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What are employee stock options (ESOs)? Employee stock options are vital for all startup founders and employees to understand. For startup employees the benefits often come in other forms than salary — one of the major ones being ownership in the company. Discussing stock options and compensation plans can be intimidating — especially for first time founders or employees working at a startup for the first time. New terms are thrown and legal documents are thrown around in conversation which can lead to confusion and intimidation. However, this does not need to be the case. The guide below is intended to help both startup founders and employees understand the basics on employee stock options. Investopedia defines employee stock options as, “a type of equity compensation granted by companies to their employees and executives. Rather than granting shares of stock directly, the company gives derivative options on the stock instead. These options come in the form of regular call options and give the employee the right to buy the company’s stock at a specified price for a finite period of time. Terms of ESOs will be fully spelled out for an employee in an employee stock options agreement.” The benefit of ESOs for early employees is quite simple. By choosing to work for a startup an employee is taking an inherent risk. To get compensated for the risk employees are offered ESOs. If the startup’s stock price rises above the exercise price, an owner of stock options will make out well. On the flip side, startups are also incentivized to offer employee stock options. By offering stock options founders and startups are incentivizing employees to work towards growing the company’s valuation and also encourages an employee to stay with the company as they have to wait for the stocks to vest (more on that later). Ultimately, employee stock options are an instrumental part of finding and retaining top talent for startups. While strapped for cash, startups often cannot compete with salary offers from larger firms so can attract top talent by offering equity and ownership in the company. Is an Employee Stock Ownership Plan (ESOP) the Same Thing? Similar but not to be confused with employee stock option plans are employee stock ownership plans. As defined by the SEC, “An employee stock ownership plan (ESOP) is a retirement plan in which the company contributes its stock (or money to buy its stock) to the plan for the benefit of the company’s employees. The plan maintains an account for each employee participating in the plan. Shares of stock vest over time before an employee is entitled to them. With an ESOP, you never buy or hold the stock directly while still employed with the company. If an employee is terminated, retires, becomes disabled or dies, the plan will distribute the shares of stock in the employee’s account.” The key difference between an employee stock ownership plan and employee stock option is that an ESOP is a retirement plan. Whereas an ESO is when an employee has the right to buy shares at a set price over a given period of time. Related Resource: How to Choose the Right Law Firm for Your Startup Are there different types of employee stock options? Employee stock options come in two main types of options: incentive stock options and non-qualified stock options. The main difference between the two mostly revolves around their tax structure. There is a third type rarely used called “restricted stock units.” For the sake of this post we will be focusing on incentive stock options and non-qualified stock options. Incentive Stock Options (ISOs) As defined by Investopedia, “an incentive stock option (ISO) is a company benefit that gives an employee the right to buy stock shares at a discounted price with the added allure of a tax break on the profit. The profit on incentive stock options is taxed at the capital gains rate, not the higher rate for ordinary income.” Let’s break that down. To get started, there are a few tax benefits when it comes to ISO. The first benefit comes when exercising (AKA buying) your shares. Generally speaking, you do not have to pay taxes when buying incentive stock options. Assuming you exercise your shares and hold on to them for at least one year, you qualify for a tax benefit on the selling end as well. As Investopedia mentions above, when selling your ISO shares you are potentially taxed at capital gains as opposed to ordinary income. Generally speaking capital gains taxes are less than ordinary income taxes. This means that you’ll be taxed at the lower bracket. However, if you sell your shares immediately after exercising you will be taxes at the ordinary income level (similar to Non-qualified stock options). ISOs are generally awarded to high level managers and high value employees. For a startup, this usually means the early employees and founders. Non-Qualified Stock Options (NSOs) On the opposite end of incentive stock options are non-qualified stock options. As defined by Investopedia, “a non-qualified stock option (NSO) is a type of employee stock option wherein you pay ordinary income tax on the difference between the grant price and the price at which you exercise the option.” So how do NSOs differ from ISOs? As we mentioned earlier, it comes down to the tax benefits. Whereas incentive stock options are only taxed when selling (and potentially taxed at the capital gains rate), non-qualified stock options are taxed when exercising and selling your shares. Non-qualified stock options are more common than incentive stock options. Related Resource: The Main Difference Between ISOs and NSOs How Do Employee Stock Options Work? It is important for both startup founders and early employees it is important to understand how employee stock options work. The different tax structures, terminology, and legal documents can make it an intimidating task. As stock options are an integral part of startup culture there are a few terms and ideas that everyone should be familiar discussing. Granting Generally when signing a job offer you will receive an offer grant. This is when the company is offering/”granting” the option to buy stocks. It is important to remember that stock options are not actual shares of stock but rather the option to buy these shares at a set price on a later date. So how do you make money on stock options? When the price between the offer or grant price (the price you can buy the shares at) and the market value of the company rises. At the time of receiving an offer letter you will also receive a stock option agreement. This document will include different dates, terms, and details that are pertinent to your grant. This includes what type of options you will receive, number of shares, vesting schedule, and the expiration date. Vesting Vesting is a mechanism that companies can use to encourage employees to stay longer. As defined by Investopedia, “Vesting is a legal term that means to give or earn a right to a present or future payment, asset, or benefit. It is most commonly used in reference to retirement plan benefits when an employee accrues nonforfeitable rights over employer-provided stock incentives or employer contributions made to the employee’s qualified retirement plan account or pension plan.” As we mentioned earlier when you receive a stock option this is not actual shares but rather the ability to buy shares at a later date. In order to retain employees, most companies will include a vesting schedule with their offer. This is the schedule in which you will have the ability to exercise your shares. A vesting schedule usually takes place over a period of time and may be split over the course of a few years or milestones. The most common vesting schedule for startups is a time-based schedule. This means that you’ll receive a set amount of shares over a set amount of time. Usually there is a “cliff” which is a set date where you get the first portion of your shares. The most common startup setup is a 4 year vesting schedule with a 1 year cliff. This means that after working for a company for a full year, the employee will receive the first quarter of their shares (1 year cliff). After the first year, the employee will receive their remaining shares over the next 3 years on a specific calendar. Usually 1/36 of the remaining shares each month. What Are the Benefits of Employee Stock Options? There are clear pros and cons of employee stock options. Generally speaking the benefits of ESOs outweigh the cons. From the perspective of a startup, the benefits of ESOs are quite clear. Generally speaking startups are strapped for cash and may not be able to compete with larger firms hiring for the same positions. When top talent is evaluating where to work they are generally looking for a few things: ownership, collaboration, transparency, and growth. Ownership can come in 2 forms, ownership in their work and ownership in the company. Offering ownership in the form of stock options is a surefire way for a startup to find and retain top talent. At the end of the day, early startup employees are taking a risk and likely a paycut to join a team that is attacking an interesting market or building a strong product. Rewarding talent for taking the risk is a must for early stage startups. Pros As we alluded to above, the pros of offering employee stock options are quite clear for a startup. On top of the ability they can be used as a tool to attract and retain top talent there are a few other pros: Employee stock options give employees ownership in the company. This leads them to feel more invested in the success of the business. ESOs offers startups financial benefits. Instead of paying a large salary they can make more competitive and attractive offers. ESOs also improve employee retention. This will allow human resources and management to focus on building the business as opposed to hiring new talent. Employees are directly rewarded for the growth of the company. If the valuation of the company goes up, so does their net worth. If employees are offered incentive stock options (ISOs) instead of Non-qualified stock options (NSOs) there are plenty of tax incentives. However, with pros comes cons. While not as plentiful as the pros of offering employee stock options there still are cons of offering ESOs. Cons As we mentioned above, there are still cons when it comes to startups offering employee stock options. A few common cons startups often see with employee stock options are: While the examples above are the most basic forms of tax implications. However the tax structure can get complicated and frustrating for employees. The more shareholders you have on the captable the more important dilution becomes. Dilution can be costly for investors and employees on your cap table and will be something startups need to be wary of. Valuing stock options can be difficult. At the end of the day, the value is on paper. Employees are required to rely on the output of their co-workers and management to make sure their stock is valued as high as possible. Related Resource: Everything You Should Know About Diluting Shares While the pros generally outweigh the cons of offering employee stock options. There still are cons that