What Metrics Matter Most in Funding Rounds

Mike Whitmire, CEO and co-founder of FloQast, CPA

Throughout a company’s lifecycle, there may be several funding rounds to raise capital and continue on your journey. Starting at Series A, companies may fund all the way to a Series D or E to gather funds, expand, grow, and meet goals. For example, our company, FloQast, just wrapped up a successful Series E funding round to raise funds that will empower innovation, enhance customer experiences, and drive further company growth.

During each of these rounds, companies will interact with various investors. Each of these investors will scrutinize many different metrics to determine if the company is aligned with their investment goals. While every funding round is different and every investor may look at different metrics, I’ve found that three unique metrics can help set your company apart from others and truly showcase the success you’ve seen thus far.

Annual Recurring Revenue and Growth

While this may be the most obvious metric, it doesn’t make it any less important. More than anything else, investors will want to see how much revenue the company generates annually, with a projection of how it will grow. As a result, annual recurring revenue (ARR) is key.

ARR provides insight into the company’s revenue stability and predictability, measuring the recurring revenue generated from existing contracts. In addition to metrics like churn, ARR is a helpful indicator of the company’s ability to retain and recruit customers, generate consistent income over time, and expand market reach. For example, high ARR coupled with efficient customer acquisition and retention indicates market demand for the product or service and a strong ability to capture a larger market share. Ultimately, investors will look to this metric to understand your company’s traction and immediate growth potential.

Being transparent with these numbers is massively important to attracting investors. Without being open about your ARR and growth, it can be hard for investors to engage with your company and get on board. Additionally, without transparency, it’s possible that investors can assume the worst about a company and avoid investing altogether.

Money-Based Net Retention

Money-based net retention calculates the change in revenue from existing customers over a year, providing insight into a company’s ability to retain and expand its customer base. New customers (less than a year old) are not included and, oftentimes, this metric also accounts for factors like upgrades and churn.

As investors evaluate a company’s ability to drive revenue growth, money-based net retention can showcase customer satisfaction, retention, and scalability. Specifically, investors look for companies with high net retention rates as they demonstrate the potential for long-term revenue expansion without only relying on new customer acquisition; when a company has a money-based net retention value over 100%, it can indicate to an investor that they are effectively upselling, cross-selling, and retaining customers. Conversely, a value below 100% suggests a decline in revenue from existing customers. Additionally, a strong money-based net retention rate can increase investor confidence in the company's ability to achieve sustainable growth and generate ROI.

Cash Burn

Perhaps the most unique metric to consider is cash burn. While some may see high cash burn as a red flag, I believe it is a critical indicator of a company’s goals, priorities, and financial strategy. A company strategically burning cash is spending a fair amount of money; while maintaining critically important cash reserves. I have been very open with our investors on my plan, and that involves burning cash in a calculated manner to fuel growth.

A low cash burn rate is often seen as a positive indicator, suggesting the company is managing its expenses efficiently. However, I believe a high cash burn rate demonstrates strategic investment in growth and market expansion. When companies have a high cash burn rate, it can signify that they’re pursuing ambitious initiatives, such as scaling operations, infiltrating new markets, or investing in research and development. All in all, a high cash burn rate can lead to significant long-term value creation.

While this is not always the case, investors should not write off a company for a high cash burn rate. It can indicate a company’s confidence in its business model and willingness to prioritize growth over short-term profitability.

Right Metrics, Right Partners

As companies navigate various funding rounds to fuel growth and innovation, showcasing the right metrics is imperative to garnering investor interest and locking in the best partners. ARR provides crucial insights into revenue stability and growth potential, while money-based net retention showcases customer satisfaction and scalability – all critical elements for investors. And while it may raise eyebrows, cash burn can signal strategic investment, high confidence in a company’s business model, and long-term value creation. Altogether, these metrics can effectively differentiate a company, highlight its successes, and attract the right partners for the journey ahead.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.