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As a serial successful entrepreneur turned angel investor and venture capitalist and one of the top female seed-stage investors in the world, I see dozens of pitches from entrepreneurs every single day – some through the form on our company site, others in email and loads of them via LinkedIn. Often, though, entrepreneurs reach out to me for advice rather than funding. As a former entrepreneur who once struggled to raise capital myself, I’m sympathetic to their pleas for help.
One of those requests came 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 customers who adored her exquisite, custom-made stationery. Now, she was ready to take her business to the next level and sought funding from venture capitalists to scale it up.
Unfortunately, her fundraising efforts were a complete 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 problem was immediately clear. She had a good vision but lacked an understanding of what investors look for. Her deck and pitch didn’t align with what investors needed to see, overlooking four key numbers – I call them BFHL – that are most fundamental to scale.
B. Big market numbers
The foundation of any scalable business is the market it serves. For investors, the bigger the better. To understand why, it’s essential to understand VC math.
Assume my fund invests in 15 companies. Ten of them will fail, and I’ll lose my money. Three or four will do okay – I’ll get my money back or make a bit (1 to 5 times my money). That means the remaining one or two companies need to generate enough returns to make up for everything else (i.e., 100 times my money). Otherwise, my fund won’t do better than other far less risky things my investors could have put their money into.
VCs look at every company through this homerun lens. What is the maximum revenue your business 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 sense of the market’s overall size.
For some industries, a market size in the billions of dollars might be considered large. In others, it could be in the trillions. Either way, a substantial market size offers massive potential for growth and a high ceiling for revenue and profitability.
Related article: What Nobody Tells You About Taking VC Money
F. Fast growth rate
The market’s growth rate is also vital. VCs favor rapidly expanding markets because they enable a company to scale more quickly.
Again, let’s turn to VC math to understand why rapid growth is crucial. Remember, VCs back the most risky companies (startups are unproven; most of them fail), so they and their investors expect extremely high returns. VC funds are also time-bound. They have eight to ten years to scout for startups, make their bets, help portfolio companies grow and achieve “exits” to get their returns. As a result, they want to know:
- How quickly can your business grow? How long until you can sell your company or take it public so they can sell their shares and get a return?
- How big can your company get? How much could it be worth (“valuation”) at the point they sell our shares?
To deliver homerun-level returns, you need to grow from a startup to $100 to 500 million in revenue in the five to eight years your investor has left in its fund life. Why? We determine what a company is worth based on “multiples of revenue.” On the high end, SaaS companies can be valued at ten times or more of revenues. E-commerce firms come in around 2 to 3 times. Others can be as low as 1 to 2 times. So, to build a company that is a “unicorn” ($1 billion valuation), you need to quickly grow enough to generate $100 million to $500 million in revenue. Growing that big is hard to do, and do quickly, in a stagnant, crowded market.
Related article: 4 Crucial Indicators To Know Before Seeking Venture Capital Funding
H. High revenue numbers from each customer
VCs want businesses that can 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 term). This is called the Lifetime Value (LTV) of a customer, and it’s a critical indicator of scalability.
Investors prefer businesses with recurring revenue over those relying on one-time purchases because they provide predictable and continuous streams of income. Sell once; earn revenue indefinitely. Even better if that recurring revenue grows through upsells and new offerings. Better still if customers become advocates and bring in more new customers. It’s all about demonstrating to investors that your business is a revenue growth machine.
Relevant article: 8 Things You Need to Know About Raising Venture Capital
L. Low cost to get customers signed up
VCs also prefer businesses that can find, sell to and secure customers efficiently. This includes your marketing and sales tactics (and budget) and the rate at which you convert prospects into paying customers. A low cost of acquiring a customer (CAC) means your business is efficient, which is vital for scalability.
CAC is also a critical metric because it directly affects a company’s profitability. VCs favor businesses that can 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:
- A massive market with high growth rates and an open landscape to disrupt and capture market share.
- Subscription models and recurring revenue streams that increase over time, with customers that drive virality.
- And a combination of high customer lifetime value and low customer acquisition cost ensures that the business can grow quickly and efficiently without eroding profits.
The BFHL framework gave her what she needed to rethink her pitch and her approach to growing her business. Whether you’re an entrepreneur like Emma trying to attract investment or you’re simply seeking to scale your business, these four key numbers — market size and growth rate, lifetime value and cost of acquisition — should be your guiding lights. By focusing on these crucial metrics, you can set your business on a path to scalable success. Understanding these numbers and optimizing them is the key to unlocking the full potential of your venture.
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