startups and founders need to work through when it comes to offering stock options as a form of employee compensation at their company. How to Issue Employee Stock Options? Deciding when and how to issue employee stock options can be a difficult task. A startup or founder needs to understand how much they should pay employees in cash and then add in stock options. When setting out to issue stock options it probably looks something like this: Define the role you are looking to hire. Decide what their total compensation should be. This can be taken from similar job postings and the market as a whole. Decide how much of their total compensation you would like to pay in cash (AKA their salary). Determine the gap between their salary and total compensation. This is entirely up to the startup or founder. It can be difficult to place a number here as the value of the company is solely on paper. Samuel Gil of JME Partners recommends doubling the value here. For example if there was a $10K difference in their salary and total compensation a startup should offer $20K in added compensation. The next step is to determine the exercise price for the stock options. As Samuel Gil writes, “As we have previously reasoned, we will assume that a fair price for the stock options is the same as the price of the common stock. So, how much is the common stock worth? The most frequent procedure is to apply a discount (e.g. 25%) to the latest preferred stock value, since common stock doesn’t have the same economical and political rights that preferred stock (what VCs usually buy) does.” Issue the number of shares. This is up to the startup and founder but can be calculated with the logic above. If you find the common stock price to be $5 and need to compensate an employee $20K that would be 4000 shares. This can be quite subjective as we need to remember dilution and valuation can rapidly change. Related Reading: How do you Determine Proper Compensation for Startup CEOs and Early Employees? How Are Stock Options Taxed? As we mentioned above the tax benefits, or lack thereof, are an integral part of employee stock options. To recap here, the main difference comes between incentive stock options and non-qualified stock options. On one hand, we have incentive stock options. ISOs offer many tax benefits. ISOs are only taxed when selling the shares of stocks — and only taxed at the capital gains rate (which is generally less than ordinary income tax). On the other hand, we have non-qualified stock options. While more common, NSOs do not offer the same tax benefits as incentive stock options. NSOs are taxed both when exercising and selling. What Happens When Employee Stock Options Are Exercised? We’ve covered what stock options are, how they are issued, how they are vested, and how they can be a benefit for both employees and startups. But what happens when ESOs are actually exercised? As we mentioned above, an employee usually does not have the ability to exercise their stock options until they have vested. For this example, we will say this is on a standard vesting schedule so they are allowed to exercise their options after the 1 year cliff. So what happens after year 1 when an employee is allowed to exercise their options? Depending on your company, there may be a few different options when it comes to exercising your stocks. Two common options for exercising stock options you might see: Pay cash — use your own cash to pay for the shares yourself. This is the highway risk approach as you are not guaranteed to make any profit on your share moving forward. Cashless — on the other hand you can use a cashless approach. This means one of two things. You can either sell enough of your shares to cover the purchase price of your shares. Or you can sell all of your shares in a single move. Employee Stock Options Terms You Should Know As we’ve alluded to throughout the post, there are quite a few terms, conditions, documents, etc. that all parties should be familiar with when navigating their employee stock options. Below are a few employee stock options terms you should know: Vesting — The process used to reward shares and stocks to employees. Generally this takes place over a period of time so shares are gradually rewarded. A common schedule for startups takes place over 4 years with a cliff after year 1. Vesting allows startups to retain employees by slowly rewarding shares. Incentivized Stock Options — One common form of employee stock options. Incentivized Stock Options are more preferable for tax purposes. Generally, someone only pays capital gain taxes when selling their shares. Non-qualified Stock Options — The other common stock option is non-qualified stock options. While more common, NSOs require someone to pay more taxes. NSOs are taxed when exercising and selling their shares. Restricted Stock Unit — Restricted stock units are grants of stocks a company will offer employees that do not require purchase. Employee Stock Ownership Plans — Employee stock ownership plans is a retirement plan for employees. Employers contribute stocks to an ESOP account over a scheduled period. An employee participating in an ESOP plan never buy or holds the stocks while being employed by the company. Employee stock options are an integral part of a startup’s success. ESOs are a powerful tool to attract and retain top talent. In order to best set up your ESO plan, you need to understand the basics of employee stock options. To learn more about attracting and retaining top talent, subscribe to our Founders Forward Newsletter We search the web for the best tips to attract, engage and close investors, then deliver them to thousands of inboxes every week.

In a SaaS business, it’s critical to understand how your sales and marketing spend is affecting your annual recurring revenue (ARR) growth. In order to better help you understand how efficiently you are growing you need to understand your SaaS magic number. So what is your SaaS magic number? The SaaS magic number is a way to evaluate whether or not you should continue to invest in customer acquisition, or take your foot off the gas. Related resource: How to Start and Operate a Successful SaaS Company Why Use the SaaS Magic Number? Lars Leckie popularized the ‘Magic Number’ as a SaaS metric in the mid-2000s, citing it as a way to help companies decide ‘how much gas to pour on the fire’ of your startup. Subscription businesses are fortunate to have clearly definable payback periods, but it’s critical to understand the influence of today’s spending on future performance. The magic number helps SaaS companies determine the impact of sales and marketing spending on ARR growth. So why track the SaaS magic number for startups? Understand Your Sales & Marketing Efficiency Ultimately your SaaS magic number is a metric intended to uncover just how efficient your go-to-market efforts are. By measuring your magic number, you’ll be able to better forecast future ARR growth and make sure your team is scaling in an efficient manner. Evaluate Where to Spend Because your magic number helps you understand your efficiency, you can easily translate this data to find the specific channels and go-to-market methods to put your focus, and dollars, behind. How to Calculate Your SaaS Magic Number There are many great resources that explain how the magic number is calculated. The SaaS CFO has an excellent in depth breakdown on the topic. Here is the SaaS magic number formula: (Current Quarter Revenue – Previous Quarter Revenue) *4 / Previous Quarter Sales & Marketing Spend Let’s say that you spend $100,000 on sales and marketing last quarter to create a monthly recurring revenue (MRR) increase of $25,000 for the quarter. This $25,000 will become $100,000 in ARR, provided that churn is minimal. In this case, your $100,000 in sales and marketing spend has earned you $100,000 in new ARR, resulting in a SaaS magic number of 1.0 for the quarter. This implies that you’ll pay back your sales and marketing expenses within a year. SaaS Magic Number Benchmarks A SaaS magic number of 0.75 or greater is said to be a sign that you should continue to invest in customer acquisition, while anything less than 0.75 means that you should reevaluate your spending. Many in the SaaS community view a magic number of 1.0 or greater to be ideal. However, you need to be careful not to view this in isolation. While the magic number is great at helping you determine how efficiently you can create new revenue, it won’t show the whole picture. Check out the SaaS magic number benchmarks below: Less Than 1 Between 0.75 and 1.0 is a relatively green zone and represents that you can continue to invest in your sales & marketing efforts. However, if you’re magic number is much lower than that there might be something noticeably wrong in your process. For example, churn could be abnormally high or your customer acquisition costs (CAC) might (learn more about CAC ratio here) not warrant your current pricing model. The goal here is to improve period over period to get closer to a magic number of 1 or greater. Equal to 1 As we mentioned above anything around 1.0, warrants further investment. Your current go-to-market process is likely working and it is time to start putting fuel on the fire. As Lars Leckie puts it, “if you are above 0.75 then start pouring on the gas for growth because your business is primed to leverage spend into growth.” Greater Than 1 If your magic number is greater than 1 you likely are building a well-run machine. Revenue growth should almost feel easy at this point. You should pour on more investment and can test new channels and customer acquisition models along the way. Other Metrics You Need To Use With the SaaS Magic Number Your magic number may be great, but it doesn’t tell the whole story – be sure to factor these metrics in when evaluating your sales & marketing spend. Churn Rate Is your churn rate low? If your sales and marketing expenses are helping you generate new ARR, it doesn’t matter how effective you are at acquiring new customers if you can’t keep them for long. Customer retention is key to a solid SaaS magic number. Gross Margins What are your gross margins? If you have high COGS (and thus, lower gross margins), then you should keep in mind that the sales and marketing expenditure payback period will be longer. Just because your magic number may be greater than 1, doesn’t mean you should ramp up spending on customer acquisition until you know how long it will take to truly pay back the cost of those new clients. Cash Flow How much cash do you have to spend? This may seem self explanatory, but you should be careful not to break the bank just because you’re efficient at acquiring new customers. Downturns and unexpected events happen – be sure you have your cash flow modeled and keep it in check. You won’t be able to service your new customers if you run out of cash. How to Track Your Key SaaS Metrics The SaaS magic number is only one of many metrics that you should be tracking – be sure to check out our Ultimate Guide to SaaS Metrics to make sure you’re keeping an eye on every area of your business. Track your key SaaS metrics, share investor updates, and engage your team all from Visible. Try Visible for free here.

