The startup metrics that the market pays attention to are not the same metrics that truly matter when it comes to building a successful, sustainable business.
Companies today can receive a billion-dollar valuation with just a few million dollars in revenue. How does that make sense? Let’s take a look at some of today’s most popular data points — funds raised, valuation and headcount — and then at the numbers you should really focus on.
Funds Raised and Valuation Metrics
Funds raised and valuation can be misleading without looking at all the dynamics of a company’s capitalization table. And these startup metrics are becoming even less important as the sizes of valuations and fundraising rounds grow.
How big are valuations and funding rounds getting? Consider these Q2 2021 numbers from CB Insights:
- There were 136 unicorns born, up from just 23 in Q2 of 2020.
- There were 390 funding rounds of $100 million or more — a nearly 3X year-over-year increase.
A lot of this is happening because we’re seeing more good companies emerge. They deserve the massive valuations and fundraising rounds they’re getting, and they’re generating huge tailwinds for other companies.
But at the same time, it’s important to remember that most companies with a billion-dollar valuation should really be doing at least $100 million in revenue. Those that aren’t may not be properly equipped to use a sudden influx of money in the best way to grow their business. And if they aren’t able to grow, that high valuation will eventually be rendered meaningless.
If I get hundreds of millions in funding and I’m only doing a few million in revenue, I don’t know how to deploy that funding. Where am I going to invest those dollars?
And that leads us to…
Headcount is not really a telling startup metric, even though founders can sometimes get fixated on it. They could just be burning cash and hiring for the sake of hiring.
That’s great you have 100 employees, but if you’re losing a significant amount of money every year, you may be trying to run before you can walk.
Enterprise value creation is important, but you want to make sure everything is sequenced in a way so that you can maintain optionality. You don’t want to raise too much too soon or hire too many people too soon — especially if you don’t have the processes in place for those people to use that funding effectively and fuel your growth.
You need to build an efficient and optimized business first. Track your growth by paying attention to these startup metrics instead: revenue concentration, deal size and net revenue retention (NRR). Growth is not just about how much money you’ve raised, how much a venture capital firm says you’re worth or how many people you hire. It’s about how many customers you have and your ability to deepen your relationships with them.
This metric is crucial to the overall health of your business. If you’ve got $10 in revenue, but one customer accounts for $9 of it — which happens a lot with startups — that’s not great. What if that customer leaves?
On a larger scale, if you have $1 million in revenue, even having one customer at $100,000 or $200,000 can put you at risk. Don’t put all your eggs in one basket.
Deal Size Range
Average deal size is a popular way to measure a company’s ability to make money off its products and services. It’s an interesting startup metric, but it doesn’t tell the whole story.
At my previous company, our average deal size was probably about $16,000 per year. You’d probably look at that number and assume we sold to small and medium-size businesses.
We did, but we also sold to individual consumers who paid $30, as well as to large global enterprises that paid more than $1 million. In our case — and in the case of many other companies — the range of deal sizes was far more compelling.
Showing that your business can actually service customers across a wide spectrum is incredibly valuable.
Net Revenue Retention
NRR measures your ability to land and expand, and it’s especially important for product-led growth companies.
Showing you can acquire, retain and upsell customers over time is a strong signal. Even in the public markets, some of the highest-traded multipliers are companies with high NRR — sometimes in excess of 130%.
Follow the Metrics Trends
With all startup metrics, the trends are more important than the absolute number at a certain time. It’s more about how you, as you’re building the company, think about the numbers and how they change over time.
If you need help aligning your financial and business operations or preparing for an investment round, check out York IE’s advisory services for Financial Operations and Capital Strategy.