Investors see or read hundreds of pitches each week. Standing out from the crowd takes not only a good idea but great showmanship, too. Pitching a business idea successfully requires projecting confidence: walking the walk, and talking the talk. Use these terms to signal you know what you’re doing — and your idea is worth investing in.
[Read more: 10-Point Checklist to Use Before Pitching Investors]
Customer acquisition cost (CAC)
Customer acquisition cost is how much the company has to spend to get a new customer. To calculate CAC, sum up the total spend over a certain time period (including marketing costs, sales team member salaries and any other expenses that went toward acquiring new customers) and divide it by the total number of new customers over the same time period. This figure usually applies to a specific time frame, like the first quarter or the first year of sales.
Investors will want to know your estimated CAC, as well as how you are going to cover or reduce this cost over time.
Customer lifetime value (LTV or CLV)
Customer lifetime value is an estimate of the total amount of money a customer will spend at your business during their lifetime. CLV can help you gauge how much to invest in maintaining a customer relationship. For instance, if you estimate one customer’s LTV to be $300, it doesn’t make sense to invest more than that to try to keep their business.
CLV can be a little tricky to calculate. A commonly used formula is to take the average value of a purchase multiplied by the number of times the customer will buy each year multiplied by the average length of the customer relationship (in years).
Of course, if you’re just starting out, investors will want to know how your sales will cover the costs of running your business: Are you going to be using their funding responsibly? They may also want to know more about your strategy for customer retention, as the cost of acquiring a new customer is often higher than the cost of keeping an existing one.
Burn rate
Your burn rate is how quickly you are spending your cash. It’s pretty straightforward: Burn rate is your current balance less your net loss. It will give your investors an estimate of how much longer you are able to operate and how efficiently you are running your business. Many investors expect that startups will operate at a loss for a little while or even a few years. Burn rate provides insight into your cash flow and can help investors estimate if their funding is really being put to good use.
Investors use market penetration to understand how much your business is growing.
Cost of goods sold (COGS)
Cost of goods sold (COGS) is the total of direct costs associated with producing goods or services. This can include things such as the cost of raw materials, direct labor costs, supplies used to market or sell a product, shipping costs and the cost of utilities for putting the goods together. A common formula used to calculate COGS is (Beginning Inventory + Cost of Goods) - Ending Inventory = Cost of Goods Sold.
Investors want to know your COGS because they are interested in your profit margin. COGS is often used as a proxy to understand how efficient you are in your business operations. A high COGS may indicate one of your suppliers is overcharging you, or you have too many people working on one project.
Market penetration
Market penetration indicates how much of the potential market of customers you are able to capture. This measurement helps a company discern whether its marketing is working and how often customers choose its product over those of competitors. Market penetration is calculated with this formula: (Number of Customers / Target Market Size) x 100 = Market Penetration Rate.
Investors use market penetration to understand how much your business is growing and compare how favorably customers view your brand compared to others on the market. It also gives them an estimate of how long it will take to be profitable: How much of the market will a company need to penetrate to break even?
Term sheet
Finally, a term sheet is a document that outlines what investors will receive in exchange for their investment. Term sheets will outline things like ownership rights and voting rights, in addition to payment terms. Term sheets mean that investors are interested — you’re on the right track!
[Read more: 5 Tips for Finding the Right Investor — Even During the Pandemic]
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