Finding deal flow is a daily challenge for investors. Every investor has their own "secret sauce" for sourcing new deals. However, there are underlying technologies that investors can leverage to better their deal flow. In this webinar, we cover: Using tech to uncover and find new deals Best Practices for Managing Potential Investments & Relationships Best Practices for managing current portfolio companies Other tech in the VC toolkit 5 minute demos of Visible and 4Degrees

What is Annual Run Rate? Annual run rate is the rough estimate of a company’s annual revenue based on existing monthly or quarterly data. Annual run rate has been around for a while, and is not to be confused with annual recurring revenue – an important metric for subscription business models. Both are sometimes abbreviated as ‘ARR,’ but you should know that annual recurring revenue only applies when you have monthly or annual subscriptions as a source of income. While annual recurring revenue is obviously useful for companies who sell yearly subscriptions to large enterprises, it can also be used to project total ARR for companies that sell a product with monthly recurring revenue. You can calculate this by simply multiplying MRR x 12. You should also exclude one-time on-boarding or setup revenue, and factor in your anticipated churn rate when creating annual projections. How to Calculate Annual Run Rate Annual run rate on the other hand can be used to project the future performance of any business. A company could use run rates to help calculate annual burn rate and prepare for future demand. Annual run rates are calculated by using current or past performance to estimate what your business will do in the future. For example, if you’ve done $100k in Q1 revenue and $150k in Q2 revenue, you could predict that you’ll do an additional $250k in revenue for the rest of the year, bringing you to an annual revenue run rate of $500k. Annual Run Rate Examples To help you illustrate how to calculate your annual run rate, we’ve put together an example below: For the example, we have $12,000 in monthly recurring revenue and 12 months in a year. So we take $12,000 x 12 months to equal an annual run rate of $144,000. When Are Annual Run Rates Useful? Tracking annual run rates tends to be more useful when you need to predict future demand, and also when calculating annual burn rates. Both of these situations require you to allocate resources properly for the health of your business. They can help you determine how much inventory you need to hold if you’re a DTC brand, or how many new sales reps you’ll need to hire if you’re an enterprise SaaS company. In addition to this, they can help you determine how much funding you’ll need to reach profitability. Predict future demand By keeping track of your annual run rate, you’ll be able to better predict future demand. This not only helps with hiring plans, go-to-market strategy, and operational metrics but will also help lay the groundwork for inventory and funding needs. Determine inventory needs An annual run rate is an easy way to project your inventory needs oven a given period of time. However, seasonal businesses or those with volatile growth should be cautious when using run rates. For example, Amazon should not use their performance during the holiday season to project annual revenue, just like you probably shouldn’t use your mid-pandemic April 2020 metrics to predict the rest of the year. Determine funding needs An annual run rate is also a great tool to help early-stage companies determine their funding needs and timeline. You’ll be able to keep a close eye on your cash efficiency. Or even better, you can demonstrate past and future success to entice potential investors with your ARR. When Shouldn’t You Use Annual Run Rate? As we briefly mentioned earlier, there are certainly a few downsides to ARR and reasons that companies should not track it. Seasonality Many industries face seasonality and changes in buying patterns throughout different seasons. For example, a D2C company that thrives during the holidays will not want to use their data from peak season as it will demonstrate unrealistic growth and revenue. One-time sales and expiring contracts Additionally, companies that have one-time sales or large onboarding fees should avoid using an annual run rate. One time sales will not correctly portray the actual go-to-market and sales figures to give you the data you need to make informed decisions. How to Use Run Rates Effectively At Visible, we recommend being conservative with your run rate calculations to maximize the quality of your decision-making. Be careful about annual run rates – they can lead to incorrect forecasting, as not every quarter is the same. Growth can be nonlinear and the past is not the future. Overly optimistic run rates can kill companies, so you should err on the side of overestimating your expenses, and underestimating revenue. Share your run rate with investors and team members using email Updates and automated Dashboards using Visible. Try Visible free for 14 days. Other Helpful Metric Resources: Our complete guide to SaaS metrics Another great primer on SaaS metrics with advice from NetSuite & HubSpot executives How to calculate your natural rate of growth Monthly Recurring Revenue (MRR) Explained: Definitions + Formulas Customer Acquisition Cost (CAC): A Critical Metrics for Founders

Getting regular, high quality, and actionable data from portfolio companies is important. It allows you to make better decisions, support your portfolio, share insights with portfolio company founders, report to LPs and more. This practice should also be highly valuable for founders. They should be able to share wins, challenges and get help from you, their stakeholder. It should only take them 3 minutes to complete (if not, either something may be wrong with the request or structurally wrong with the company). Below are some best practices to make sure you get: Timely information (e.g. 100% completion) Structured data(comparing apples to apples) Actionable insights (how can we help companies) Timing & Cadence Same time every period Set the expectation that you will be sending a request the same time every month. e.g. your request will be due the 20th post month or quarter end. Don’t randomly switch between the 10th, the 30th, etc. Founders will not have an expectation and know they can submit whenever they want. Luckily Visible makes this easy for you. You’ll be to set you schedule and we take care of all emails, due dates and reminders. Appropriate Cadence We recommend the following cadences. This is 100% customizable as every fund is different. Weekly – Accelerators in Cohort Monthly – Pre-Seed, Seed, Series A Quarterly – Series B & later Request Content Less is more. Don’t send a request asking for every metric under the sun. Only get the information you truly need. If you are truly providing value back to the founders, then start small, get a rhythm and expand the data. Metrics 5-15 Metrics. Depending how closely you work with companies, ask for 5-15 metrics and no more. Use a metric description! If you are asking for Burn and don’t provide context, you might get 15 different variations. Should it be negative? Should it be trailing 3 months or current month? Should it include financing? Be descriptive about what you want. **Here is our Metric Library** that has some helpful descriptions. Qualitative Info How can you help? Always make sure to use a qualitative section to see how you can best help the portfolio. Also let the founder share their wins and challenges if it makes sense! Rollout Let your current (and new) portfolio companies know to expect a regular request from you and what to expect. Intro Template Feel free to use our Intro Copy Template if you need some inspiration. Custom Domain All of your requests will come from you. However, with Visible you can fully white label the request emails so they come from your email and domain.

Naval Ravikant, the founder of AngelList, recently began a new project called Spearhead. The program gives founders $1M to start angel investing, and seeks to educate those who wish to enter the space. The Spearhead podcast, meant to scale these efforts, is a treasure trove of insights not just for those who wish to be angels, but for entrepreneurs looking to raise a Seed round. You can find the full podcast & transcribed episodes at spearhead.co. Here are 7 insights for founders from the podcast: Angels build brands. Be aware of who you’re associating yourself with. Investors in early stage companies need not just deal flow, but access to the best deals. To get access, angels build brands. They do this in many different ways – Jason Lemkin built the SaaStr conference, Naval built AngelList, and Fred Wilson blogs. You should be mindful that the brands you associate yourself with in the early days can have an impact on the future of your company. Angels with great brands can get you access to key hires, new customers, & helpful mentorship. Future investors may also use the brand of your angels as a signal as to whether or not they should invest. If your early stage investors have have a track record of success, securing later funding gets easier. Avoid angels who put too much on the line. It can lead to bad behavior. If an angel invests so much into your company that they stand to lose a large portion of their net worth if you fail, this could lead to tense situations. This applies to family member & friend investments as well. Angel investing is a high risk sport, you should only play with people who understand this. Don’t use FOMO as a fundraising tactic. The best angels refuse to be pressured into a deal. Telling a high level angel investor that they ‘only have 24 hours to get into the round!’ can backfire. There is a fine line with this, as social proof and scarcity are tools that you need to leverage when fundraising. However, being overly aggressive or pushy makes people hesitant about working with you – especially investors with experience and strong brands. Social proof is key. Angels are often wary about getting involved in deals where they have no network connections to the founders or fellow investors. Naval & Nivi explain this by saying that good angels should be cautious about deals that are made up of complete strangers. If a founder is raising money and none of their direct connections or past investors are involved, that may be a bad sign. Similarly, if an angel with excellent judgement writes a huge check to a company, it sends a message to other investors that they’re a strong bet. Cold emailing is part of the fundraising process, but you’ll have far more success with people you already know. Your network is critical. Build it before you have to. Get your psychology right. Great founders often toe the line between visionary & madness. To build a massive company, you need to attempt something that most people don’t think will work. It takes a special mindset to do this. Naval explains that great angels don’t expect founders to be ‘coachable’ or have perfect records, as they sometimes have to operate as an outsider at first to be successful. Instead, founders should be aggressive and seek to build traction. However, you should avoid the perils of over-aggressiveness. If you prioritize hyper growth at the expense of traction, you can end up ‘blitzfailing’ as David Sacks explains on a guest episode of Spearhead. You need to keep your genius in check, and ensure that you’re prioritizing the right things in your business. Build a technical network. Angels are looking for huge returns in exchange for taking a chance on you. This is an all or nothing game, and you’ll need to be very right when others are wrong. It’s often the only way to generate massive returns. This is why you should solve technical challenges where you have what Naval calls ‘specific knowledge.’ Many of the most valuable startup opportunities are in technology. Build relationships with scientists & technologists at the source of new developments. These people can give you access to angels who seek to invest in tech companies, in addition to talent and insight that comes from the source of innovation. Get your team right. Angel investors are betting on founding teams more than their initial ideas. Pivots are common in startups, and savvy early stage investors understand this. When a company pivots, the common denominator ends up being the team the angels invested in. Naval explains that you should seek to create a company of world class builders, salespeople, & community creators. These are vague categories that take on different meanings in different industries. A builder could be a software engineer or a logistics expert, while a seller could be a fundraiser or a marketer. The key is to have both. An amazing product with no distribution won’t win, and Naval calls the outsourcing of product development a “red flag.” Team up with skilled people who have the 3 traits Naval & Nivi look for in partners – intelligence, energy, and integrity. If you do this, you’ll attract investment, and be more likely to whether the inevitable storms that come with starting a company. When marketing any product, you start by understanding your customer. Why wouldn’t you do the same when selling investment opportunities in your company? We think that Spearhead is a great entry point into understanding the psychology of an angel investor, and hope that you can use these insights when raising funding for your early stage startup. Want more advice delivered to your inbox every Thursday? Subscribe to our Founders Forward Newsletter. We search the web for the best tips to attract, engage and close investors, then deliver them to thousands of inboxes every week.

