Yesterday, we discussed the first part of our framework in evaluating B2C companies, the natural advantages in brand building. Our next step is to analyze the specific metrics we look for in funding a Series A company.
Series A Metrics
A popular question among founders is what metrics they need to achieve to be ready to raise their Series A round of funding. The answer is always, “it depends.” Every rule is made to be broken, but some of the factors we look for before investing in a Series A round are as follows:
- Vision. Is this a company that can create $1B or more in equity value if their vision becomes a reality? Can they do so off their initial set of products or do they need to launch new products and categories to make it happen?
- Monthly revenue. We target $500K-$1M.
- Organic growth. At least 40–50% of new customers should be organic
- Evidence that new dollars can scale growth. It can be through evidence that investing in new products is proven to drive revenue, or it can be through investing in different marketing channels.
- Frequency. We prefer brands that attract a high frequency of repeat customers and typically, we like to see at least 25% repeat within three months of first purchase. Blue Nile and Away show that you can still build valuable brands with high ticket, low frequency items but our bar is higher for this type of business.
- Paid marketing. For high frequency purchases, paid customer acquisition cost (CAC) should be six-to-nine months or less. For less frequent purchases, we want to see a new customer as profitable on the first purchase
- LTV:CAC ratio. An estimate of long-term value (LTV) at an early stage company is simply that — an estimate. Realistically, we look for the amount of revenue and contribution margin a company can expect to get from each acquired customer over the first three years. We then look at initial CACs and whether the company can realistically generate a 3–5x LTV:CAC ratio over time. It’s worth noting that contribution margin should include all variable costs and an allocation of fixed overhead — so many companies are not intellectually honest in calculating their true economic profit per order.
