In our first funding round, and our experience with the pitches we have received to date, we have discovered that early stage and prospective founders tend to have exciting and interesting ideas but struggle to convey this in  metrics that are relevant to investors. We at Khula Lula have put together a private equity calculator for pre-seed and early stage startups, that not only provide an explanation and financial analysis for each metric, but users will be able to input their data and be able to calculate directly from our page without having to struggle with formulas. We hope this goes a long way in expanding the accessibility to information in private equity.

Gross Burn Rate

For Pre-Seed and Early Stage

Burn rate is a very important metric for pre-seed and early-stage startups that are looking to raise capital. Gross burn rate measures the rate at which capital injected in the startup is spent. One of the major inhibitors to a pre-seed startup's success is burning all the capital the startup has raised before the business is even operational and without any prospects of receiving new capital injections. This is a very important metric to investors as it indicates if the capital allocated for the round is sufficient in bringing the startup to market. For early stage startups this metric can be calculated either retrospectively, based on the capital you have spent to date, or as a projection based on the capital you're trying to raise.

Calculation: 

For pre-seed startups estimate the expenditure the startup would incur in bringing the business to fruition. For Early stage startups estimate the expenditure the startup would incur to expand the business.

Estimate the amount of months it would take to bring the startup to market or for the full expansion to take place. Include hold-ups as a result of regulatory compliance and applications. For instance if you have to apply for patents, licenses, business registration, VAT, these usually delay the pre-incorporation period and must be accounted for.

Financial Analysis and Interpretation:

It is important to compare these with similar startups and industry averages. Your gross burn rate can also dictate how much capital you raise in a round and how many investors you bring on board. A high gross burn rate may require multiple funding rounds with multiple investors, this may also indicate that your startup is more suited for venture capital. A low gross burn rate is ideal for microfinancing or angel investment, here you can bring on less investors, as the capital raised may be sufficient in covering the early expenses for the startup. It is imperative to communicate your gross burn rate with investors upfront, so they're aware of any possible future dilutions in equity.

Landing Page

Conversion Rate

For Pre-Seed

Without a customer base, pre-seed startups struggle to convey potential demand for their product or service without having their startup operational yet. Landing page conversion rates are a great metric for investors as it gages the general interest and demand behind a startup's product. Founders can create a landing page to showcase their upcoming product or services to potential customers. Determining the number of page visitors that are converted into bookings, emails collected, pre-orders is valuable data to share with investors. The inputs for this calculation are usually provided by your web host.

Calculation: 

Determine the amount of monthly sign-ups / bookings / pre-orders 

 

Add up the daily visitors on the landing page to determine monthly active visitors on the page.

Financial Analysis and Interpretation:

Compare the answer you have to industry averages. Low conversion rates indicate the founder may need to drive investment towards customer acquisitions through marketing, PR and ad spend. Structure your pitch/proposal in a way that indicates the possible returns linked to investing in customer acquisition. High conversion rates indicate potential demand and interest in your products, framing your proposal around product-market fit would be beneficial to your startup as you have data that backs this up.

Displaying this data over multiple months to indicate growth is also beneficial.

Customer Acquisition Cost

For Pre-Seed and Early Stage

The projected customer acquisition cost for a pre-seed or early stage startup is critical information for an investor, because with a small or even no customer base, some portion of the capital invested in the startup may need to be allocated for customer acquisition. This metric represents the total amount spent in acquiring and on-boarding a single user or client for the startup. Regardless of how brilliant an idea for a startup may be, failure arises when the customer acquisition cost exceeds the ability to monetize this customer base (This is known as the LVT metric), this is why this metric matters when pitching to potential investors, as it determines the viability of your startup. This metric has a number of variations, but our focus will be on determining the projected customer acquisition costs. An early stage startup may use the actual customer acquisition costs, alternatively if the expansion is based on substantial investment into customer acquisition, the early stage startup can convey both the current customer acquisition cost and the potential customer acquisition costs under expansion.

Calculation: 

Determine the total cost to acquire customers. This includes the marketing costs like influencer marketing, ad spend, discounts given to customers, competitions. Any form of campaign that is driven towards growing your potential customer base would be added together and included in the total cost.