Raise capital, update investors and engage your team from a single platform. Try Visible free for 14 days. What are the advantages of angel investors? When trying to get investors to fund your company, you should know that funding comes in a variety of flavors. You will have access to different types of investors depending on your industry, company stage, and size. A common question we receive when talking with new founders is about the difference between varying types of investors. In this post, we’ll explain the the differences between angel investors and venture capitalists and the advantages of angel investors. Angel investors and venture capitalists have many things in common. In principle, VC’s and angels perform like functions – they invest in your company in exchange for a percentage of ownership. The amount of money they give and the total number of shares they take is dependent on their valuation of your company. To better understand the advantages of angel investors and VCs, we need to take a look at the differences between angels and VCs. Angel Investors vs. Venture Capitalists VC funds are often organized under the limited partnership (LP) model. They raise large sums of money from institutions – such as pension funds, endowments, and family offices, then invest that money in exchange for a share of the return & management fees (see this excellent article by Elizabeth Yin for a deeper explanation on how VC’s make money).This gives them incredible leverage and financing power, but often leaves them under the watchful eye of LP’s who want a return on schedule. Angel investors usually operate under a different model. Most tend to be high net worth individuals, and in many cases have built and exited a company themselves. They need to be accredited investors who can stomach the inherent risks involved with early stage startups. Because angel investors tend to have smaller sums to invest than VC funds, you’ll often find them in Pre Seed and Seed rounds. VC’s tend to participate across all rounds, but typically only they can afford to play the game in Series B and beyond, as the shear amount of money required tends to be out of the range of most angels. How Angels and VCs Can Help Angel investors can often play a role in providing crucial company building guidance in the early days. Because they tend to arrive on the scene early, they stand to make a massive return if your company succeeds. VC’s can be equally helpful, and they’ll sometimes place a member of their fund on your board who can assist in guiding the direction of your company. And, if you’re successful after raising funding from them, they’ll often provide and help orchestrate follow on investments as you continue to grow. While you can benefit from raising from both angels and VC’s, it’s important that you be careful and seek to partner with investors who are high integrity. Some VC’s are known for asking CEO’s to step down the moment that things don’t go well, while angels can try to become too involved in the operation. There’s an apocryphal quote about the average founder / investor relationship being longer than the average marriage – we recommend keeping that in mind when doing diligence on your angel investors and venture capitalists. Advantages of Angel Investors While you can benefit from raising from both angels and VC’s, it’s important that you be careful and seek to partner with investors who are high integrity. Some VC’s are known for asking CEO’s to step down the moment that things don’t go well, while angels can try to become too involved in the operation. There’s an apocryphal quote about the average founder / investor relationship being longer than the average marriage – we recommend keeping that in mind when doing diligence on your angel investors and venture capitalists. What Kind of Money Do You Want? Not all investments are created equally. Do you want an investor that will write you a check and leave you alone? Are you interested in ‘smart money’ that will help you build your company? Do you want mentorship in exchange for a board or advisory seat? No one can answer these questions for you, but it’s important to keep it them mind when evaluating the pros & cons of angel investors vs venture capitalists. Fundraising is one of the hardest jobs in the world – you should try to make it worth it. To learn more about fundraising, subscribe to our weekly newsletter here.

NextView Ventures is a hands-on seed venture capital firm based in Boston. The team at NextView makes 10-12 investments a year so its fair to say they’ve seen their fair share of investor update email templates. David Beisel, Partner at NextView, recently put together a great seed investor update template for startup founders. As David Beisel, partner at NextView Ventures, wrote in his investor update post, “First and foremost, investors (whether they say it or not) prefer over communication of what’s happening at the company, both the good and the bad. And a regular update with candor about what is going well and what is not signals an orientation towards transparency, which in turn engenders trust. This trust can yield benefits later on if the company faces a challenging situation in which it requires to raise more capital outside a position of strength.” By building trust, this will only unlock further benefits down the road. When you stay top of an investor’s mind they will be more inclined to help with networking, hiring, fundraising, decision making, and more. You can check out the NextView seed stage update template below or continue reading for a deeper breakdown of the template. The Seed Stage Investor Update Template As David writes in his post, “In terms of form, we recommend an update email that is short and sweet. After all, the goal is to have investors actually read it!” The seed stage investor update template from NextView is similar to the other seed stage templates we have seen in the past. The template is largely broken down into the easily digestible sections below: TL:DR; The TL:DR; section is used to give a short and sweet overview of the entire update. This can include a sentence or two overview of the last period with a bullets highlighting key initiatives and specific areas where you need help. Highlights The highlights section is exactly what it sounds like; a section to showcase your team’s wins over the last period. Make sure to share goals that you achieved or other company and team initiatives that are moving your company forward. Core Metrics Include 3 to 5 key metrics that are related to the success of your business. Your investors should be familiar with your metrics and should know what to expect here. With each metric be sure to include a chart or visualization and a brief recap of the last period’s performance. Challenges Arguably the most difficult section to craft, this can also be one of the most important sections for your investors. Mentioned where you missed the mark and what your plans are for improving this moving forward. Investors know that building a startup is hard and are fully expecting challenges and road bumps along the way. Goals This section should lay out your major company goals over the next few weeks or months. You will want to be sure to revisit these goals in a future update. Asks and Thanks Use this section to call out specific people, investors and teammates, that went above and beyond over the past few weeks or months. This will not only make the person feel good but will also motivate others to help in the future. Finances Share the vital metrics to your companies financial health. David encourages founders to share cash in bank, runway, and burn rate. If anything unexpected happened over the past period, be sure to call it out. Bonus points if you include a financial document or link to a spreadsheet. We hope this template is helpful. To learn more about best practices for sending regular investor updates, check out our template library here.

