If you’re angel investing through syndicates or other channels where information is scarce I suggest you try to obtain the key metrics mentioned in this article at the very least, especially if historical Profit & Loss, Income Statements, or Balance Sheets aren’t available for viewing nor have been prepared. Not viewing key metrics is going in blind and and can expose risks that would help you make a more informed decision on your angel investment.
This article is part of the series on angel investing. I’ve previously covered the following two topics related to angel investing. This article is meant to supplement these two topics:
- The Founder Fit Checklist for Angel Investing
- Using Customer & Employee Feedback for Angel Investing.
Are you a numbers shy angel investor? Be honest.
Investors often shy away from asking for business metrics without good reason. Any start-up that relies on digital customer acquisition should and will most definitely be able to provide this information within a day’s notice. You should ask for as much information as possible, bearing in mind there may be exceedingly high and exceptional variation in the figures provided given the evolving nature of early stage businesses. Angel investors often don’t insist on this information as start-up founders can deflect due to the reason of confidentiality. However, is it worth putting time, money or effort into founders, friends or lovers, if there is little to no honesty?
Angel investors need to respect and understand the metrics
Investors should understand the context of the metrics and at which parts of the customer life-cycle, and business operations stage, do such metrics become relevant.
Angel nvestors should focus more on metrics that show growth potential than business health. For example, cash flow and other stats of high importance should not be ignored either when evaluating angel investments. Getting historical results of the metrics below will give you a good indication of the company’s growth prospects. Below are a few different types of metrics to look for. These are split into different categories all of which are self-explanatory.
Marketing metrics shed light on how things are going with the business as it stands in the present, as well as how it performed in the past. You should ask for these metrics to be provided on a monthly basis if possible and annotated against any tangible improvements, outages, bugs or other changes that would cause variation. The point here is to get an idea if the business progress can be exciting, as in, increasing CLV, low churn, high conversion rate, and paid advertising metrics such as CPC, CPL and CPA.
Customer Lifetime Value
The CLV and CPA (Cost per Acquisition) go hand in hand when in comes to marketing metrics. What’s the estimated about of money a customer generates throughout their life-cycle of using the product? How long is the customer life-cycle? Ideally, as an angel investor, you want to put money in companies with long customer life-cycles and high CLV. Or short but highly repeatable life cycles (e.g. eCommerce purchase), which all add up to a high CLV. Companies can tweak their CLVs by offering more products and services. If a company has a declining CLV or has no CLV at all, then maybe reconsider the investment if they can’t be improved upon or are not accompanied by any reasonable explanations on the low performance.
Customer churn rate
Churn is usually calculated over cohorts in subscription based businesses. For example, the group of customers signing up for a subscription during the same month (e.g. April 2019). Churn is also expressed with respect to time. As in, how many customers from the April 2019 cohort cancelled their subscriptions by April 2020. Churn provides insight into the usefulness of a product or service. Customers who are deriving value from a product or service will be less likely to cancel their subscriptions. When looking at cohort data, make sure that there were no significant product or pricing changes that may skew the results to look less or more favorable.
Conversion rate can be considered the most important marketing metric for an online business. The figure is expressed as the number of customers that sign-up or pay for a product or service service, divided by the number of website visitors. It provides strong indication if a product is viable or not in its current form. Conversion rate can be increased through the following:
- Targeting relevant customers
- Making improvements on the marketing messaging on the website or app.
- Improving the speed, price, quality or overall experience of the service or product through the customer journey
Cost per Click (CPC)
CPC is relevant if marketing on paid channels such as Google Search or through other pay per click platform providers. Cost per click is an indicator of how effective an advertisers messaging is when targeting customers. Derivative metrics such as Cost Per Thousand Impressions (CPM) or Cost Per View (CPV) are also relevant and provide insight into ad performance.
Cost per Lead (CPL)
CPL is mostly relevant to businesses using affiliate marketing. CPL is used to calculate the effectiveness of an affiliate’s quality of leads or based on the competitiveness of a business niche. Businesses the operate in a niche and highly profitable industry will usually pay higher CPL as well.
Cost per Acquisition (CPA)
CPA is the cost the business incurs to pay an intermediary to obtain one paying customer. CPA can be considered the second most important metric for determining product or service performance. Remember, CPA must always be lower than CLV or else the business has no justification to exist.
Organic and (non paid) social website traffic
Web traffic from unpaid sources provides a good indicator of how the company is performing with respect to its Search Engine Optimization (SEO) practices and social media activity. Organic traffic can also come from social media and other websites where there is no pay to display or pay to play.
I’ve not going to dive too deep in financial metrics. These are covered elsewhere and in better detail. Unfortunately, many investors overlook these completely when making investment decisions. However, these need to be here for the sake of their importance.
