Key Metrics that Investors care about: Part 1 Market and Users.
Like your morning starts from a mug of coffee, your business journey also starts with the “MUG”: market, users, and the growth of these 2. If your market and users are growing then you might be on the right way. I used “might be” as the journey to success is not as easy as just “MUG”, and I am glad to cover some ABCs on the market and user-related metrics in this article.
I will focus on Blockhain and Fintech fields together and cover the most common business models in these field. Let’s start diving in.
Market Size
If you’re a pre-seed or seed startup, you will need to demonstrate more pre-market validation. This is where the market research comes in and provides you with all the data you need. Case studies, market trends, growth tendency, and, of course, TAM, SAM, and SOM.
These 3 numbers will give a good understanding of how big is your market, what are the opportunities to grow there in future, and what can be your market share.
TAM — Total Addressable Market
It’s the size of the largest possible market
SAM — Serviceable Available Market
It’s the size of your target market
SOM — Serviceable Obtainable Market
It’s the size of the market that you can reach
US-based Fintech startup Brex has a great example for these 3 metrics in its deck:
TAM: US$ 101 billion that is the size of the global B2B payments market
SAM: 25.6 billion that is the size of the US Fortune 500 companies market
SOM: 5.2 billion is the size of the US venture-backed professional services and funds market
Fintech startup OpenFin decided to add a slight creativity to the slide by dividing markets into the target categories (sub-markets) and indicating when the company will start approaching each of the categories.
Revolut, one of the biggest neobanks in Europe, launched as a travel card that minimized costs of transactions. Their deck indicates the current target — UK travellers and shows the growth opportunity on this market in both US$ and users number terms.
Market size can be shown in different ways, you can go with a commonly-used TAM, SAM, SOM, or can follow its logic and find a better way to show investors what is your target market and what is your potential market.
In addition, you may want include some validation points on why your business can succeed there by sharing the case studies of your direct and/or indirect competitors, similar use cases and users preferences and needs. I will be glad to share more details regarding this in one of my future articles. This time I would like to concentrate more on financials and numbers.
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Users
Userbase (Customerbase)
The main question that investors are trying to answer when they’re starting a conversation with you is whether your product fits the market or not. It is difficult to find a better metric to show that it does (or doesn’t) fit the market than the userbase or your clientbase. For the vast majority of business models in the fintech and blockchain fields, the pure number of users will not be as representative as their growth rate. Thus, you need to show investors 3 things:
you have users
the number of users is constantly growing
the number of new users outpaces users’ retention rate.
Monthly Active Users (MAU)
If your business model involves frequent payments and/or user engagement (e.g. transactional, marketplace, e-commerce, advertising, some subscription businesses, etc), then you would need to pay special attention to the number of active users. Active users are those who will bring you the largest value and help to sustain your business operations. Investors also know it and often don’t take into account your total userbase but only look at the active one. You would want to show investors MAU and in some cases DAU (Daily Active Users).
Retention rate
The great majority of businesses want to know if their users retain and how to increase the retention rate. The most challenging are the business models where retention rate isn’t applied. It means that the company only sells product ones and has to look for a new customer again. Thus, companies are always looking for a way to optimize their business model and have an actual possibility for customers to retain. Retention rate will be a key metric for most of the startups, and a dealbreaker for subscription, transactional, marketplaces, and SaaS, BaaS companies. If your users do not retain it will indicate that you’re at the wrong market or approaching the wrong target audience. A low retention rate is a trigger to reconsider your services, UX, or even the whole business. On the contrary, a high retention rate will show that you’re moving in the right direction and will help you to have a more productive conversation with investors.
CLTV (Customer Long-Term Value)
One other important metric that is related to the user- or customerbase is the CLTV. For startups that are only starting, this would be quite challenging to calculate. However, as the time goes and you are starting to get more traction, this will be an essential metric for your business. This metric can tell a lot about your business performance and product. The higher CLTV is the better your business does since it’s a combination of the following 4 factors:
Recency — how recent was the purchase/action?
Frequency — how frequent are the payments/actions?
Order value — what is the price of the transaction or the monetary value of the actions?
Lifetime — how long does the customer retain on average?
Maximizing CLTV will be an important goal for your business development. A higher CLTV can also mean that you get a larger return on your user acquisition cost. It’s better to get a user/client who will retain longer and bring a larger value than the one who will leave after the first trial.
PPU/RPU (Price Per User / Revenue Per User)
Although PPU (or RPU) can be and is widely applied, it’s worth adding to your pitch deck if you have a subscription model (as your business model itself is about a price per user). For other businesses, this metric can be one of many that your financial team calculates and looks at. Thus, investors will not be paying too much attention to PPU/RPU unless you earn on subscriptions.
Customer Acquisition Cost (CAC)
If you have a SaaS, BaaS, subscription, transactional, marketplace, e-commerce business model, then CAC and particularly paid CAC will be number to mention during your pitch. The lower your CAC the more sustainable is your business model and the more attractive it is for investors. It can be a very strong advantage if you have a low (or nearly 0) CAC together with high PPU/RPU, CLTV, retention rate, and/or userbase growth rate. Low CAC is one of the reasons investors love SaaS companies so much. These companies spent less to attract new users, have a higher retention rate and CLTV, sound like a great investment opportunity, right?
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Today I covered core user-related metrics that will be important for your Fintech and/or Blockchain startup. If you have any additional questions or would like to study other business-specific metrics, you can reach out to me through LinkedIn or ask FAS team directly through our website form.
In the next article, I will talk in more detail about the revenue and profit metrics that investors want to see.