Over the last few months we’ve directly helped a few of our customers with their venture fundraise. One of the questions that continues to come up is, “how should I display my sales and marketing plan in my pitch deck?” In order to best help our customers, we’ve set out to research and find out how to best display go-to-market strategies. Your Business Model Your business model often goes hand-in-hand with your go-to-market and customer acquisition strategy. At the end of the day, an investor needs to make a return on their investment. In order to do so, investors need to clearly understand how your company will make revenue. In the Guy Kawasaki pitch deck template, Guy suggests sharing your business model in slide 5 and following that with your marketing and customer acquisition plan in slide 6. Assuming you have a solid understanding of your business model, you’ll need to clearly articulate how you will acquire new customers and retain existing customers. Your Go-to-Market Strategy Being able to show a repeatable and efficient process for acquiring new customers is a must. Investors want to make sure that they will not be throwing their money down the drain. Going into a pitch with potential investors you need to understand your go-to-market strategy like the back of your hand. Make sure your GTM strategy slide is easily digestible and can be easily understood without added context. Still developing your GTM strategy? Check out how Nick Loui, CEO and Founder of PeakMetrics, found their first customers below: Customer Acquisition Costs & Strategy One of the key metrics that investors will want to understand is your costs to acquire a new customer. (Learn more about CAC here). It is important to demonstrate to your investors that your customer acquisition costs are less than your customer lifetime value. This will help showcase your path to profitability. Ablorde Ashigbi is the Founder and CEO of 4Degrees. Earlier this year, Ablorde wrapped up a round of financing for 4Degrees. We went ahead and asked Ablorde what tips he has for founders looking to showcase their CAC in a pitch deck. His response: Don’t present CAC without a corresponding view of LTV Don’t present a blended CAC (including both organic and paid – only include conversions that came from paid channels) For earlier stage companies, payback period equally (maybe more) important than pure LTV / CAC When it comes to presenting your GTM strategy and customer acquisition costs it all comes down to simplicity. An investor should be able to take a look at your slide and know exactly how your business functions. Under the current circumstances and in the wake of larger companies failing to find profitability, a financially responsible customer acquisition strategy is more important than ever. If you have your own tips for presenting your GTM and customer acquisition strategy, we’d love to hear it. Shoot a message to marketing at visible dot vc. Related Resource: Customer Acquisition Cost: A Critical Metrics for Founders

Term sheets can be intimidating as a first-time founder. As it is likely the first time you’ve seen a term sheet, the intricacies of the deal can be difficult to understand. You can spend hours trying to understand a term sheet and what exactly makes up a “good” term sheet. As the team at YC writes, “we’ve noticed a common problem: founders don’t know what “good” looks like in a term sheet.” If you’re looking for a breakdown of a term sheet specific to Series A, check out our blog post, “Navigating Your Series A Term Sheet.” In order to help founders best understand their term sheets, many firms and individuals have come up with their own term sheet templates. In fact, many investors and founders now use a 1-page term sheet template. Check out our breakdown of term sheet components with a few templates below. As a note, this is not legal advice and we suggest consulting with your lawyer while reviewing your term sheet. Related Resource: How to Choose the Right Law Firm for Your Startup VC Fundraising Timeline As we often write about at Visible, we believe a startup fundraise shares a lot of characteristics of a B2B sales funnel. In the most simple breakdown — at the top of the funnel you are bringing in new investors, in the middle you are nurturing them through investor updates and meetings, and at the bottom, you are signing term sheets and building relationships with new investors. Kicking off a VC Fundraise Once you have formed your company and launched/are preparing to launch a product you may decide to pursue venture fundraising (to learn more about determining if VC funding is right for you, check out this post). Before kicking off a fundraise, especially at seed stages and later, you likely have some form of product-market fit. Finding Investors If you’ve decided VC funding is right for your business. You’ll need to start finding investors to “fill the top of your funnel.” Check out Visible Connect, our free investor database, to filter and find the right investors for your business. If you’re earlier in your company lifecycle and want to find angel investors, check out this post. Pitching Investors Once you start reaching out to investors (via cold email or warm intros) you’ll begin a series of meetings and pitches with the hopes of moving them down the funnel. Check out our template and guide for pitch decks here. Related Reading: How to Write the Perfect Investment Memo Due Diligence and Final Steps If an investor is interested in moving forward, you will likely begin due diligence where they will audit your data, get feedback from customers and investors, and confirm their conviction in your company. If they decide to move forward, next comes a term sheet. Term Sheet At the end of a fundraise comes the term sheet. Assuming both parties are happy with the terms, you’ll be able to onboard your new investor. 6 Components of A VC Term Sheet Liquidation Preferences Liquidation preference is simply the order in which stakeholders are paid out in case of a company liquidation (e.g. company sale). Liquidation preference is important to your investors because it gives some security (well, as much security as there is at the Series A) to the risk of their investment. If you see more than 1x, which means the investor would get back more than they first invested, that should raise a red flag. To learn more about liquidation preferences check out this article, “Liquidation Preference: Everything You Need to Know.” Dividends In the eyes of an early-stage investor, dividends are not a main point of focus. As Brad Feld puts it, “For early-stage investments, dividends generally do not provide “venture returns” – they are simply modest juice in a deal.” Dividends will typically be from 5-15% depending on the investor. Series A investors are looking to generate huge returns so a mere 5-15% on an investment is simply a little added “juice.” There are 2 types of dividends; cumulative and non-cumulative. YC warns against cumulative dividends; “the investor compounds its liquidation preference every year by X%, which increases the economic hurdle that has to be cleared before founders and employees see any value.” Conversion to Common Stock Common practice will automatically convert preferred stock into common stock in the case of an IPO or acquisition. Generally, Series A investors will have the right to convert their preferred stock to common stock at any time. As Brad Feld puts it, “This allows the buyer of preferred stock to convert to common stock should he determine on a liquidation that he is better off getting paid on a pro-rata common basis rather than accepting the liquidation preference and participating amount.” Voting Rights On a Series A term sheet, the voting rights simply states the voting rights of the investor. Generally, your Series A investors will likely receive the same number of votes as the number of common shares they could convert to at any given time. In the Y Combinator example, as with most term sheets, this section can include some technical jargon that is not easy to understand. The most important vetoes that a Series A investor usually receives are the veto of financing and the veto of a sale of the company. Board Structure One of the more important sections when navigating your Series A term sheet is the board structure. Ultimately, the board structure designates who has control of the board and the company. How your Series A investors want to structure the board should be a sign of how they perceive you and your company. The most “founder-friendly” structure is 2-1. A scenario in which 2 seats are given to the common majority (e.g. the founders who control a majority of the common stock) and 1 given to the investors. This allows founders to maintain control of their company. On the flip side, there is a 2-2-1 structure (2 founders, 2 investors, 1 outside member). In this scenario, it is possible for the founders to lose control of the company. While a common structure, be sure that the board structure is in line with conversations while fundraising. As Jason Kwon of YC puts it, “So when an investor says that they’re committed to partnering with you for the long-term – or that they’re betting everything on you – but then tells you something else with the terms that they insist on, believe the terms.” Drag Along As defined by the Morgan Lewis law firm, “Drag along is the right to obligate other stockholders to sell their securities along with securities sold by the investor.” Drag along rights give investors confidence that founders and the common majority will not block the sale of a company. While there is no way around drag-along rights, some people will suggest that founders negotiate for a higher “trigger point” (e.g. ⅔ votes as opposed to 51%). You can learn more about drag along clauses in this post, Demystifying the VC term sheet: Drag-along provisions. VC Term Sheet Examples The Y Combinator Term Sheet Template With thousands of investments under their belt, Y combinator is always a great place to start when looking for startup best practices. The team at YC put together an awesome 1 page term sheet template (with a focus on Series A) that any founder can use. While your actual term sheet may look different the Y Combinator Term Sheet template is a great place to get familiar with the subject. YC does a great job of breaking down the different components and laying out terms and language that founders should keep their eye out for. Check out their term sheet template here. Buffer Series A Term Sheet The team at Buffer raised a $3.5M Series A back in 2014. Check out the signed term sheet and the terms from their raise here. VC Term Sheet Templates As term sheets are a necessary part of any fundraise there are hundreds of templates and examples to choose from by the investors, founders, and lawyers that have been there before. Check out a few popular templates below: The One Page Term Sheet Template from Ben Milne Ben Milne, Founder of Dwolla, has spent his fair share of time navigating term sheets. Ben is a Midwest founder and has seen the amount of time midwest founders and investors waste negotiating term sheets. As he put it, “Midwest investors and founders lose a lot of time trying to figure out the term sheet. Sometimes, they lose even more time deciding what the terms should be.” In order to help bring some guidance to both startups and investors, Ben put together a one-page term sheet template. You can check out the template below: You can check out the one-page term sheet template from Ben Milne in this blog post. The NVCA Term Sheet Template The National Venture Capital Association recently released their latest version of their term sheet template. As the team put at NVCA wrote, “The Enhanced Model Term Sheet allows an investor to draft term sheets while comparing terms against market benchmarks. Version 2.0 is powered by a database that now includes more than 100,000 venture transactions, representing over 40,000 investors with a combined network of over $1 trillion in assets under management.” Check it out and download the template here. Let Visible Help We are here to help with any fundraise. Use our free investor database, Visible Connect, to kick off a raise. From here, use our fundraising CRM as you move investors through your funnel and sign a term sheet. Start your free trial here.