Revenue is also called ‘top line’. It is simply how much money the company makes with respect to some element of time. Time related revenue terms include Annual Recurring Revenue (ARR) and Monthly Recurring Revenue (MRR). If a company is not making any revenue, is it even worth considering for an investment or is it still in the research or business analysis stage?
Gross Merchandise Value
Often confused with revenue, Gross Merchandise Value (GMV) is the total value of merchandise sold through a website or app, less of any fees or other revenue generating services. It is often proportional to revenue but not always. GMV is most relevant to eCommerce sellers.
These pertain mainly to the administrative costs of a start-up. This number will include the costs of goods sold (COGS), which are often office or equipment rental costs, payroll, and other overheads as well as any maintenance expenses. Costs arising from financing activities such as interest payments, currency conversion or other debt are often not included. When in doubt, ask the company to confirm how they calculate their figures.
Quite simply, sales, minus all product costs, overheads, finance costs, discounts, allowances and taxes gives you profit. If a company is finding it hard to generate a profit, nor does it have faith in ever achieving profit, is it worth angel investing in? Yes, only if you think one day someone else will one day pay a higher price for the shares.
Does the business measure productivity? If so, how do they do it? It should make sense and be consistent across the company. It shouldn’t be based on output alone.
Consistency is key, as is standardization. If the business does not have any processes yet, they should start to form them as they bring on more people. People working without set processes is mostly chaos. Processes at start-ups should be malleable but most employees should be able to work within processes to a satisfactory level, as deemed by the business. Employees don’t work with the intention of messing up or making mistakes, and if they regularly do, it’s mainly due to bad company processes.
Has the company taken internal surveys on its own employee satisfaction? If so, how happy are they working within the company? What do current and former employee reviews say on GlassDoor and PayScale? What do past and present employees say on Reddit? Take time to learn more about what these people are saying online about the business if you can’t speak with them directly or don’t feel comfortable contacting them on LinkedIn.
Employee churn rate
The easiest way to determine employee satisfaction is to find out the churn rate. Some businesses may not keep track but the honest entrepreneurs or those with very low churn will know it by heart. Bad places to work usually are not able to keep good people. A typical business excuse involves brushing high employee churn under the rug by saying it’s due to the company’s demands for excellence and competition in the workplace, but this is just a mask for a crummy business culture. I’ve worked at some businesses where this can pass for a few years but not more than 2-3. Even in big cities employers can churn through a vast majority of their workforce before they start getting second and third tier talent rather than the best of breed workers you’d want a business you invest in to hire.
Customer Service Metrics
Time to resolve enquiries
How fast are customer complaints or enquiries handled and at what level of customer satisfaction? TrustPilot, Google Reviews and other review websites can provide some indication of these metrics if the business does not yet keep track. High performing businesses always make sure they address and resolve issues to ensure happy customers, be they businesses or individual consumers.
Customer feedback scores
Again, look up customer reviews on other websites. It can provide a lot of insight. Check reviews across multiple platforms including TrustPilot, Feefo, Google Reviews, FaceBook, Twitter and others. Get the full spectrum on what customers think of the business with real feedback. Often the reviews are the tip of the iceberg but for early stage companies they provide a lot of feedback on where things are going.
You forgot [INSERT_METRIC_X_HERE]!
The list above is not exhaustive, merely more illustrative of what you should be looking for.
Why are you calling these metrics and not KPIs?
I come from a process improvement background. The companies I worked at were keen on differentiating between the two. In a simplistic terms, metrics are not entirely within a company’s control. To compare, a KPI is intended to measure performance of processes that were mostly within a company’s control. For example, a KPI would be time required to successfully resolve a customer enquiry, or number of customer enquiries across the queue. Thus, I can’t consider metrics as KPIs. Very soz indeed.
Start-up metrics are usually horrible, what’s the point of even asking?
Yes, startup metrics are usually bad. However, it’s the remediation techniques that provide insight into how a team is going about trying to solve their company viability problems. Some businesses may have great marketing metrics, but horrible operational metrics. So, succeeding in one area does not connote success in any other. The metrics provide insight into angel investors in how bad or good things currently are. If the company’s numbers really are dismal, is there any point in angel investing? Probably not!
Things can be hard sussing out companies when angel investing. Data on key metrics is one area where you may get some resistance. Company founders may push back on providing any data for sake of confidentiality but this can be construed as just lack of respect. If they can’t front at least some of the data to enable angel investors to make more informed decisions, then you should not consider giving them a penny no matter how promising their venture may be. There’s no reason to be protective of information that bears no consequence other than potentially scaring investors away.