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Welcome to the Founders Journey podcast. Inspiration education for Founders by Founders. I'm Greg Moran from Evergreen Mountain Equity Partners in the Founders Collective. And today, I want to talk about one of the most really crucial parts of angel investing. So I know probably many of you listening to this are angel investors. Or maybe you're a founder looking to raise angel investing.

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This video will also help you get a perspective from the mind of an investor as well. But most importantly, if you're thinking about investing in startups as an asset class, it's really important that you have an ability to really assess a startup's potential. Investing in startups can be incredibly rewarding and a lot of different ways, not only financially, but it's also really high risk, and knowing what to look for can make all the difference in your success as an angel investor.

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So in this video, I'm going to break down the key metrics that every angel investor should know. So that you can evaluate a startup's potential as well as a really important key factor that's often overlooked. And we're going to talk about that as well. And that's the importance of choosing the right founder. So let's get started. Metrics are really the backbone of any startup evaluation.

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When you're considering going down that path as an investor, you really need to dig into the metrics to really understand the performance of the business. Now, sometimes you're going to be investing pre-revenue, and that's a different thing altogether. That's even far riskier, really suggests that if you're going down that path to really make sure you have some specific domain knowledge, so you can understand if the product is going to be accessible to the market.

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But let's assume the business has some revenue. So we're going to talk about some of the metrics associated with that. Because those metrics really what they do is they offer a window into the business's current health and its growth potential, and the likely of generating long term returns. But it also is going to give you an indication of whether that business can stay in business long enough to kind of break the cycle and be able to break out from what we call a scape velocity.

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Right. Which is that sort of that early stage inertia where they really starts to pick up momentum. Not all metrics in startup are created equal. So you really need to understand which ones matter the most of that. They can really help you make better decisions. So I'm gonna walk you through some of the core metrics and indicators that I look for.

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When we look at a startup's potential at Evergreen Mountain. And we're going to talk about this from an early traction to customer acquisition costs and more. So we're going to look at kind of a, you know, a variety of metrics. We're also going to discover and really discuss why founder selection, especially with our proprietary selection approach I'll talk about that a little bit at evergreen is really critical for assessing startups true potential.

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Let's jump into key metric number one here. And we'll start with traction. Traction is all about evidence, right? Every startup most startup ideas sound really good on paper. If you've got a capable founder at all, they're going to be able to present it in a way that's probably going to sound like they're next. They're on to the next hottest thing.

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But what we're looking for is evidence that the market wants what this startup is offering. So whether it's customer acquisition, it's revenue growth or user engagement, metrics around tracking really demonstrate that there's a genuine demand, right. So I'll give you an example. If a startup in the SAS space is showing month over month revenue growth of, say, 20% or more, that's really strong traction.

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It's a good indicator that there's clear product market fit. Right. That's really what we're looking for is our customer is going to buy what this company is doing at enough scale to create a successful business and ultimately create successful returns for you and the founder. So it tells us that there's existing demand in that example, and people are willing to pay for it.

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Now, it doesn't have to be 20% growth. That's pretty high growth, but looking for demonstrable evidence that there's enough traction to build a substantial business here. However, don't just look at the growth rate. Assess what's really driving this traction is organic or driven by really costly marketing events. A lot of times at a very early stage, it may be most of the traction that you're seeing may actually not have gone out of the Founders network yet.

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That's good. But it doesn't necessarily tell us we're going to get widespread market adoption, sustainable traction. Really what it does is indicate a really robust product market fit. And that's really essential for long term success and returns on the business. So let's jump in a key metric. Number two. And we're going to talk about customer acquisition cost sometimes called CCaC and lifetime value.

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You'll see it referred to sometimes as LTV, caca CAC. These two metrics are critical because what they really do is reveal the efficiency of a startup's growth. Right. So it's one thing to start to get growth. But if you're buying that growth, if that growth is too costly, you can't build business to scale on that. So we're looking for for efficiency of growth here.

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Customer acquisition costs are Kak tells you how much the company spends to acquire a new customer. On the flip side, lifetime value, or sometimes known as LTV, estimates the total revenue a startup can expect from a customer over the course of their relationship with the product. Right? So when you're looking at calc, you're looking at how much does it cost to get the customer LTV.

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You're looking at? If I get the customer and this customer stays on, what's the what's the long term value of that relationship with that customer? So I'll give you another example. If a startup's LTV is five times higher than their Cacc, that's a great sign. It means they're able to generate significant revenue relative to their acquisition costs. That's what you want to see in SAS or an enterprise software.

