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Founders often ask me what’s the best way to cold email an investor. in my best TV announcer voice Do you want to know the one trick to get replies for your cold email startup pitches that investors don’t want you to know? Ok, I lied. No investor ever said they don’t want founders to know this, but how else am I going to get a clickbait-y question? Time and time again, I recommend them to start with the one (at most two) metrics they are slaying with. Even better if that’s in the subject line. Like “Consumer social startup with 50% MoM Growth”. Or “Bottom-up SaaS startup with 125% NDR”. Before you even intro what your startup does, start with the metric that’ll light up an investor’s eyes.
Why? It’s a sales game. The goal of a cold email is to get that first meeting. Investors get hundreds of emails a week. And if you imagine their inbox is the shelf at the airport bookstore, your goal is to be that book on display. Travelers only spend minutes in the store before they have to go to their departure gate. Similarly, investors scroll through their inbox looking for that book with the cover art that fascinates them. The more well-known the investor, the less time they will spend skimming. And if you ask any investor what’s the number one thing they look for in an investment, 9 out of 10 VCs will say traction, traction, traction. So if you have it, make it easy for them to find.
That said, in terms of traction, most likely around the A, what growth metrics would be the attention grabber in that subject line?
Strictly annual growth
A while back, my friend, Christen of TikTok fame, sent me this tweetstorm by Sam Parr, founder of one of my favorite newsletters out there, The Hustle. In it, he shares five lessons on how to be a great angel investor from Andrew Chen, one of the greatest thought leaders on growth. Two lessons in particular stand out:
And…
Why 3x? If you’re growing fast in the beginning, you’re more likely to continue growing later on. Making you very attractive to investors’ eyes — be it angels, VCs, growth and onwards. Neeraj Agrawal of Battery Ventures calls it the T2D3 rule. Admittedly, it’s not R2-D2’s cousin. Rather, once your get to $2M ARR (annual recurring revenue), if you triple your revenue each year 2 years in a row, then double every year the next 3 years, you’ll get to $100M ARR and an IPO. More specifically, you go from 2 to 6, then 18, 36, 72, and finally $144M ARR. More or less that puts you in the billion dollar valuation, aka unicorn status. And if you so choose, an IPO is in your toolkit.
Source: Neeraj Agrawal’s analysis on public SaaS companies that follow the T2D3 path
For context, tripling annually is about a 10% MoM (month-over-month) growth rate. And depending on your business, it doesn’t have to be revenue. It could be users if you’re a social app. Or GMV if you’re a marketplace for goods. As you hit scale, the SaaS Rule of 40 is a nice rule of thumb to go by. An approach often used by growth investors and private equity, where, ideally, your annual growth rate plus your profit margin is equal to or greater than 40%. And at the minimum, your growth rate is over 30%.
For viral growth, many consumer and marketplace startups have defaulted to influencer marketing, on top of Google/FB ads. And if that’s what you’re doing as well, Facebook’s Brand Collabs Manager might help you get started, which I found via my buddy Nate’s weekly marketing newsletter. Free, and helps you identify which influencers you should be working with.
But what if you haven’t gotten to $2M ARR? Or you’ve just gotten there, what other metrics should you prepare in your data room?
Net retention
net dollar retention (NDR) is a proxy for product-market fit (PMF).
NDR = (starting MRR + expansion — downgrades — churn)/(starting MRR)
Specifically PMF for a single customer. Equally important is net revenue retention (NRR), which is the same equation for all your customers. Seth Levine of Foundry Group recently wrote a concise breakdown between NDR and NRR. At the same time, consider tracking NRR of your largest customers (i.e. top 10%, top 20%) versus all of your customers.
Here, the golden standard is 120%+ for bottom-up SaaS. 80% for consumer SaaS. On the flip side, if you’ve yet to generate revenue, top-notch consumer user retention is 40%. For enterprise, around 90%.
Note: I define users as people who use your platform. Customers as people who pay to use your platform.
If you want a more detailed breakdown of what good versus great retention looks like for different types of businesses, I highly recommend checking out Lenny Rachitsky’s piece.
Source: Lenny Rachitsky’s What is good retention
Also, note that over time, you want to optimize for a smile on your retention curves. So if you have a retention curve that looks like Evernote’s, then you’re a magician!
Source: Sequioa’s Measuring Product Health, citing TechCrunch’s Should Your Startup Go Freemium?
The magic number
Speaking of hocus pocus, many investors swear by the magic number. So, what is this magic number? Some people call it sales efficiency. A number that measures how efficient your sales and marketing is at bringing back revenue.