Elizabeth Yin is the Founder and General Partner at Hustle Fund (and one of our favorite follows on Twitter). A few weeks back she Tweeted that fundraising is all about managing the supply and demand. As she put it, “Supply of your round. Demand from investors.” (To pick Elizabeth’s brain on the matter, we hosted a webinar with her last week. Check out the recording here.) Before I dive into what this is, let’s take a step back. Fundraising is all about supply and demand. Supply of your round. Demand from investors. It’s hard to control demand from investors. But you can constrain the supply in your round to get it done. — Elizabeth Yin (@dunkhippo33) May 29, 2020 Rewind to your Economics 101 course and you’ll remember the supply and demand curve all too well. To jog your memory, “The price and quantity of goods and services in the marketplace are largely determined by consumer demand and the amount that suppliers are willing to supply. Demand and supply can be plotted as curves, and the two curves meet at the equilibrium price and quantity.” So what does this have to do with startup fundraising? Well, a lot actually. Managing the Demand from Investors Managing the demand for your round from investors can be difficult. If you don’t have the combination or product, market, or team that an investor is looking for, drumming up demand might be difficult. However, there are a few levers you can pull to generate demand and encourage investors to move faster. If you look at your startup through the eyes of the investor, most of the time it is not beneficial for them to make an investment now. They will only benefit from waiting to see more data to make a more informed decision on your investment in 6 months. As Elizabeth explains, “It is your job as a founder to build impetus for investors to move now.” You want them to feel like the deal won’t be on the table in 6 months. The best way to do this is to generate demand from a large group of investors. This means that you are running a strong process and talking to as many investors as possible to drum up demand. This will create a fear of missing out for investors as you continue to push forward with meetings and new investors. As Elizabeth Yin puts it, “you want investors to be afraid of each other.” Constraining the Supply of Your Round When it comes to raising a smaller round drumming up demand almost feels impossible. At earlier stages, you likely lack a product or strong traction metrics that forces investors to move fast. Additionally, you’ll likely be talking to smaller investors and cashing smaller checks that don’t create the urgency for larger firms to jump in before the round is closed. Tranche Strategy One way Elizabeth Yin suggests to constrain the supply of your round is by using a tranche strategy. “As an example, Elizabeth uses a seed company going out to raise $2M total. This company may go out and raise a smaller tranche to create some demand from investors to move quickly. For example, if the smaller tranche is $500k investors may have a fear they will miss out as it is a smaller size round that is easier to raise. From here, it is a lot easier to go to larger investors as you can create some urgency around the round as you’ve already raised $500k.” Ask around and see what your founder and investor think about trying a tranche strategy. While some investors may not agree with a tranche strategy it is up to you as a founder to make the decision that is best for your business. Tranches can certainly be a powerful way to manage the supply and demand of your round. Take on Your Investors in Sets Another strategy to constrain supply and build demand is by taking on your investor meetings in sets. As the team at First Round Review puts it, “There’s nothing worse than the perception of an over-shopped deal, as VCs relish having the inside scoop on an exciting company. Group investors in batches to better evaluate and select them, like a surfer scanning sets of waves that move toward the shore.” Regardless of how you look at it, fundraising essentially turns into a founders full time job. By accepting this, you’ll be able to stack your meetings for a full schedule. This will allow you to talk to new investors regularly and build a strong process. As you continue to escalate conversations with different investors, this will also create a sense or urgency that the deal is moving forward and now is the time to get in on the terms. Fundraising is hard in good times and challenging times. By building a process and understanding what levers you can pull you will only increase your odds of a good raise. Raise capital, update investors and engage your team from a single platform. Try Visible free for 14 days.

Finding Your SaaS Metrics The software-as-a-service industry has experienced rapid growth in the past few years. Typical SaaS companies have added staff at rates exceeding 50 percent a year. At the same time, not every SaaS company grows at the same rate. Rapid growth and the nature of this sort of business can also expose startups to certain vulnerabilities that other kinds of companies may not have to contend with. On the positive side, digital companies should have access to the right SaaS metrics in order to track and manage growth. Take a moment to understand these important performance indicators to make certain they’re properly collected and analyzed. With the explosion of the SaaS industry has come the explosion of the resources and data surrounding the industry. There are more SaaS metrics benchmarks available than ever before to make sure that your company is on the right track. Related Resource: Check out our free Google Sheet Template to track your key SaaS Metrics here. Related Resource: How to Start and Operate a Successful SaaS Company Churn Rates New companies may focus upon customer acquisition. Still, businesses almost always find they spend less keeping loyal customers than always having to seek new ones. The nature of SaaS billing makes it even more important to ensure customers keep renewing their monthly or annual subscriptions. Typical forecasting depends upon customers keeping their accounts active. With that in mind, consider a couple of churn rates to track: Customer churn rate: This simply refers to customers lost within specific time periods. Hopefully, you can also enhance these SaaS metrics with information about why the churn rate may have either spiked or declined under various circumstances. Revenue churn rate: A SaaS business model may include various prices, based upon the number of unique accounts or levels of features or services. Hopefully, customers upgrade over time; however, if they’re not, SaaS companies should find out why. Customer Value & Cost Metrics SaaS businesses should track various SaaS metrics that help them compare the costs and revenues associated with acquiring and keeping customers. This helps them understand if they need to improve marketing, retention, and various other areas. Customer Lifetime Value You can estimate the lifetime value of your customers by following these steps: Estimate your customer lifetime rate with this formula: 1/average churn rate. With an average churn rate of one percent, for example, your CLR would be 100. Divide monthly revenue by the number of customers to calculate your average revenue per account, or ARPA. For example, 100 customers and a monthly revenue of $100,000 would work out to an ARPA of $1,000. Finally, calculate the customer lifetime value, or CLV, by multiplying the ARPA by the CLR. In the example above, your CLV would be 1,000 X 100 = $100,000. You can use the CLV to help you estimate the lifetime value of each customer. Companies can also use this handy metric to illustrate their value to investors. Customer Acquisition Cost After estimating how much value an average customer contributes to a SaaS business, it’s important to balance that against the price of acquiring them. Obviously, businesses need to compare these two numbers to demonstrate their business model’s viability. To accomplish this SaaS companies track their customer acquisition cost. The customer acquisition cost is the monetary cost it takes to acquire one new customer. Presumably with a SaaS company the cost of acquisition will lower as they acquire more customers. Simply divide all marketing and sales expenses by the number of customers acquired during a given month. If a SaaS company spent $10,000 to gain 10 new accounts, the CAC would be $1,000. Related Resource: Customer Acquisition Cost: A Critical Metrics for Founders Months to Recover Acquisition Cost Figure out how long it takes for a business to recoup their acquisition costs by using customer acquisition cost, monthly gross margin, or MGM, and monthly recurring revenue. Your formula would look like this: CAC / (MGM X MRR). Acquisition Cost to Lifetime Value Ratio Such metrics as acquisition costs and lifetime value are only truly informative when compared to each other. Some financial experts will say that your LVR should exceed CAC by a factor of at least three. Ratios closer to one mean that you need to trim expenses. On the other hand, too large of a ratio may mean that you could spend more to gain even more business. Customer Scores Since SaaS businesses live and die by their ability to maintain customer subscriptions, they should consider SaaS metrics that help measure how well they keep customers active with their product subscriptions. For instance: Customer engagement: To create a customer engagement score, each business will need to figure out unique measures that apply to their product. Some examples could include how often customers login or stay logged in. Customer health — Net Promoter Score: Similarly, companies should create customer health scores using factors that may indicate the likelihood of keeping accounts active or letting them expire. Seeking input from various players, like sales and customer service, can help develop good customer health scores. Marketing Scores Since new companies need to focus mostly upon custom acquisition, marketing scores will offer important insights for both marketers and upper management. These SaaS metrics for marketing include: Qualified marketing traffic: As your customer base grows, so will your traffic. For marketing, you need to separate prospects from existing customers when you analyze website visitors. Qualified marketing and sales leads: Depending upon the SaaS product, the customer lifecycle can vary considerably. You can work to identify which step in the customer journey your leads are in. For instance, a qualified marketing lead may have already downloaded a marketing eBook or used a free demo. A qualified sales lead may have made a phone call and is ready for another contact. Lead-to-customer rate: Sales and marketing can evaluate their effectiveness by analyzing ratios that tell them how many of their leads turn into customers, how long that takes, and so on. Taking steps to improve LTC rates should increase revenues. Why SaaS Metrics Matter? Good SaaS companies have a great chance to boom as their business model grows more popular. Still, SaaS companies may have their own vulnerabilities. For instance, some companies struggle to manage rapid growth as much as they might struggle to manage slow growth. While a business onboards many new customers, they also need to keep on eye on pleasing the customers they have already attracted. At the same time, these digital businesses should have the luxury of easier metric collection. As is illustrated in the examples above, it’s not enough to simply collect gross numbers of website visitors or total revenue. Rapidly growing companies need to find the metrics that will help them make vital business decisions that can improve important business processes. That way, SaaS companies can attract investors, know who to hire, and adjust marketing and sales strategies to acquire and retain their customers. Related Resource: Top SaaS Products for Startups Related Resource: Who Funds SaaS Startups? Related Resource: 20 Best SaaS Tools for Startups The journey as a SaaS startup founder can often feel like you’re alone on the journey. Finding a reliable SaaS metrics benchmark can be an easy way to see how you are stacking up to your peers. With more data at our fingertips than ever before, there are more SaaS metrics benchmarks and tools available than ever before.

