If you are an entrepreneur preparing your funding pitch, I’m guessing you have a product or service. You probably have a business name, maybe a logo, and maybe even the beginnings of a website. And you almost certainly have a business plan.
But so does everyone else. Just about every funding-stage startup has the items listed above. So how can you set yourself apart from the pack? Go one step further and predict some of the questions that any knowledgeable investor will ask & provide them within your funding pitch.
Once the audience understands your concept, they’ll try to predict your future in basic financial terms. Beat them to the punch with these five critical numbers and you’ll find yourself in a much better position to negotiate terms and launch the business you envisioned – not the one your future investors decide for you.
Funding Pitch Key Numbers
1) Burn Rate – Also known as churn rate, this is the monthly outflow of cash required to cover operating expenses. Typical expenses included in this calculation are fixed in nature and can include rent, payroll, utilities, legal and professional fees, technology fees, etc. This rate is usually discussed in the context of when your cash will run out after you have received funding pre-revenue. For example, if your burn rate is $25,000 per month and you have raised $200,000, you have eight months to operate without generating any revenue. This gives investors an idea of the ‘length of the runway’ and when you’ll need to knock on their door asking for more money.
2) Lifetime Value of Customer (LVC) – This term should be the basis of your pricing model. Essentially what it means is how much revenue that will be generated on average from one customer over time. For many startups in the software-as-a-service (SaaS) space, this includes a monthly subscription fee. Other businesses know they will only sell their product once or at most twice to a customer, such as automobiles, appliances and books. To illustrate how this is calculated, let’s say an average customer will generate monthly revenue of $100 and will be a customer for 30 months. This calculates to an LVC of $3,000.
3) Sales Lifecycle – The time period it takes for you to transition a new customer from prospect to paid customer. This varies by industry and business model and can range from one day to several years. The shorter the length of the period, the better for the organization. This metric can be combined with the LVC noted above, as well as the acquisition cost defined below to tangibly estimate valuation of an organization.
4) Acquisition Cost of a New Customer – Essentially, this means the total direct and indirect costs required before the first sale made to a new customer. These are described as selling costs and can include sales commissions, advertising expenses, trial period costs, etc. For example, if you have a 25 percent sales commission, $500 of marketing expenses directly related to that customer and a system cost of $250 during the trial period, a $5,000 sale to a new customer has an acquisition cost of $2,000. Costs will continue to incur for you to keep your existing customers indefinitely, but the initial cost should be the highest.
5) Margins – This can be defined by the direct costs incurred during a sale. These can include cost of product manufacturing, shipping charges, sales commissions, wholesale application costs, credit card fees, etc. The higher your margins are, the better for your organization as it takes fewer costs to achieve $1 of revenues. These costs are variable in nature as they vary directly by the level of sales. As a general rule of them, as sales volumes increase, margins should increase as well. This term is probably the most familiar of the five included in this post, but also the most misapplied as not all direct costs are included in the calculation thus margins appear better than they actually are.
In all the VC pitches I’ve seen over the years, there have only been a few start-ups that provided all of these numbers up front, but I’ve met countless investors who ask about them, calculate them on their own and make decisions based on what they come out to.
Get ahead of the pack by including these metrics in your funding pitch and proving to your potential investors that your concept is viable and led by someone who is willing to do the homework to make their case.
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