Be Honest With Your Metrics
Traction.
For early-stage founders, it’s a word that can represent accomplishment, growth and possibility. It can also embody pressure, fear and judgement. Especially within the context of fundraising.
Unfortunately, all too often the pressures of fundraising lead founders to present traction in non-standard ways that they hope will make it look better. MRR becomes ARR. Daily active users become monthly active users. And so on.
Just putting on some lipstick…
I get it. You’re worried that the numbers aren’t impressive enough to secure the funding you need to keep going. But here’s the thing: you’re not tricking any investors by presenting “roll-up” metrics like these. What’s worse, you’re potentially planting unnecessary seeds of doubt in their minds about your trustworthiness, focus and understanding of the business.
Here are 5 misleading metrics that have no place in your fundraising deck (or your business):
1. ARR
What You Think it Means
Annual Recurring Revenue
What it Actually Means
If you sell your products exclusively through contracts that auto-renew once per year (or after multiple years), then it’s the amount of revenue normalized on an annual basis.
But if even a single customer renews monthly, it means absolutely nothing.
Despite what many blog posts and questionable startup advisors claim, you cannot calculate ARR by multiplying MRR by 12.
What You Should be Using Instead
If you’re a subscription service with any customers that renew on a monthly basis, your revenue metric should be monthly recurring revenue (MRR). All of your relevant performance metrics (churn, growth, etc.) should be based on the same time horizon: monthly.
2. Downloads/Signups/Accounts/Users
What You Think it Means
The number of people for whom your value proposition resonates.
What it Actually Means
The number of people who saw your Facebook ad, Product Hunt launch, etc., said to themselves “this sounds interesting” and clicked a link.
What You Should be Using Instead
Users.
But a very specific definition of users.
If you’re being honest about your metrics, a user isn’t a download nor is it a signup. It isn’t simply an ID that was created in your database (so, no, your total number of users isn’t equal to the number of the user accounts in your database). A user also isn’t someone who made it through your activation flow, kicked the tires for 30 seconds and never came back (see: MAU).
A true user is someone who not only created an account and made it through the activation flow, but looked around for awhile and, most importantly, came back.
At DataHero, we defined a user as someone who logged in on at least 3 separate occasions. Once just meant that they created an account. Twice could indicate they ran into problems during the activation flow or initial onboarding and came back to complete it. Three separate visits meant that they unequivocally understood what the product did and were intrigued enough to try to use it.
There’s an important benefit of using such a strict definition of users: it allows you to separate churn during each step of the acquisition and onboarding process from churn after they became a user. From a product development standpoint, this is massive:
3. MAU
What You Think it Means
Monthly Active Users
What it Actually Means
People who tried your app once and never came back.
Ok, that’s a bit harsh. Some of them probably came back…
What You Should be Using Instead
Usage should be measured on a daily or weekly basis (DAU or WAU), depending on your use case.
You should also expect that investors will ask for a cohort analysis showing usage over time, so have it ready to go (bonus points for including it as an appendix when you send your initial pitch deck):
4. LOI
What You Think it Means
Letter of Intent.
Proof that a company is excited about what you’re doing and wants to become a customer.
What it Actually Means
Absolutely nothing.
A letter of intent has zero commercial value and isn’t worth the paper it’s printed on.
What You Should be Using Instead
Phone calls.
In general, the key metric for B2B companies that aren’t yet into significant revenue is pilot agreements (signed legal agreements that form the basis of a pilot or trial engagement). But there’s an interim metric that can be beneficial when fundraising: referenceable prospects (aka “phone calls”).
How many people have you spoken with, showed a prototype or demo to, etc. who are willing to get on the phone and tell an investor that they genuinely want to try your product when it’s ready?
Rather than try to get a prospect to sign an LOI, see if you can convince them to take a reference call from a potential investor. Time is money, so I promise that I’ll be far more impressed by someone willing to spend 15 minutes of their day telling me how much they can’t wait to try your MVP than an “agreement” that has no commercial value whatsoever.
5. Partners
Just…don’t.
While it might seem perfectly reasonable to “roll-up” your metrics to try to look better to investors, the reality is most will have the exact opposite reaction. Meaningless metrics shine a spotlight on your insecurities and guarantee you’ll be asked even more questions about the things you’re trying to smooth over.
Every billion-dollar company had to get to $1 first. Every massive hit app started with a single user.
So instead of trying to make your traction look better, be confident in where you are in your journey. Come prepared with detailed that shows how things are moving in the right direction, even if the numbers are small. Convince me you have a plan to get from zero to one, instead of trying to trick me (and yourself) into thinking you’re already there.
Want more examples of phrases that founders and investors interpret differently? Check out You Keep Using that Word…