It’s no secret - the venture capital (VC) landscape has undergone significant changes post-Pandemic. As a founder, it begs the question - how do you set yourself and your team up for success from the jump?
Product-First Is Out and Customer-First Is In
It sounds obvious, but it wasn’t long ago that the product-first mindset had Silicon Valley in a chokehold. What was considered new and cool took precedence, regardless of whether or not customers actually wanted to use it. There were products galore that sounded really amazing and innovative in theory but in reality, ended up falling flat when the time came for customers to pay. The value simply wasn’t there and multiple recessions inside of a decade left the market unwilling to part with their cash for another feature-bloated subscription.
Soon enough, investors started realizing that their odds of ROI were getting slimmer and slimmer. So the stakes skyrocketed. 100X became the standard. All of the sudden, it took a unicorn to get a return.
And then, the pandemic happened. Obvious economic impact aside, the effect on the startup community was a sharp contrast to what we’d observed in years past. To get a check, you had to prove results. You had to have a little something called product-market fit. Headcount? Irrelevant. Downloads? Forget it. Even total revenue was on the chopping block.
The market has made a significant pivot towards products that are directly in line with what customers are asking for, and they’re not afraid to dig deep to find the metrics that matter to assess product-market fit. Taking a page out of Amazon’s book, it was time to get customer obsessed. Whether that’s through user research, focus groups, or running ads against a landing page to gauge interest - product inception starts with real, tangible challenges your future buyers experience today.
Traction Trumps Potential
No longer are VCs willing to invest in startups based on their potential alone. Previously, a great idea, a strong team, and a solid business plan were enough to secure funding, particularly in the early stages. However, the tide has turned, and investors are now placing a greater emphasis on traction.
Even angel investors, who traditionally backed early-stage startups, are increasingly looking for evidence of traction before writing a check. This means that founders need to focus on validating their ideas and gaining initial customers or users before seeking investment.
Metrics Matter More Than Ever
VCs are also becoming more data-driven in their investment decisions. They want to see concrete metrics that demonstrate your startup's growth potential and viability. This goes beyond just revenue and includes factors such as:
- Net Retention: Starting strong with net retention, or how much you’ll grow or shrink without any new customer action. Frightening? Potentially. Enlightening? Certainly.
- Burn Ratio: If you're a startup on fire (in a good way) and cruising through cash to grow, this is your friendly reality check. Just divide your Net New ARR by your FCF Burn, and voila - it’s lit.
- Cash Conversion Cycle: CCC is all about how long it takes your company to turn investments into cold, hard cash from sales. It's like a stopwatch for your inventory, receivables, and bills.
- LTV by Cohort: Lifetime value is basically how much you expect to make from a customer before they churn. It's all the sales they bring in after your cost of acquisition.
- Contribution Margin: In a nutshell, it's your product line or sales team's bookings minus their costs. Knowing how much each department is pitching in is clutch for making smart investment moves.
- CAC Payback Period: This is what you spend on sales and marketing to a new customer. It’s crucial to show that your go-to-market game is on point.
- Sales Quick Ratio: Want a quick and dirty way to see if your growth is on track? Divide your Sales by your Churn. It's like a health check for your sales machine.
- User Activation Rate: Also known as the product activation rate, this tells you how many trial users hit the activation milestone. Just divide the number of users who made it by the total number who signed up.
- LTM Revenue vs Gross Margin vs Profit Margin: Your P&L statement has three key components: Revenue, Gross Margin, and Profit Margin. Revenue and Profit Margin are the top and bottom lines, while Gross Margin sits in between. By tracking these metrics over the last 12 months, you can get a clear picture of your company's financial health and spot any trends or changes in performance.
- Customer Concentration: Landing big deals is awesome, but relying too heavily on a handful of customers can be risky business. Keep an eye on individual customer risk, so one big churn doesn't tank your business.
- IRR and ROE for Projects: The biggest mistake leaders make after investing in a specific part of their business is not measuring the return. Make sure to calculate Internal Rate of Return and Return on Equity every six months to stay on top of it.
- Developer Productivity: Every CTO wants their devs to crush it. High-quality, speedy application deployment means faster time to market (and more revenue). The key is knowing where to focus those efforts.
- User Conversion Rates: Not all sales and marketing pipelines are created equal. Sure, you want to max out your funnel's potential, but at the end of the day, it's all about the conversion rate.
- Gross Margin: This is your revenue minus the cost of goods. Higher margins mean more room to invest and grow.
- Revenue Growth: Last but definitely not least, and probably the most important metric of 'em all. Here's a handy rule of thumb: 6% month-over-month growth equals 100% year-over-year growth.
The bottom line is you must be prepared to present a clear picture of your key performance indicators (KPIs) and how you plan to scale these metrics over time. Having a solid understanding of your data and being able to communicate it effectively can make all the difference in securing funding.
The Path to Profitability Starts with the Right Infrastructure
As you work to gain traction and improve your metrics, it's essential to choose wisely when it comes to your cloud infrastructure. The path to profitability begins with making smart decisions about your technology stack from day one.
Choosing a scalable, cost-effective cloud platform like Amazon Web Services (AWS) can help you optimize your costs and grow your startup efficiently. AWS offers a wide range of services and tools specifically designed to support startups, from cost-effective compute and storage options to managed services that simplify complex tasks like machine learning and data analytics.
Moreover, AWS is committed to supporting startup growth through its co-selling program. By partnering with AWS, startups can leverage their vast sales and marketing resources to reach new customers and drive revenue growth. This can be a game-changer for early-stage startups looking to scale quickly and efficiently.
Navigating the New Normal
The VC landscape may have changed, but we’re confident that the fresh emphasis on actionable metrics is a good thing in the long run. By focusing on traction and choosing the right infrastructure, you can position your startup to attract investors and secure the capital you need to grow. It also puts you in a great position for alternatives, like acquisition or simply running a profitable business without having to be continually reliant on capital injection.
At Protagona, we're committed to helping founders navigate this new normal. As an AWS Advanced Tier consulting partner, we specialize in helping startup teams build on AWS and leverage its full potential to drive growth and profitability.
Whether you're just starting out or looking to scale, we can help you build a solid foundation on AWS and set your startup up for long-term success.
