KPIs, TAM, ROI, CAC, NPI: Founders are fond of using acronyms to quantify their startups’ successes. The only hitch is that not every venture capitalist wants to be spoon-fed an alphabet soup of progress metrics. Here are a few data points and figures that six VCs think are overrated–and what, in their view, matters a whole lot more.
“In the earliest stages, revenue projections don’t really matter,” explains Arteen Arabshahi, principal at Fika Ventures. “VCs understand that this is all hypothesis, and most care more to understand how you are going to spend, not what you think you are going to earn–especially because those projections are almost never accurate.”
Hugues Lalancette, head of Growth at iNovia Capital, backs this up. “Precise forecasts actually don’t matter pre-Series A,” he says. “In the land of extreme uncertainty, the only immutable truth is that forecasts will inevitably be wrong.” Investing “is a game of outliers,” Lalancette points out, “and startups tend to either outperform or underperform, and there isn’t much else in between.”
What matters more: “Instead,” Arabshahi continues, “one metric that VCs intrinsically think about but [which] may not be expressed is ‘momentum’ or rate of growth.” He points out that “traction” is the common shorthand for a startup’s overall health, but it can be an imprecise term. Sharing your growth rate is an easy way to add more specificity. “Would you rather invest in the company that went from 3 to 15 to 50 or from 40 to 45 to 50?” says Arabshahi. “That’s an easy answer for us.”
Obviously, product-market fit matters, but it might matter at the stage when founders are first courting investors than many entrepreneurs believe. Indeed, as Fast Company contributor and Tacklebox Accelerator founder Brian Scordato counseled founders in an article last year, “Stop focusing on gaps in the market–they don’t matter.”
What matters more: Razmig Hovaghimian sees things similarly. “The first thing I do is look at the first 10 people the founders bring on,” says the partner at Graph Ventures. “What I want to determine is if this core team are all high-performing hitters and not too similar in backgrounds. You can hack some product-market fit and talk about that in your pitch all day,” he continues, “but you can’t hack a driven, high-performing team.” In Hovaghimian’s experience, that’s the much more crucial element in determining how a startup’s culture takes shape–and, ultimately, its chances for success.
Contacts and connections
Jillian Williams, an investment associate at Anthemis, often hears founders tout their personal and professional networks, citing all the senior execs and other movers-and-shakers they know “as a proof point that the startup will be successful,” she explains. “What I find, though, is that while these personal networks–comprised of former corporate colleagues and friends–can be a good start, it does not necessarily mean there is a need for the product. Just because a friend is willing to take a call, it doesn’t mean that founder should forget to create a plan to market more broadly.”
What matters more: The smarter approach, says Williams, is to leave your contacts to the side and convince someone who doesn’t know you that your business idea can succeed. “A better indication of the market’s need for a solution,” she says, “is for it to be able to get the attention of someone outside of your network.”
Ben Joffe, Partner SOSV’s hardware arm, invests in companies at their prototype stage. “There are very few metrics to look at that stage, frankly,” he explains. “Some founders try to impress us with media coverage, YouTube views, awards, and prize money,” but Joffe takes those with a grain of salt, reasoning that “awing readers or a jury is not the same as building a product that will actually sell.”
What matters more: Instead of coverage and fanfare, Joffe says founders need to demonstrate that prospective customers are eager and excited: “Have you talked to customers? Are they ready to put money down, even for a prototype? That’s what matters.”
Proofs of concept and letters of intent
Yida Gao, partner at Struck Capital, notes that a large number of POCs or LOIs don’t really move the needle for him. “These ‘promises’ from potential customers carry very little weight relative to true ARR [annual recurring revenue] and contracts, because many times large enterprises can ‘kick the tires’ on new software for several months,” he explains. In fact, Gao finds that “having too many outstanding POCs” can be a liability, diverting resources from product development.
What matters more: Gao says he’s much more interested in finding out a startup’s customer attrition rate. “High churn is typically a red flag, but VCs should dig into the reason for the churn,” he explains, “because sometimes attrition is healthy if the startup is focused on a different demographic of customers as it scales.” Either way, that’s the metric that’s really worth looking into.