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It's not uncommon. It may take a year or two to recoup the money, but you want to see is a long term trend. Being able to retain that customer, continue to grow that customer, and continue to build that lifetime value. So the ideal LTV to cash ratio is somewhere around 3.1 and or 3 to 1. I'm sorry, not 3.1.

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So LTV 3 to 1, right? Which shows that the business can sustainably grow without burning a lot of cash on customer acquisition. That's what you're looking for from growth efficiency here. But if cash is too high or LTV is too low, what it will also do is indicate potential issues with the long term scalability that a company that's going to cause a problem.

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Key metric number three, and we're going to talk about here is runway, which refers to how long a startup can keep operating its current burn rate, which is the rate at which it's spending cash. Startups are often in growth mode, so they're burning cash to gain traction. That's normal. They have to hire talent. They have to expand operations.

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Startups can be pretty costly in the early days. It's okay if they're burning cash. So, you know, for example, if a startup has 500 K in the bank and it's a monthly burn rate of 50,000, the runway is about ten months. You need to understand that, right? How long is this cash that either you're investing or consortium investors are investing?

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How long is it going to last them? And what's the prospects of raising more money if that's going to be needed during that period of time. So why is this important when we gives you an idea of how urgent the next funding might be, and whether the startup has any flexibility to execute in its growth strategy, it's not a good thing.

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If a startup is chronically short on cash. The company may be good, but they're so capital starved, they have to. Execution has to go perfectly. And in some cases, even that's not enough. You really need to understand if there's a little bit of give in that runway to say, okay, what's the fault tolerance here? If not, everything goes right, but a lot goes right.

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Are they still going to run out of money? Ideally, for evergreen, we like to see the bare minimum of 12 months, like to see 18 and softer kind of startup market where capital was not as plentiful. We actually looking for 18 to 24. We're bringing that down a little bit, but really like to see about 18 months of runway to give the startup enough time to really make meaningful progress without the pressure of just immediate fundraising, because the more companies fundraising, the more time that they're spending not running the business.

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Now, I want to talk about a factor that's just as important, arguably, maybe even more important than any of the metrics that we've discussed. And that's founder selection. So metrics can tell you a lot about the business, but they can't predict the resilience, the adaptability, the determination, the wisdom of the founder or the drive of the founder. The person responsible for making the critical decisions is ultimately what you're investing in, right?

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Because in startups, things go wrong. Having a founder that can pivot quickly, that can learn quickly, that can adapt quickly, that's really critical. And that's why founder selection is really essential to evaluating startups performance. It's so critical because their startups are full of dynamic and unexpected changes. Just stuff. Crazy stuff happens. And a founder with a strong track record with resilience and ability to adapt can steer the company through those ups and downs.

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Pivot rally the team when things when times are tough. A great founder and I've seen this so many times, a great founder can turn a decent idea into a successful business, but if you've got the wrong founder, they can have the greatest idea ever and still not execute. Not the promise of that startup will never really be materialized.

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At Evergreen Mountain, we actually developed our own proprietary founder selection. Model. There's it's an archetype model called the adaptive innovator. There's four pillars of it. What this does. And we've got other videos on this. So check them out. What this does is it helps us evaluate a founder's potential for long term success. So the assessment really examines the founder's leadership qualities and their vision, their emotional intelligence, a lot, among a lot of other factors, to determine their likelihood of long term being able to grow this business.

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Here's a quick offer. If you're if you're an angel investor and you're considering investing and you want to use our, founder assessment complimentary, if you want to just run a founder through it, just to kind of get a sense to help you out with founder selection, we're happy to help you there. So sum it up as an angel investor, understanding the right metrics, the traction LTV, runway burn rate, they give you really invaluable insights into a startup's health and their growth potential.

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But remember, those metrics aren't enough. You gotta understand the founder's vision, their adaptability, their resilience, and those those intrinsic characteristics to know you've got the right founder building on this startup. So if you're interested in startup investing as an asset class, that's what we do at Evergreen Mountain Equity Partners, where early stage venture fund for the future of work so unique thesis driven fund.

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If you want to learn more about our founder selection assessment or how we evaluate startups at Evergreen Mountain, or just understand the asset class better and how to invest in startups, we'd love to discuss this with you. So thanks for watching. Don't forget, take a moment like subscribe, turn on the notifications, just click that bell and feel free to drop your questions in the comments below.

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Thanks! We'll see you next time.