25 Most Important Metrics We Look At While Funding Series A

At Leta Capital, we have invested in more than 40 companies to date, mainly participating in Late Seed and Series A rounds. We review thousands of pitch decks annually, take hundreds of calls with the founders, and review gigabytes of data related to technology startup development and fundraising.

As every other firm investing at Series A, we rely heavily on data provided to us by the founders and make data-driven decisions coupled with the “gut feeling” and our experience from the past. Even though every startup company whom we interact with is unique in many ways, still there are certain patterns and metrics which are common for different companies that we use as a barometer to measure the attractiveness of the startup company from an investment perspective.

In this post, I am going to list the most important metrics we at Leta Capital look at while funding Series A rounds in order to make our decision-making process a bit more transparent.

It’s important to remember, that there are as many opinions as there are VC firms, each focusing on their own “North Star Metric”, moreover please don’t treat the following as a universal truth, but rather as our own Leta Capital’s way of picking the winners at Series A stage.

TL;DR

#1 Revenue

… is one of the best indicators of a startup’s performance. It is essentially money brought into a company by its business activities, calculated as the sales price multiplied by the number of units sold. We at Leta Capital prefer to analyze startups’ bottom line (net revenue) over the top line (gross revenue) as the latter can sometimes be misleading.

#2 Revenue Structure

… there are various sources from which a startup can earn money (service fees, transaction-based, one-time project fees, subscription, licensing, etc), moreover, we look specifically for the most predictable income, acting as a signal of repeatability which we then try to extrapolate based on what the company has now. Recurring revenue fits best in this case.

#3 Revenue Concentration

… amount of the startup’s total revenue that is generated by either the highest paying customer or a set of top paying customers, calculated as revenue from the largest customer divided by total revenue.

#4 Revenue Growth

… percent increase in revenue from the previous period, shows the startup’s current growth trajectory and momentum.

#5 Rule of 40

… a principle that states that a software company’s revenue growth rate plus profitability margin should be equal to or greater than 40%.

#6 Number of Months of Consistent Revenue Growth (15%+ MoM)

#7 Gross Margin

… shows how much money is left after covering the costs directly associated with selling your product or service, excluding any indirect expenses such as salaries or office rent.

#8 LTV:CAC

… a business only makes sense if the LTV is at least 3x greater than the CAC, which means that for every sales and marketing dollar spent to acquire a new customer, at least $3 of lifetime gross profit is generated.

#9 Average Customer Lifespan

… is the amount of time between the customers’ first purchase and their last before they unsubscribe from the service. In order to calculate an average customer lifespan, you need to sum up all the customer lifespans and divide by the total number of customers.

#10 Churn

… percent of existing revenue lost due to clients canceling or downgrading.

#11 Net Revenue Retention

… is calculated by taking the annual recurring revenue of a cohort of customers from 1 year ago and comparing it to the current annual recurring revenue of that same set of customers.

#12 Average Contract Value

… as business models differ from one to another, it is unfair to compare ACVs across different startups (“ACV” stands for Average Contract Value and is essentially an average annualized revenue per customer contract). Instead, we prefer to assess ACV in the context of feasibility to reach $100mln+ in ARR on the basis of historical ACV multiplied by the number of required customers and if the targeted growth is realistic.

#13 CAC Payback

… is the number of months it will take to recover the costs of acquiring new customers. It is always impressive when CAC is paid back after the first purchase.

#14 Operating Margin

… includes all operating costs except interest and taxes and is an important metric that is assessing the financial health of a startup, is calculated by taking operating income (gross profit minus operating expenses )and dividing it by total revenue.

#15 Number of Years From the Launch Until Raising Series A

… if it takes too long to reach “product-market fit”, then there might be some fundamental issues with the startup (ill-timed, small TAM, etc.)

#16 Share of Founders And Key Management In the Cap Table

…a general rule of thumb is to give away 10–20% equity to investors during pre-Seed and Seed rounds each, but bear in mind when raising early rounds that the goal is not to reach the highest valuation possible, but rather to find the balance between i) the amount needed to achieve the KPIs and metrics to raise next round , ii) acceptable dilution and iii) finding the right partner-investor who is in line with your goals and strategy.

#17 Number of Employees

#18 Revenue Per Employee

… measures the aggregate productivity of your employee base by revenue generated.

#19 Magic Number

… shows how much revenue a company generates for every dollar spent on sales and marketing and is calculated as follows: (Current quarter ARR — Prior quarter ARR)/ Prior quarter total sales and marketing spend.

#20 Sales Cycle Length

… is the number of days/weeks/months it takes for a deal to close

#21 Burn Multiple

… is the metric that provides insight into how much revenue a startup is generating per dollar burned. The 3 most famous formulae used these days are: 1) Bessemer’s efficiency score: Net New ARR / Net Burn; 2) Hype ratio: Capital Raised (or Burned) / ARR and 3) David Sachs’ burn multiple: Net Burn / Net New ARR.

#22 Customer Cohorts

… clients retention after 3, 6, or12 months

#23 Amount Raised Prior to Series A

#24 Cash Runway

… is the number of months until the cash runs out before closing the Series A round.

#25 North Star Metric

… is the one key metric which is specific to each startup and is mainly helpful for long-term goal setting. Oftentimes it becomes a foundation stone for most of the teams in a startup and defines the desired goals. Following the Series A raise, we expect the founders to determine the “North star metric” and be able to clearly communicate it with the employees, investors, and the wider public if necessary.

Lastly, I would like to share with you 3 quotes from some of the greatest investors of all time which perfectly summarize the concept of Series A:

“Series A is all about product-market fit. You have to be able to show that someone cares about what you’re building.” — Greg Gretsch, Jackson Square Ventures

“To be Series A ready, you need to make real progress traveling down the path from a good idea to a great business.” — Ben Horowitz, Andreessen Horowitz

“Treat the money that you raise as the last money you will ever raise” — Alexander Zemlyak, Leta Capital