Building any technology company from the ground up is undeniably challenging and resource intensive. Of course, it takes more than just money to build a startup — and survive — but access to outside capital is possibly the most important asset for scaling. It is also often the biggest challenge to overcome.
The number of early stage companies that seek financial investment continues to grow. According to Gust, 17.9 percent more funding applications were submitted in 2016 compared to the previous year and the U.S. is the source of nearly 55 percent of funding applications worldwide. Venture capital investment in the U.S. reached a record $84.2B in 2017, its strongest year since the dot-com bubble.
The competition for venture capital and private equity funding is only becoming more competitive — roughly one percent of companies that aspire to obtain venture capital actually receive it. Why is this percentage so small? Too many entrepreneurs in pursuit of funding don’t understand enough about how the venture capital process works and what criteria motivate decision-makers.
In truth, investors require more than a great idea — they want to see indicators that a business can truly succeed. Here are four success indicators that growth equity wants to see before they invest in your tech company:
Bookings momentum and velocity
Bookings is the amount of money committed to be paid to the company in the future from both new and existing customers. This is probably the most important metric that investors look at to project long-term success. If your company is growing its bookings — whether through new business, upsells or renewals — billings will increase. Rapidly growing bookings doesn’t just show future revenue, it also shows show strong traction, scalability and product-market fit.
Customer success and retention
The only thing more important than acquiring new customers is keeping the ones you have. This is because it takes more time and resources to acquire and onboard a new customer than it does to retain and upsell existing ones. Ninety-five percent of SaaS revenue is generated through customer success and retention, and it is the key to driving lifetime value. The longer a customer is kept, the greater the revenue potential is. Having high customer retention validates that your technology is sound and that customer service is working.
Customer acquisition cost (CAC) relative to payback period and revenue creation
CAC lets investors know how much it costs a company to acquire a single customer. This varies by industry, so it’s important to also take into account how much your company is making from each new customer and how long it takes to surpass the money you spent to acquire them in the first place. Investors will be able to tell a lot from these numbers, although not every growth equity investor will look at them the same way. Generally speaking, the shorter the payback period, the better.
Lead generation and pipeline conversion
Building a quality pipeline involves lead generation, CRM, marketing automation and a strong understanding of your conversion metrics. Do you have the infrastructure in place to produce a pipeline of prospects and a process for converting them? If so, how many qualified leads are you pulling in, how many get converted and how quickly? This is an excellent indicator of how well your marketing team is qualifying leads to maintain a high-caliber pipeline. A quality pipeline and healthy conversion rate are typically good indicators of future performance.
With tens of thousands of tech companies in search of funding each year, entrepreneurs must come prepared with more than an idea to set their business apart. By keeping these four success metrics in mind, early stage companies can not only position themselves for investment but be successful in obtaining the capital needed for lasting success.
Jim Douglass is a Partner of Fulcrum Equity Partners, an Atlanta-based growth equity firm focused on providing expansion capital to rapidly growing technology and healthcare companies. Douglass brings more than 25 years of operations management, strategic development and financial experience with high-growth technology and tech-enabled service businesses.