For companies raising capital in the coming year, news of rising interest rates, market volatility and falling valuations paints a daunting picture. Understandably, founders are eager to understand how current public market conditions may impact fundraising in the private markets. The good news is that market correction are frequent throughout history –– and exceptional firms are still positioned to succeed.
Using performance data to tell a clear story about your company’s potential is a smart practice in more favorable market situations. However, in today’s dynamic world, using statistics to tell your story is critical. Investors pay much more attention to a company’s performance and prospects when attempting to issue equity or debt in order to minimize their own investment risk. The good news is that market correction are common in history, and strong companies are nonetheless positioned to succeed.
As a former venture capitalist, I advise all founders that their data’s trustworthiness will have a significant impact on their company’s valuation and transaction terms when obtaining funding. Unfortunately, many businesses lack an effective mechanism to gather, combine, and analyze data into real-time insights, forcing them to rely on static, Excel-based samplings that may not capture the complete picture of their potential. With so much conflict, it can be difficult for entrepreneurs to know where to start. The following stages are a good place to start for founders and startup teams trying to become more data-driven in their approach to fundraising.
Begin by looking at revenue cohorts. A cohort analysis examines several groups of clients, whether they are users through time or separated by geography or size, and allows investors to assess how they perform separately. Investors enjoy looking into the future because they understand that a company’s value is equal to the present value of its future cash flows. You can increase investors’ confidence in your cash flow estimates by deconstructing the drivers of revenue growth using cohort analysis, leading to a higher valuation or more favorable loan conditions.
Take, for example, the graph above. According to cohort research, newer client groups are larger and more retentive than ever before. This tells investors that there’s a tendency toward increased customer lifetime value, which boosts investor confidence in your company’s prospects. Companies who can link the success of the same cohort to increased sales and marketing efficiency will be able to show that the company’s growth isn’t only due to increased client acquisition and retention spending. To put it another way, this is a company that is increasing its value over time, making it even more valuable to investors.