Early-Stage Startup Metrics Investors Consider

To accelerate business, founder Early-stage startups usually raise funds for investors, both angel or venture capital. Studying previous startup experiences, there are several approaches that are usually taken to successfully pocket investment funds pre seed or seed funding. First, they can “sell” the experience or vision founder accompanied by a potential market size that will be worked on through the developed products/services.

Second, this is a more measurable approach, namely presenting business achievements to investors. Of course the context is market acceptance of minimum viable product (MVP) which has been launched; to show that what has been done has been achieved product-market fit. Here founder need to use appropriate metrics to describe the business situation in phase early adoption. These statistics can be a provision for investors to see the potential of startups in the future when capital is injected for growth.

DailySocial have talked to several representatives venture capital to ask about the metrics they usually see when meeting early-stage startups seeking funding. First, we chatted with Principal Indogen Capital Kevin Chandra. He said that the metrics would largely depend on the business model adopted by the startup.

"For B2B, where the sales cycle tends to move much more slowly, we tend to look at sales efficiencies based on channel in the early phase. Then, for business models that have a recurring revenue element, one of the key metrics we evaluate is Net Monthly Recurring Revenue (Net MRR). So there is no one formula that fits all," he said.

Net MRR is the monthly net income earned by a startup. The calculation is based on the money earned and then deducted by various accompanying costs. For example in e-commerce, revenue This is just calculated from the total proceeds from the sale of goods minus various costs such as deductions for discounts or returning goods due to defects.

Kevin continued, specifically for early stage startups, Indogen always looks at two main metrics, namely Vanity and KPI. Vanity metrics are used to help understand a startup's position in a landscape. For example, for startups based on E-commerce usually by looking at GMV (Gross Merchandise Value), namely the total sales value of all goods in a certain period.

"KPI-based metrics are assessed by end users who receive them value of the products/services sold or known as 'aha moment'. For example, 7 friends in 10 days is a measurement that companies like Facebook choose to understand that they have an early sign of product-market fit. KPIs will certainly develop as the business grows. "And this is the main (clear) indicator for understanding the business being carried out at a certain time," added Kevin.

In its investment hypothesis, Indogen Capital itself is sufficient sector agnostic. They invest across a wide range of business landscapes. Some of its portfolio includes Travelio (proptech), Carsome (car marketplace), Alive (e-commerce), GoWork (coworking space), Wahyoo (new retail), Ekrut (job marketplace), etc.

We also spoke with the Head of OCBC NISP Ventures Darryl Ratulangi, CVC, which was just inaugurated earlier this year, usually measures potential portfolio candidates using three main assessments. Namely based on customer acquisition cost, customer lifetime value, and customer cohorts.

"Customer acquisition costs used to measure how much (cost) they spend to get new customers, to measure (make sure) it is not too expensive and measured in conjunction with customer lifetime value," he said.

Customer lifetime value measures the revenue a business receives from each of its customers. So measure the transactions they make repeatedly after their first purchase. The higher the value, the better it will be for business. Temporary customer cohort analysis is an analytical metric used to study user behavior over time and understand customer retention.

Even though it is under the auspices of a banking holding company, OCBC NISP Ventura has a unique portfolio. Since its debut, they have invested in four startups including AwanTunai (fintech), Sirclo (e-commerce enabler), Decoruma (E-commerce furniture), and Kiddo (marketplace child activities).

Profitability projections

Basically, initial growth statistics are also a variable used by investors to estimate potential ROI (Return of Investment), one of which is by looking at the potential profitability of the business model being applied. This was also expressed by Selina Koharjo as Investment Analyst at Vertex Ventures. Since each startup he came across was unique and operated in a different industry, they used two key metrics to see future growth potential, viz economy units and customer cohort analysis.

"economic unit used to look at the revenue and costs associated with a unit of product or service and project the profitability of a startup," said Selina.

However, Selina also said that her party understands that in the initial phase most businesses will incur a lot of operational costs -- including for user acquisition.

However, according to him, economic units is the foundation that will support a startup as they grow and develop. "By analyzing various components of startup costs in similar industries, we can better assess the efficiency of each startup," he added.

He further gave an example, analysis economic units for startup direct-to-consumer can highlight areas of strength or improvement within direct costs, variable costs, outliers, and fixed expenses. "In the startup industry, many may be tempted to rely on assumptions of significant growth without a monetization strategy. In reality, especially as highlighted during this pandemic, when unit economics is not prioritized, startup success will be tested," explained Selina.

Meanwhile, for cohort analysis According to him, it is necessary because startups continue to iterate and innovate. The newest group of customers will ideally increase retention. Although a company may be growing rapidly, this growth may not be sustainable if it relies on new customers alone. So, compare cohort (customer groups) of any startup can highlight product-market fit.

