5 Metrics Investors Look for in a Business Plan

Investors evaluate business plans through various metrics to gauge the viability, potential return on investment, and overall health of the business. Highlighting these key metrics effectively in your business plan can make a strong case for your startup. Here are five critical metrics that investors look for, along with detailed explanations and examples.

1. Revenue Growth

Revenue growth is a primary indicator of a company’s performance and market demand for its product or service. Investors want to see a clear upward trajectory in your revenue projections, indicating that your business is scaling and gaining market traction.

Example: A SaaS company projects its annual revenue to grow from $500,000 in the first year to $2 million by the third year. This growth can be attributed to an expanding customer base and successful upselling strategies. Including a graph that visually depicts this growth trend can help investors quickly understand the potential of your business.

How to present it: Use historical data (if available) and forecasted figures to illustrate revenue growth. Break down the sources of revenue, such as product lines, services, or geographical regions. Highlight any significant contracts, partnerships, or market expansions that will drive future revenue.

2. Gross Margin

Gross margin measures the difference between revenue and the cost of goods sold (COGS), expressed as a percentage of revenue. It indicates how efficiently a company is producing and selling its goods.

Example: An e-commerce business with a gross margin of 40% is considered more attractive than one with a 20% gross margin, as it suggests better control over production costs and higher profitability. For instance, if the business generates $1 million in sales with $600,000 in COGS, the gross margin is ($1,000,000 – $600,000) / $1,000,000 = 40%.

How to present it: Include a detailed breakdown of COGS and revenue to calculate the gross margin. Compare your gross margin to industry averages to provide context and demonstrate competitive efficiency. Highlight strategies to improve gross margins, such as cost-saving measures or higher-value product offerings.

3. Customer Acquisition Cost (CAC)

Customer acquisition cost (CAC) is the total cost of acquiring a new customer, including marketing and sales expenses. Investors use CAC to assess the efficiency of your customer acquisition strategies and the potential for sustainable growth.

Example: A subscription box company spends $100,000 on marketing campaigns and acquires 1,000 new subscribers, resulting in a CAC of $100. If the average lifetime value (LTV) of a subscriber is $500, the CAC is considered favorable.

How to present it: Calculate CAC by dividing total acquisition costs by the number of new customers acquired in a specific period. Compare CAC to the lifetime value of a customer (LTV) to show the return on investment for your marketing efforts. Discuss any strategies in place to reduce CAC, such as leveraging organic growth channels or optimizing marketing campaigns.

4. Customer Lifetime Value (LTV)

Customer lifetime value (LTV) estimates the total revenue a business can expect from a single customer account over its lifespan. A high LTV relative to CAC indicates a profitable and sustainable customer base.

Example: An online education platform calculates an LTV of $1,200 per student, considering the average subscription duration and monthly fees. If the CAC is $200, the LTV to CAC ratio is 6:1, indicating strong profitability.

How to present it: Present LTV calculations by considering the average revenue per user (ARPU) and the average customer lifespan. Show how LTV compares to CAC to illustrate profitability. Highlight initiatives to increase LTV, such as improving customer retention, upselling, and cross-selling opportunities.

5. Burn Rate and Runway

Burn rate is the rate at which a company is spending its capital before generating positive cash flow, and runway is the amount of time a company can continue operating at its current burn rate before running out of cash. Investors closely monitor these metrics to understand a company’s financial health and sustainability.

Example: A tech startup with a monthly burn rate of $50,000 and $600,000 in the bank has a runway of 12 months. This indicates the company has one year to achieve profitability or secure additional funding.

How to present it: Calculate the monthly burn rate by summing all operating expenses and dividing by the number of months. Determine the runway by dividing the current cash balance by the burn rate. Provide a detailed financial plan that outlines cost-saving measures, revenue growth strategies, and funding requirements to extend the runway and achieve financial stability.