Last week, we had the opportunity to talk to Elizabeth Yin of Hustle Fund. Elizabeth Yin is a co-founder and General Partner at Hustle Fund, a pre-seed fund for software entrepreneurs. Previously, Elizabeth was a partner at 500 Startups where she invested in seed stage companies and ran the Mountain View accelerator. In a prior life, Elizabeth co-founded and ran an adtech company called LaunchBit. Our CEO, Mike, and Elizabeth chatted about all things related to fundraising. Elizabeth shared what she has seen in the VC market over the past few months and how founders can manage the supply and demand of their round. Check out the video recording or our favorite takeaways below: Now is Actually a Good Time to Raise Fundraising in good times and bad times is challenging. Fundraising over the past few months could almost feel impossible. Elizabeth saw her portfolio companies attempt to raise in early April and most struggled as larger firms slowed investment at the start of COVID. However, investors, both large and small, are quite active again. With US states beginning to open and more investors comfortable with making remote decisions investment activity has been picking up pace. With the uncertainty of a future lockdown in the US it may also be a good idea to raise now. As Elizabeth puts it, “now is actually a good time to raise, especially from local investors.” In fact, Hustle Fund has even increased investment over the past 2 months. Bifurcation of Terms As Elizabeth puts it, “terms have been weird.” Elizabeth has been seeing a bifurcation of terms over the last few months. On one side, you have well networked founders raising at very high valuations similar to 2019. On the flip side, you have less networked founders raising at quite low valuations. Why Invest Now? When going out to raise it is important to understand how investors think to improve your odds of success. One of the first questions an investor will ask themselves is, “Why should I invest now?” However, most of the time “now” is not a great time for investors to make an investment. Generally, it is most beneficial for an investor to drag their feet as they can get more information and data. So how do you make investors move faster? You need to make an investor feel like they cannot wait 6 months because the valuation will change and the deal won’t be on the table. As Elizabeth said, “your job is to generate demand on your deal from other investors… you want investors to basically be afraid of each other.” You can do this by running a strong process and talking to a LOT of investors. Tranches Can Be Useful When going out to raise a seed round it is difficult to get people to move faster on the deal. You have a large supply of your raise with little demand. At the earliest stages, investors rarely feel motivated to move quickly as the deal may still be on the table in 6 months. To help with this, Elizabeth suggests reducing the “supply of your round” using tranches. As an example, Elizabeth uses a seed company going out to raise $2M total. This company may go out and raise a smaller tranche to create some demand from investors to move quickly. For example, if the smaller tranche is $500k investors may have a fear they will miss out as it is a smaller size round that is easier to raise. From here, it is a lot easier to go to larger investors as you can create some urgency around the round as you’ve already raised $500k. While Elizabeth may be a black swan when it comes to her thoughts on tranches, it can certainly be a powerful way to manage the supply and demand of your round. Customer Discovery… with Investors If you are struggling to drum up any interest from investors you likely need to improve different aspects of the business. Feedback from investors can be a valuable asset for prioritizing your time. Elizabeth suggests harnessing customer development strategies when it comes to investors. While you may not hear back from most investors, getting feedback and data points from investors that rejected your company can be incredibly valuable. If you start to see a theme in why investors said no, that is a good indicator of where you need to improve your business. Founders Should Fundraise Full Time Elizabeth suggests that her founders do fundraising full time (when they set out to raise). This means that you are not working directly on the business. In a good raise, it can take anywhere from a few weeks to a few months to close your round. Juggling this and making sure the needle still moves without you there is challenging. Elizabeth promotes stacking your meetings so you may have 20+ meetings in a week as opposed to a handful. In the beginning, this is a great way to create urgency with investors. If you are taking second meetings and have a docket full of investor meetings, investors may feel the heat and move quicker. Interested in joining our next webinar? Subscribe to the Founders Forward to stay up-to-date with our upcoming webinars.

You can’t improve what you don’t measure. Implementing metrics at your startup is a surefire way to bring focus to your entire organization. As David Skok, General Partner at Matrix Partners, puts it, “One of the greatest things about putting in place the right metrics is that showing them to people will automatically change their behavior to try to improve the metrics. Furthermore, the metrics make it clear what levers they can use to change performance.” In addition to helping your team focus and grow. Metrics are often the first thing a potential investor will ask to see during a fundraise. As your company moves further and further through the venture fundraising lifecycle – from Seed to A to Growth rounds – the numbers gain importance in the overall story for the fundraise. How do you know what metrics to track for your startup? We’ve laid out a few basic metrics to get you headed in the right direction. Startup Sales Metrics Metrics are vital to track in every aspect of a startup but are especially important when it comes to sales. Generally speaking sales metrics can be measured on an individual, team, or organization basis. By setting up a strong system to track your sales metrics you will be able to make better informed go-to-market decisions. Revenue Metrics Revenue is the lifeblood of a for profit organization. Revenue can come in many shapes and sizes. There are startups that track monthly recurring revenue, annual recurring revenue, service revenue, and more. There are generally two types of revenue for a SaaS company – the first is Subscription Revenue (called MRR or ARR). This is product focused revenue that is recurring and predictable — especially if you are able to sign customers to longer term agreements. Investors prefer this type of revenue because it signals a high quality product with a path to long-term profitability. The second type of revenue is Services Revenue which often comes in the form on one-off (read: not predictable) consulting engagements or implementation fees. Because of the human-capital intensive nature of providing these services, they are far less profitable and scalable than Subscription Revenue. Related Reading: What is a Startup’s Annual Run Rate? (Definition + Formula) Annual Contract Value (ACV) ACV is “the value of the contract over a 12-month period.” If you are seeing an uptrend in ACV over time (which is generally the goal), then your company is likely doing one or many of the following things: Shifting to customers with a larger budget – more seats, usage, etc. Employing a more effective sales strategy to convince customers to invest more heavily in your product Building a product that continues to improve and provide increasing value Effectively upselling existing customers Increasing your annual contract value will allow your company to increase customer acquisition costs. Pipeline Value The pipeline value is exactly what it sounds like, the value of all active deals in your sales pipeline. For example, if you have 10 deals that are actively be sold but at different stages you can calculate the value of all deals with their likelihood of closing. For those 10 deals, let’s say they are all worth $100 and: 3 are new deals with a 30% chance to close 3 deals have sat a call and are interested in buying with a 50% chance to close 4 deals have received a contract and are ready to sign with a 90% chance to close That would be (3 new deals x $100 x 30%) + (3 calls sat deals x $100 x 50%) + (4 contract deals x $100 x 90%) = $600 in pipeline value. You can also break this number down by different stages. For example, the pipeline value of your new deals from the example above would be $90. Understanding your pipeline value gives you a good understanding of the health of your current pipeline and can help with future forecasts. Activity Sales Metrics Activity sales metrics can be used to track individual reps and teams efforts on a daily or weekly basis. A few examples of activity sales metrics would be number of phone calls made, emails sent, demos sat, etc. Tracking these numbers can be helpful for a few reasons. The first is so you can understand where an individual or team may be lacking if they are struggling to hit quota or numbers. They can also be used to create and build a predictable cadence with your potential customers. This data can be used to understand where and when your customers are buying to improve the likelihood of closing a potential customer. Startup Marketing Metrics Setting up and tracking marketing metrics can be an intimidating endeavor. There are countless metrics to track. From individual campaigns to website traffic metrics there is a lot to cover. However, properly picking and tracking your startup’s marketing metrics will set up your go-to-market team for success down the road. Without getting too bogged down by the countless metrics, we’ve shared a few of our favorites below: Customer Acquisition Costs As we have written in the past, “Customer acquisition cost is the sum total of the amount that it takes your business to acquire a customer, including time from your sales representatives and marketing and advertising expenses. The customer acquisition cost definition: the total cost it takes to bring a customer from first contact to sale.” When you sit down and think about it, a lot goes into acquiring a new customer. You may be running multiple paid campaigns online, have a dedicated marketing team, and