Opinion

6 things venture capitalists really care about when assessing B2B startups

- August 27, 2019 3 MIN READ

 

Founders regularly ask me about the metrics that truly matter to venture capital (VC) investors.

Although there are a number of metrics that are standard across all startups, there are many tools that can be used to measure performance.

In the early due diligence stages VCs will often look at the big picture – the size of the opportunity, the revenue and customer numbers – because they are an indicator of the scale of the business and its opportunity. If a business passes this first hurdle, investors will look more deeply at growth and seek to uncover any barriers to scalability.

There are six key questions investors seek to answer when considering an investment in a B2B business and founders should consider the metrics they can use to best answer these questions.

 

Is the “use case” the same across different businesses and industries?

Having the same application of the technology across different businesses and the same path to purchase within an organisation has a direct impact on the scalability of the business and the founders’ ability to target decision makers within organisations.

This is particularly important for sales-focused vs marketing-led startups. The development of customer personas is essential for targeted sales campaigns.

 

What are the biases a start-up must overcome to win customers?

The phenomenon of loss aversion bias is well understood – the idea that losses loom larger than gains. Or put simply a person thinks it’s better not to lose $5 than to find $5. Part of loss aversion is the pain of moving from the status quo.

If a customer has this bias then they are closed to new opportunities and inertia takes over, preventing sales. Founders need to anticipate these barriers and consider how they are overcome.

Experience tells us that a new product that is positioned to enhance a customer’s performance is valued more than a product that simply saves time or money.

 

What is the sales cycle?

Founders should be clear about metrics around the length and steps of the sales cycle. This includes all stages such as initial meetings, the average trial period for the product, time to proof of concept and the final stage of issuing a contract.

As important as the initial contract value is the ability of the founder to expand the value of the contract over time and deepen their relationship with their customers. This is measured by looking at the total contract value and the annual contract value.

Investors will be looking to see an increase in the amount customers are paying for a product over time as this indicates adoption of added functionality or that is it delivering enough value that customers are willing to pay more for the product.

 

What is the customer’s feedback and has this been measured effectively?

VCs will be looking for founders to demonstrate that the product has the stamp of approval by customers and validation that the product achieved what it set out to achieve.

 

What is the net negative churn rate?

Even the most successful start-ups cannot hope to keep 100% of their customers and no investor will expect this. What is important, however, is the behaviour of those customers who remain. If 5% of the customers leave, will the remaining 95% of the customers provide enough growth in the start-up to compensate for the loss of the initial 5%? And are there enough opportunities to grow the business with the remaining 95%?

 

What is the annual recurring revenue (ARR)?

Related to net negative churn is ARR, or the measure of revenue components that are recurring. A VC will be interested in whether ARR is flat or growing as this is a measure of the behaviour of the 95% of customers who remain and whether the start-up is successful in gaining access to new customers.

 

The way a founder tells the story of their startup shouldn’t be overlooked and they should avoid getting bogged down in spreadsheets and charts.

To make B2B metrics memorable founders should craft a narrative that uses the metrics to capture the success of the business and the passion of those who are the driving force behind the company.

 

  • Benjamin Chong is a partner at venture capital firm Right Click Capital, investors in high-growth technology businesses.

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