrealistically high, or your estimated cost of goods sold might be too low.
Clearly, investors want to know how your company will grow, by how much, and how fast. Your projections need to show a clear pathway to rapid growth. Investors are typically looking for an exit in three to five years, and they want a significant return on investment from that exit. If your projections do not get them to that end goal, they are not going to consider your company investable.
Of course, they are going to scrutinize your projections to confirm that they are realistic. Projections are always essentially guesses, but they need to be based on information and have a strategic plan to back them up. You’ll have to show exactly what you are going to do in terms of growth initiatives to get to those numbers.
Investors want to know a lot about your customers including how many you’re projecting to acquire, how you’re going to acquire them, and how much it will cost to acquire them. Your customer acquisition cost is another is another industry benchmark that they will analyze. If your projected customer acquisition cost is too high, it’s a red flag that something is wrong with your acquisition strategy or even your business model.
Investors will also look at your potential customer lifetime value. They want to know that you can retain customers and get value from them for the long haul. You’ll need to show how you will retain customers, and why and how they will spend more money. Customer lifetime value is a key number in your growth potential.
When you implement sales and marketing strategies, you need to know how many customers from a potential pool of customers you can convert. Assuming you have some sales history, you should show how you achieved your current conversion rate, and how you plan to maintain or improve it. This will also be part of determining what your ROI is on your sales and marketing dollars.
Your Overall Financial Model
Investors, of course, are going to analyze your overall financial model, with a focus on the numbers we’ve discussed. If those numbers stand up to the test, they are going to look at the story behind the numbers. You need to have solid information to back up every single number you put forth, and that information should be the foundation of your strategic plan. Your numbers must be in line with that strategic plan, since that plan is what you will execute to achieve your projected numbers.
C-Suite Deal Makers is a boutique investment banking firm that provides M&A and capital raising services to early-stage and lower middle-market companies.
Deal Makers’ focus is working with companies to raise debt and equity capital, providing acquisition services, preparing and taking business owners through the process of selling their business, advising owners and companies with regard to their real estate strategies and transactions. and taking companies through the public offering process.