are contributing to in-person events. Let’s say that all of your cost dedicated to acquiring customers was $10,000 for the month and you brought on 50 new customers. That would be a customer acquisition cost of $200. In order to be a successful business that means that your CAC needs to be less than the revenue that your customers will bring in the door. CAC can tell you a lot about the sustainability of your business and marketing efforts. Related Reading: Breaking Down the Nuances of Annual Contract Value (ACV) Customer Lifetime Value In order to understand how sustainable your customer acquisitions costs are you need to understand the lifetime value of your customers. Customer lifetime value is the amount that the customer will spend with the business throughout their relationship with the business. Calculating lifetime value can change greatly depending on your business. For example, a SaaS company may have a customer paying a monthly subscription fee for years (their total lifetime value) where a real estate company may only make one transaction with a customer. Constantly tracking your LTV is a great way to keep your CAC in check and make sure you are the path to a profitable and sustainable business. LTV:CAC Ratio The LTV:CAC takes the 2 metrics mentioned above and keeps it to a digestible and easily understandable metric. You simply take your customer lifetime value and divide it by your customer acquisition costs. Ideally you want this number to be greater than 3. In general, a good lifetime value (LTV) to customer acquisition cost (CAC) is 3:1. If a customer is being brought in for $100, their lifetime value should be at least $300. Otherwise, you will be spending too much drawing in your customers; it will become important to fine tune, streamline, and optimize your marketing and your advertising. If your ratio is 1:1 this would mean that you are not making any money on new customers and will eventually run out of cash and go out of business. Related Reading: Unit Economics for Startups: Why It Matters and How To Calculate It Website Traffic No matter the business, essentially every business has a website today. Getting leads to your website is a great way to increase marketing and sales metrics across the board. Having a deep understanding your website traffic is a great way to tweak and improve content, website copy, button copy, paid campaigns, and more. You will want to understand where your website traffic is coming from. This is generally referred to as the source. This can generally be bucketed into organic, paid, social, referral, and direct traffic. Knowing where your traffic is coming from will help inform your decisions for where to spend your time and budget. Example of a startup website traffic breakdown below: Next you will want to understand what pages and content is converting well. For example, if you have a page on your website that converts to your call to action at a higher rate you will want to implement the ideas behind this page across the website. You should always be testing buttons and content copy to improve the likelihood of website users taking a specific call to action. Startup Customer Success Metrics Once you have a customer in the door, the work is not done. Being able to retain and grow your current customer base is the easiest way to grow your business. In order to do so, you need to have the right metrics in place so you can optimize what is working well when it comes to your customer success efforts. Net Promoter Score If you’re not familiar with NPS, it is used to gauge the loyalty of a firm’s relationships. It is used by more than 2/3 of the Fortune 1000 and it can measure a company, employer or another entity. You have likely received an NPS survey yourself. It’s a score of 1 to 10 usually with a question of “How likely are you to recommend X to your friend or colleague?” X could be your company, your customer support experience, an event, etc. If you answer 1 to 6 you are considered a detractor and at risk of customer churn, 7 & 8 are considered passives and 9 & 10 are considered promoters. To get your score take % Promoters – % Detractors. This creates a scale ranging from -100 to 100. 0 to 49 is considered good, 50 to 70 is Excellent and 70+ is World Class. To give you an idea for the 4 Major Airline Carriers in the US the scores are as follows: American: 3 Delta: 36 Southwest: 62 United: 10 On the other hand of the spectrum Apple clocks in at 89. Customer Churn Customer churn is the % of customers (also called “logos”) that you lose over a given period of time. Let’s say that you have 10 customers and lose 2 of them over the past month. That would be a customer churn rate of 20%. Keeping your churn rate in check is an easy way to grow the business. Revenue Churn On the flipside revenue churn is the % of revenue dollars that you lose over a given period of time. Taking the example in the section above, let’s say that the 8 customers who did not churn are paying $100 and the 2 customers that did churn are only paying $10. That would be a churn rate of 2.4% ($20 in churned revenue divided by $820 in total revenue). For world class companies they may actually have negative churn. This means that they are expanding current customers at a greater rate than they are losing customers. Customer Retention Rate As the team at HubSpot put it, “Customer retention refers to the ability of a company to — you guessed it — retain customers. Customer retention is impacted by how many new customers are acquired, and how many existing customers churn — by canceling their subscription, not returning to buy, or closing a contract.” Startup Operations Metrics At the end of the day, every metric impacts how your business operates. If the metrics above are not falling into place, the chances of your business operating for the long run are slim. You need to constantly have a deep understanding of where you company’s financials stand. Burn Rate As Investopedia defines it, “The burn rate is the pace at which a new company is running through its startup capital ahead of it generating any positive cash flow. The burn rate is typically calculated in terms of the amount of cash the company is spending per month.” Burn rate is an essential metric for every early stage startup leader to have their eye on. If your burn rate gets out of hand it is important to bring it in as soon as possible. Potential and current investors will have their eye on your burn rate to make sure you can sustain your current business practices for the future. Months of Runway Months of runway is exactly what it sounds like — the number of months your business can go on until it is out of cash. This is particularly important for early stage companies that have yet to find product market fit or are still in the early stages of developing their product. You can find your months of runway by taking your cash in the bank and dividing it by your net burn rate. Related Resource: How to Calculate Runway & Burn Rate Revenue per Employee While revenue per employee is not the most informative metric for internal purposes it can be a great metric to benchmark against your peers. For example, if you are a seed software company comparing yourself to a publicly traded software company many of your metrics will not be comparable. However, revenue per employee allows you to break it down by the size of your business and have a benchmark to share with internal employees. Related Resource: EBITDA vs Revenue: Understanding the Difference Total Addressable Market Total addressable market (TAM) is the estimated size of the market that your business can attack. As we wrote in our “Total Addressable Market Templated”, “TAM helps paint the picture of how big the opportunity is and if the business deserves to be venture backed.” While TAM is not something that is tracked regularly it is important to have an understanding of your addressable marketing when you set out to fundraise. Related Resource: A Guide to Building Successful OKRs for Startups Startup Metrics Dashboards/Templates Building A Startup Financial Model That Works Check out our blog post and guide for building your first financial model (plus, a template to help you size your potential market). Check it out here. Andreessen Horowitz Startup Metrics Template Andreessen Horowitz (a16z) is one of the most prolific VC investors in the market today. With investments across a number of different stages, sectors, and business models, they have seen first hand the lack of (and the need for) standardization in the way private technology companies track metrics and present those metrics to current and potential stakeholders. While their well known post, called “16 Startup Metrics“, dives deep into a number of great metrics for different business models – Marketplaces and Ecommerce in particular – we focused this video on SaaS metrics and how companies can use Visible templates along with other sources to benchmark themselves against others in the market and set themselves up for fundraising success. Check out a video explaining their metrics below: Rockstart Digital Health Accelerator Startup Metrics Template As with any early-stage company, focus is key. This is why Rockstart puts each company’s Most Valuable Metric front and center on the business dashboard. The primary reason to have a single, understandable metric for your business is to cut out the noise that comes with trying to track (and take action on) every single thing so that you can hone in on the one thing that drives your success. Read any startup post-mortem and you’ll quickly realize the negative impact that lack of focus can have on a company. In the digital health sector, companies don’t all fit within the same bucket from a business model perspective. The first Rockstart Digital Heal Accelerator class has hardware companies (like Med Angel), marketplaces (like Dinst), and SaaS businesses (like Mount) who all likely have different true north metrics.

Fundraising is hard. Fundraising in the current environment can almost feel impossible. Being able to bring capital in to grow your business is a skill that all founders should hone. In this webinar you’ll learn: How the state of the venture capital has changed over the last 6 months How fundraising has changed over the last 6 months How to create supply and demand while fundraising How VCs think and work so you can better your odds of raising