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As a serial successful entrepreneur turned angel investor and enterprise capitalist and one in all the highest female seed-stage investors on the planet, I see dozens of pitches from entrepreneurs each day – some through the shape on our company site, others in email and a great deal of them via LinkedIn. Often, though, entrepreneurs reach out to me for advice quite than funding. As a former entrepreneur who once struggled to raise capital myself, I’m sympathetic to their pleas for help.
One in every of those requests got here from Emma. Her passion for her stationery business was undeniable. She’d spent years perfecting her craft and had a small but fiercely loyal following of shoppers who adored her exquisite, custom-made stationery. Now, she was ready to take her business to the subsequent level and sought funding from enterprise capitalists to scale it up.
Unfortunately, her fundraising efforts were an entire disaster, with investor after investor turning her down. Discouraged, she reached out to me for assistance.
I had Emma send me her pitch deck, and the issue was immediately clear. She had a superb vision but lacked an understanding of what investors search for. Her deck and pitch didn’t align with what investors needed to see, overlooking 4 key numbers – I call them BFHL – which might be most fundamental to scale.
B. Big market numbers
The inspiration of any scalable business is the promote it serves. For investors, the larger the higher. To know why, it’s essential to understand VC math.
Assume my fund invests in 15 corporations. Ten of them will fail, and I’ll lose my money. Three or 4 will do okay – I’ll get my a reimbursement or make a bit (1 to 5 times my money). Meaning the remaining one or two corporations need to generate enough returns to make up for all the pieces else (i.e., 100 times my money). Otherwise, my fund won’t do higher than other far less dangerous things my investors could have put their money into.
VCs have a look at every company through this homerun lens. What’s the maximum revenue what you are promoting could generate if it captured 100% of the available market (Total Addressable Market, or TAM)? While no business can realistically achieve that, TAM provides a way of the market’s overall size.
For some industries, a market size within the billions of dollars is perhaps considered large. In others, it might be within the trillions. Either way, a considerable market size offers massive potential for growth and a high ceiling for revenue and profitability.
Related article: What No one Tells You About Taking VC Money
F. Fast growth rate
The market’s growth rate can also be vital. VCs favor rapidly expanding markets because they allow an organization to scale more quickly.
Again, let’s turn to VC math to understand why rapid growth is crucial. Remember, VCs back probably the most dangerous corporations (startups are unproven; most of them fail), in order that they and their investors expect extremely high returns. VC funds are also time-bound. They’ve eight to ten years to scout for startups, make their bets, help portfolio corporations grow and achieve “exits” to get their returns. In consequence, they need to know:
- How quickly can what you are promoting grow? How long until you’ll be able to sell your organization or take it public in order that they can sell their shares and get a return?(*4*)
- How big can your organization get? How much could or not it’s price (“valuation”) at the purpose they sell our shares?(*4*)
To deliver homerun-level returns, you wish to grow from a startup to $100 to 500 million in revenue within the five to eight years your investor has left in its fund life. Why? We determine what an organization is price based on “multiples of revenue.” On the high end, SaaS corporations may be valued at ten times or more of revenues. E-commerce firms are available in around 2 to 3 times. Others may be as little as 1 to 2 times. So, to construct an organization that may be a “unicorn” ($1 billion valuation), you wish to quickly grow enough to generate $100 million to $500 million in revenue. Growing that big is difficult to do, and do quickly, in a stagnant, crowded market.
Related article: 4 Crucial Indicators To Know Before In search of Enterprise Capital Funding
H. High revenue numbers from each customer
VCs want businesses that may generate high levels of revenue from each customer — from the initial sale and subsequent purchases, upsells, cross-sales, and retention (aka, keeping them for the long run). This is known as the Lifetime Value (LTV) of a customer, and it is a critical indicator of scalability.
Investors prefer businesses with recurring revenue over those counting on one-time purchases because they supply predictable and continuous streams of income. Sell once; earn revenue indefinitely. Even higher if that recurring revenue grows through upsells and latest offerings. Higher still if customers change into advocates and produce in additional latest customers. It’s all about demonstrating to investors that what you are promoting is a revenue growth machine.
Relevant article: 8 Things You Need to Know About Raising Enterprise Capital
L. Low price to get customers signed up
VCs also prefer businesses that may find, sell to and secure customers efficiently. This includes your marketing and sales tactics (and budget) and the speed at which you change prospects into paying customers. A low price of acquiring a customer (CAC) means what you are promoting is efficient, which is significant for scalability.
CAC can also be a critical metric since it directly affects an organization’s profitability. VCs favor businesses that may scale their customer acquisition efforts without proportionally increasing their costs. And a scalable customer acquisition strategy is crucial for achieving rapid growth.
So, where did that leave Emma? After our talk, she could see how essential it was to have a business (and a deck) that aligns with investor preferences:
- An enormous market with high growth rates and an open landscape to disrupt and capture market share.(*4*)
- Subscription models and recurring revenue streams that increase over time, with customers that drive virality.(*4*)
- And a mixture of high customer lifetime value and low customer acquisition cost ensures that the business can grow quickly and efficiently without eroding profits.(*4*)
The BFHL framework gave her what she needed to rethink her pitch and her approach to growing her business. Whether you are an entrepreneur like Emma trying to attract investment otherwise you’re simply searching for to scale what you are promoting, these 4 key numbers — market size and growth rate, lifetime value and price of acquisition — ought to be your guiding lights. By specializing in these crucial metrics, you’ll be able to set what you are promoting on a path to scalable success. Understanding these numbers and optimizing them is the important thing to unlocking the total potential of your enterprise.