Aligning Startup Metrics with Stage of Maturity (Beyond Labels for Fundraising Rounds)

Martin Casado

1/ My experience is that most pitches go sideways because the investor is lead to believe there is more maturity in a company than their is. And then they leave unsatisfied because there wasn’t sufficient focus on the important metrics for the assumed stage.

2/ For example, a company claims to be raising a series B to scale sales, however there are few hard signs of product market fit and instead the pitch focuses on product vision and roadmap.

3/ In this thread, I try and outline how we view startup maturity, and what we look for in each stage, independent of the round label.

4/ First, seed/A/B/C is a bad approximation for the stage of a company. Rather than implicitly signal through the round, be clear up front. The stages we use internally are: Team, Product, Repeatable Sale, Unit Economics.

5/ Team : If this is a team bet (pre product in market) be sure to give the long form of your bios. Take the time you need, and focus on founder/market fit. For a 50 minute pitch, taking 15-20minutes on the team is just fine.

6/ Entrepreneurs at this stage are often overly enamored by their solution. But investors are far more interested in the market, the broad problem domain and the suitability of the team to crack it.

7/ Product : Post product creation, the investor wants to know if you have product market fit. This is a tough one on either side so do your best to lead the investor to the real market signal (e.g. potential customer quotes are effectively useless).

8/ A common failure is to over-emphasize sales traction. Early deals can be messy and misleading so we call customers at this stage. Don’t oversell exploratory PoCs, discussions with OEMs/partners, services engagements, one offs, etc.

9/ Rather, be crisp on real market signals : production deployments, engagements with real decision makers, ad hoc internal projects that mirror your solution, broad trends in your favor, etc.

10/ Repeatable Sale – If you claim to have repeatable sales, be sure you really do. That means, similar buyer, similar use case, growing pipeline etc.

11/ Often at this stage, a company will have been working accounts since inception, so when the product arrives they have a burst of early sales. But these aren’t necessarily indicative of repeatable growth, and that’s reflected in a lack of real pipeline.

12/ At this stage we talk to customers to diligence the duration of the sales cycle and the pipeline to understand whether the company has hit repeatability, or this is just a temporary burst.

13/ Unit Economics – If you have repeatable sales, our diligence focuses on signs of positive unit economics that will ultimately result in attractive margin. We pay special attention to ACV, CAC and net dollar retention.

14/ In the enterprise, gross margins are difficult to determine because so much of the company, from founders to engineers, are needed to make a sale and get the product in production.

15/ So when we diligence here, in addition to looking at your internal numbers, we’re also trying to get a sense of the “actual” effort required to make a sell, and implement the solution at a customer.

16/ Final note, the problem is rarely that the company has less maturity than expected given it’s age, amount raised, etc. Startups are hard and can take years for real traction. I’ve invested in very successful companies who only caught their stride after 5+ years of slogging.

17/ The real problem is when startups signal more maturity than they can justify. I’d much rather have a founder clearly highlight pivots, or slow market maturation than try and hide them only to be uncovered during diligence.

18/ Thanks for reading 🙂

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