 

Next determine the average number of potential customers that can be generated from the campaigns and marketing. Use the analytics from social media ad services to project an estimate of the audience you can generate from an ad. TV and radio ads would require the average listenership for the platform you've chosen to advertise on. The potential audience size for influencer marketing can be estimated using influencers social media analytics. The full audience size is not a reflection of all the customers you will onboard, but rather a pool of potential customers. You would need to adjust this total, by multiplying it with a percentage of how much of the audience size can be converted into actual customers. This percentage is usually low for pre-seed startups, and can be based on an industry average. 

Financial Analysis and Interpretation:

For early stage startups comparing this metric to the life time value (LTV) is very critical in conveying the profitability of your startup. Pre-seed startups do not have enough data available to determine their LTV, and a projection of this amount would be to far out of an estimate, that can bring all your metrics into question. Rather convey the customer acquisition costs on their own, and indicate the potential revenue that may be derived from this.

Life Time Value

For Early Stage

Life time value is a metric that is a great indicator of growth, retention and the value a startup can derive from one singular customer. Contrasting this metric against the CAC , can be an indicator to investors of how the investor can recoup their investment in the early stage startup. Life time value measures how much revenue can be earned from a single customer over the lifetime of the business. Early stage startups that have over 12 months of data can use the predictive life time value, and startups that only have a few months in data can use use historical data. This is also a metric that may vary based on the type of consumers you have, revenue recognition and the type of industry you are operating in. You can start off by looking into the basic formula below, and follow up by researching how it can alter based on your industry.

Calculation: 

Determine what the average purchase value for the startup is. Take the total revenue for the period and divide it by the number of purchases that have taken place over the same corresponding period.

Next you will need to determine how frequent purchases are made, by dividing the number of purchases made by the number of non-repeat customers. This means that each customer is only counted once.

Next you need to determine the customer value by multiplying the average purchase value for the startup by the frequency rate.

Following this you need to determine the average customer lifespan by averaging the number of years a customer continues purchasing from your startup.​ In the case of an early stage startup that has only been operational for a number of months, apportioning for months is perfectly fine.

 lastly to get the LTV you can multiply customer value by the average customer lifespan.

Financial Analysis and Interpretation:

A low customer life time value can be an indicator of your startups lack of ability in retaining customers. This can be as a result of poor customer service, support, communication and reinvestment into existing customers. A high customer life time value is very attractive to investors, and indicates your ability to retain existing customers for long periods of time. Use this as a selling point in your pitch or proposal.

Monthly Recurring Revenue

For Early Stage

 

Monthly recurring revenue measures the revenue that is recurring in nature over the period of a month. This is more of an appropriate metric for early stage startups over annual recurring revenue. This is largely as a result of the lack of data the startup has available to accurately estimate what annual recurring revenue may look like. Including far to many estimates that appear outside of the industry range, can make investors skeptical as to whether the data you have provided is accurate or not. Early stage founders are encouraged to use historical data points when using revenue and growth metrics. In the case that you can only convey revenue and growth through estimates, it is advised to utilize more conservative estimates. This private equity metric is most ideal for startups with a subscription revenue model or who keep records of recurring contracts.

Calculation: 

First determine the amount of subscriptions or recurring contracts the startup has at the beginning of the month.

 

Remove any once-off fees included in the total

Add monthly recurring contracts or subscriptions gained in the current month.

Remove monthly recurring contracts lost from churn.

Financial Analysis and Interpretation:

An MRR that increases over months indicates the startup is scaling while retaining existing customers. An increasing MRR is very beneficial in conveying the value of the product or service you're selling. A declining MRR may indicate stagnation, or declining demand in the product or service. The best way to convey the message to investors is by indicating what changes in this trajectory can be made through reinvestment.

Month on Month Growth Rate

For Early Stage

This is a common metric that is used in both public equity and private equity. Investors are interested in the month on month growth for revenue, gross profit and net profit. This can be computed as a simple growth rate and a compounded monthly growth rate. Investors often prefer CMGR as it is adjusted to measure periodic growth. For the purposes of simplicity we have provided a SMGR. This metric assists founders in benchmarking their growth with other companies in the industry and competitors.

Calculation: 

First determine the amount of revenue / gross profit / net profit for the current month.

 

Determine the revenue / gross profit / net profit for the previous month.

Financial Analysis and Interpretation:

A monthly growth rate that increases over months indicates the startup is scaling and growing its revenue or net profit or gross profit. It is important to compare the growth in revenue with the growth in both gross profit or net profit. As this provides an analysis into whether fixed costs or variable costs are the cause behind any stagnation in the startup, and can provide insight on which segments of the business can be allocated capital investment to reduce costs and improve the growth rates.

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