"Besides, understand economic units and cohort analysis will allow us to understand customer lifetime value [...] Because acquiring new customers may be expensive, new startups can grow sustainably if customer lifetime value greater than the acquisition cost. " he said.

Vertex Ventures has investment coverage in Southeast Asia and India, some of its portfolio in Indonesia includes HappyFresh (online grocery), RateS (social commerce), Aruna (aquatech), Grade (edtech), Tanihub (agtech),print (printing marketplace), and others.

Find collaboration opportunities

In the Indonesian startup ecosystem, there are also investors from corporations. Called Corporate Venture Capital, apart from investing in startup growth, they also look for opportunities for synergy or innovation. One of the corporate venture capitalists who is quite active in Indonesia is Central Capital Ventures (CCV) from Bank Central Asia (BCA). We had the opportunity to chat with CCV Investment Analyst Anthony Adiputra Lauw to discuss the metrics they usually use when considering investing in their prospective portfolio.

At CCV, Anthony and the team always examine all investment opportunities holistically. "As BCA's innovation and investment arm, they always want to position themselves as a strategic investor first and foremost. So the single most important metric we focus on for all fintech, fintech-enabler, or embedded-fintech startup, is the strategic added value they bring [regarding synergy with BCA]," he said.

Synergy is a form of mutualism, meaning it must provide benefits for the parties involved. Likewise, the principle at CCV is that they not only want to gain strategic value from the innovation that startups produce, but also hope to provide more value for the development of the startup itself; for example by connecting them with a network of financial institutions in the BCA group throughout Indonesia.

"For this reason, CCV's investment scope has expanded beyond fintech, because we aim to synergize with a wider range of industries that can collaborate with the growth of our company. While searching founder with innovative solutions to partner with BCA and its ecosystem, there has never been a single metric that is suitable for all [types of startups]," explained Anthony.

He further gave an example, when CCV invested in startups p2p loans, they identified strong synergy channels between themselves and BCA. "Akseleran and KlikACC [CCV portfolio] have both succeeded in conquering market segments that BCA may not yet have. In this way, we can foster smooth and mutually beneficial cooperation; banks get wider exposure, while startups get liquidity from BCA. "

Apart from the two startups already mentioned, CCV, which has been established since 2017, has invested in other players including Wallex (fintech), Element (biometrics), Qoala (insurtech), Pomona (loyalty), July (fintech), etc.

Invest in pre/post-traction

As revealed in the opening paragraph, sometimes investors also invest in startups that have no results at all traction. One of them is Genesia Ventures, according to Elsha E. Kwee as Investment Manager, for startups that are still very early or have only been launched for a few months, there is not much data that can be obtained or analyzed. Often what is done is to look at several factors such as: market conditions (market size, competition, customer pipeline, etc.), business model, and founder.

Meanwhile for startups that already have several traction, Elsha usually uses different metrics for each business model. But most of it will come down to two things, namely recurring revenue and user engagement.

"I believe that revenue is a good indicator of whether a company provides a solution to a problem that is significant enough for users to pay for it. While repeatability and engagement indicate sustainable utility and resilience," he said.

For revenue or revenue, he says will depend largely on whether the service/product is something that must provide value from the start or whether the business model requires gathering a large number of users first before providing value to users. For example online marketplace, relies heavily on network effects and increases in value as the number of users increases, so initial revenue may not be that important to consider.

Elsha also gave another example. For startups providing SaaS like learning management systems for schools, it is important to start generating revenue from the start rather than letting schools use the platform for free. Because if it is given for free, it is usually difficult to convert them into paid users. For SaaS types of services, having a lot of users with no revenue does not bode well for business sustainability.

"Then regarding user engagement, it depends on whether the company is marketplace, SaaS, B2C, B2B, or others. "For example, I expect higher user engagement (based on DAU and/or MAU) from B2C such as social or community applications than SaaS for tax services," explained Elsha.

Genesis Ventures investing in early-stage startups in Asia, though sector-agnostic they have a bias towards B2B and SaaS startups. Some of its portfolios in Indonesia include Bobobox (hospitality), Qoala (insurtech), Finantier (fintech), logically (logistics), and others.

SeedPlus Partner Tiang Lim Foo also gave his opinion. It's difficult to generalize metrics for all startups. But he always has some basic variables for analysis, including number of customers, level of customer engagement with the product, and revenue value. This, he continued, was influenced by his experience investing mostly in B2B startups for SaaS products.

"The number of customers gives me an indication of the size of the audience they currently have and how quickly the startup is building that audience size. While the engagement rate gives me an idea of ​​how useful the resulting product is, and naturally the best indicator of value is how many customers pay for the service , and how much value it has," said Tiang.

SeedPlus is a venture capital company headquartered in Singapore. They already have three portfolios in Indonesia, including Travelstop (SaaS), Qoala (insurtech), and Logisly (logistics).