Magic # = (new revenue [usually ARR])/(sales and marketing expenses to get that revenue)
The golden number here is 1.0. If your number is greater than 1.0, then you’re a promising growing business. You’ve paid back your CAC and then some. But that also means you could be growing even faster, if you double down on your S&M expenses. If your magic number is less than 0.5, you’re spending too much on S&M. Cut back and focus on finding PMF first, particularly closing customers. If your magic number is between 0.5 and 1.0, spend some time considering why. Where in your sales funnel can you better optimize conversion? Where is there friction in the closing process?
While your magic number at 1.0 might not guarantee a check, at the very minimum, it shows that you know how to allocate capital. And if you’re hitting the other metrics, you’re in solid territory.
User engagement
Most consumer founders might be familiar with the ratio: DAU/MAU. DAU — daily active users. And MAU — monthly active users. Subsequently, DAU/MAU measures what percent of your monthly users come back to use your product on a daily basis. For consumer businesses, if you’re hitting north of 30%, that can probably get you a meeting with an investor. 40%, you can get a meeting with a top-tier investor. And if you’re hitting 50% DAU/MAU, you’re flying. Really flying. That comes with a check.
Back in February, I alluded to David Sacks’ take on DAU/MAU for enterprise. Unlike consumer product engagement trendlines, enterprise user engagement is illustrated with frequent spikes and troughs. Spikes during the weekdays. And troughs during the weekends. As Sacks notes, great enterprise SaaS products have a DAU/MAU of >40% (>8 workdays a month). And DAU/WAU of >60% (>3 workdays a week).
Source: David Sacks’ Measuring SaaS Engagement
Some other engagement metrics to consider on top of DAU/WAU/MAU:
Time spent per day
# of sessions per day
Time spent/session
Open rate — also note less engaging products have open rates <10% monthly.
New users/MAU
Sign-ups/installs
An increase in the above metrics usually show signs of product-market fit. Ideally on the magnitude of hours per day, especially if you’re a consumer social product. But realize that the above metrics may not be something you optimize for depending on your value metric.
I highly recommend performing cohort analysis to see what features and campaigns stick. And which don’t. Equally so, separating your average user from your power users to give you a better idea what delights your core users.
Putting growth into perspective
As your startup continues to grow, you will end up raising larger and larger rounds. And by definition, receive greater and greater valuations. It’s a bet that VCs take on your potential. Does it always reflect the “true” price? Probably not. It’s a guesstimate and gamble that you will become greater than the business you are providing now. I love Packy McCormick‘s Price/FAAMG ratio — the probability that your company will rival today’s biggest players. Take for example, Clubhouse, who’s recently valued at $1 billion. At the time that I’m writing this, that’s a 1/850 chance that they will become as big as Facebook. A startup’s valuation is the probability that it achieves its upside potential. If your valuation is based on the market, then it’s the probability you’ll achieve a sizeable share of that market.
Taking the flip side of the analysis, considering Clubhouse’s estimated 10M users, and a $1B valuation. The expectation is that each user returns $100 of future cash flow, once they are monetized. Be it via subscription and premium plans or advertisements. In comparison, by the same “model”, Facebook at their $850 billion market cap has coming up on 3 billion users, pegging the expected value of each user at $250. Of course with all generalizations, there are fallacies. So this exercise is merely a guesstimate of what’s expected on the ARPU (average revenue per user) front. Or even more ARPPU (average revenue per paying user) if users have to pay (subscription, features, etc.).
In closing
A common question in society, in interviews, and sometimes, startup pitches is: What’s the biggest risk you’ve taken? While that is an important question to set the y-intercept, it takes two points to draw a line. And I really like this second question: What’s the biggest risk you have yet to take?
Because if you feel like your biggest work is behind you, you’ve already reached your own market cap. Years ago, I once asked my very-accomplished friend an admittedly lazy question when we first met, “What would you say is your greatest success?” He responded, “It has yet to come, so stay tuned.” To this day, his answer still resonates with me. And I’ve taken it as my own.
At the end of the day, growth is a bet of on the future. In the lens of: If everything works out, what’s the best case scenario? Growth requires two parts: ambition and a bias to action. Your dream and vision is the vessel. And your actions determine how much of that vessel you can fill. The bigger the vessel, the more you can fill.
To get that VC term sheet, as a founder, it’s less about we need your money. If you focus on your North Star of building a product your customers actually want, the conversation with a VC becomes more like, “We would love your support; but even if you don’t believe in our idea, we’ll do it anyway.” At least, it’s the obsession I look for. That reality distortion field. If it doesn’t exist, we will will it into existence. After all, you have the willpower and numbers to back it up.