Metrics that matter to your climate startup

Metrics are a powerful tool when it comes to telling the story of your climate startup to investors. They convey your risk as well as your upside, and if you understand the connections between them, will offer invaluable information you can use to boost your business. But when you’re an early-stage business with limited data, what should you be tracking? And as your business grows, how should your focus shift?

Rahul Parekh is a partner at the Venture Capital firm 2150. We sat down with him to discuss the metrics investors care about, the insights you can draw from them, and how the metrics you use to create your narrative will change over time.

Why is measurement important?

1. VCs will zero in on your metrics
VCs look at your metrics for evidence that your business is capable of delivering the returns they expect, which at the seed stage is an enormous 100X. Early stage investors know that not all their investments will succeed and that only a small handful will drive the majority of their fund returns. Therefore they aim to evaluate every company’s potential to produce outlier returns before they invest. It’s vital that your metrics indicate this potential, but remember that VCs only care about the data that’s relevant to them, and how they interpret your metrics might significantly differ to how you view them. 

For instance, your investors might want you to control your burn and extend runway another 12 months, while you’re happy to spend the cash building your team and product in order to generate revenue later. Or, you may think that your 2X revenue growth over the past 12 months is impressive, but if you’re expected to be growing at least 3X, your investors might be concerned.  Metrics tend to be subjective, and it’s important to understand not only what to present, but also what the baseline expectations are.

2. Metrics help you improve your business
There are certain metrics around your financials that matter for all businesses, even if you’re not VC-backed, and measuring them will give you critical insights into how your company is performing. Even better, this data will help you make intelligent, informed choices about what you can do differently in order to grow faster and generate more revenue.

Key metrics for your business by stage

Seed 

1. Revenue
This is the most important metric across all stages, and encompasses the pace of growth, the amount of revenue, where revenue is coming from, and how concentrated it is.  If you want to take this further, you should be measuring revenue at a granular level, by product/service/offering type, by customer segment, etc.

Revenue metrics are usually the first thing investors look at when evaluating investments.

2. Your cash on hand, burn rate, and runway
At the Seed stage, you likely won’t have enough revenue to cover your OpEx, and it’s practically a given that everything will take longer than planned, so investors will be perpetually concerned about your company running out of liquidity.  Carefully measure and track your available cash, gross and net burn rate on a monthly basis, and proforma runway (i.e. how much time you have left before you need to raise again).  The runway math can feature in your expected receivables, or just be based on a simple formula of cash-on-hand/net burn.

3. Headcount
Here, investors are looking at the number and type of full time employees you have on your team, as well as the size of your contractor base. They will want to understand how headcount has tracked historically and how it will change over time.

Remember, as a founder, investors will spend a lot of time digging into your background, vision, ability to execute, and commercial expertise. The latter is especially salient in climate, where there are many first-time founders who might be extremely knowledgeable and driven scientists or technologists, but tend to have a lower level of commercial expertise than entrepreneurs in other sectors. If there isn’t currently anyone in your business with these skills, you’ll need to urgently hire to fill those gaps, and your headcount plan should reflect that.

What aren’t investors focused on at this stage?

Since there’s generally very little data available at the seed stage, VCs are typically investing in your team, concept, and maybe an MVP or demo product. While they’re important, metrics like your costs of customer acquisition, EBITDA, or projected revenue aren’t looked at so closely here, because if the investor sees you have the right people and an innovative solution, and some early traction, they’ll often trust in your ability to create a market or beat the competition, even if that revenue traction is minimal or the early unit economics are imperfect. 

Looking beyond the numbers

At such early days, your numbers may be so low that while you might have 5X year-over-year revenue growth, that might only mean going from $50K to $250K. The process of measurement is more important than the outcome - as is demonstrating to the investor that these figures are going to change over time. It’s critical that you understand the relationships between your different metrics, and can address anything that will jump out as a red flag to an investor. For instance, if you're at a very early stage and you have revenue, they’ll start putting a multiple on that number, no matter how low it is - which might work against you when you’re trying to prove your company has the potential for explosive growth.

Series A

What’s the same?

At Series A, investors will drill deeper on all things revenue: revenue growth, revenue traction, the concentration of revenue, the pipeline that’s linked to that revenue and how customers are moving through it. They’ll also still be looking at your cash on hand and burn rate, although runway is slightly lower down the list of priorities, because having been through one or two rounds, you should have a better sense of how to manage it.

What changes?

1. Return expectations
At Series A, investors are typically looking for a 10-15x return on a larger investment, and they’re expecting a significantly lower loss ratio than at seed stage because they have access to more information. 

2. Gross margin
At the seed stage, your gross margin isn’t something that can typically be measured but at Series A it becomes much more apparent. Climate startups can be divided along two lines: first, deep tech hardware companies that have the potential to decarbonize entire industries, but take a long time to grow and scale, and crucially can only do so if they have strong positive gross margins in the long term, but maybe not at the onset. On the other side of the coin, there are asset-light companies (i.e. SaaS companies), where gross margins tend to be high - around 80% or more, from the onset. 

So, when you’re talking about your gross margin, your current figures matter, but so does your narrative around them. If you’re a hard tech company, you might not currently have a positive gross margin, but you might be making progress towards one. That’s the story you need to tell, and you need to show it can happen on a timeline that matters to the investor - around 5-7 years. 

3. Other metrics
If you’re a hardware company, investors will be looking at your R&D spend and investments, your pilots, your patents, and your ability to do field testing of your product. With a SaaS-style company on the other hand, while it’s still quite early, you can start measuring your ARR, CAC, LTV and get some sense of retention (i.e. gross/net churn, etc).

Series B

Once again, revenue is the most important metric at this stage. But investors will spend much more attention on your overall OpEx, gross/net margin, and depending on your business, other metrics like ARR growth, churn, CAC/LTV. The bigger your business grows, the more meaningful these measurements become. 

Does reality match expectation?

Here, investors will also properly look at your net margin/EBITDA for the first time. While at Series A, they were looking for the potential for your business to scale, at Series B they’ll start asking whether this is actually realistic, and look for concrete signs that your business can get there. The return expectations start to shift materially at Series B, where investors are targeting around a 3-5x return (but also anticipating much lower risk), and will stay with the company until an M&A or IPO. 

Rahul Parekh is a Partner at 2150 and Urban Partners, based in London. He has played a pivotal role in supporting the firm’s investments, serving on the boards of a number of investments such as Ember, HomeTree and OpenSolar.

Rahul has been on both sides of the table having founded and exited a VC-backed business, which he led as CEO for several years. He was also a Managing Director in Rocket Internet’s investment team. He began his career at Goldman Sachs, where he spent eight years as an Executive Director in equity derivatives trading.