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How Investors Evaluate Startups

731 Comments / By / December 23, 2021

If you are looking to grow or expand your startup in Pakistan, you will eventually need more capital. And one of the most effective ways to raise capital for any business is through investors.

 

An investor is anyone who puts money into a business with the intention of gaining profit. Now, while this sounds great, any competent investor will perform their due diligence before putting any money into your business. A major component of this due diligence is business valuation.

 

There are many metrics and indicators that investors will consider during the valuation process for your business. Here are some of the most important factors:

 

Key Performance Indicators (KPIs)

Key performance indicators (KPIs) are the most important metrics and factors that are used to determine the financial and overall success of your business. KPIs can vary between businesses based on a number of factors, including industry trends, company size, goals, and more. However, some examples include profit margins, cost per lead acquisition, business growth rate, revenue growth, customer satisfaction, and more.

 

Benchmarks

Industry benchmarks are another way that investors evaluate your business as part of their due diligence. Benchmarks refer to industry standards, or guidelines, for key financial metrics. It basically refers to the average KPIs or metrics that your business should be meeting, according to the average standard of businesses in the industry. Benchmarks allow investors to see how your business is performing as compared to competitors and other industry players.

 

Customer Acquisition Cost (CAC)

Customer acquisition cost (CAC) shows investors how much it costs your business, on average, to gain a single client or customer. This cost includes advertising fees, sales commissions, referral fees, and other marketing expenses. This is a very important measure for business valuation, because it shows the investor how much they will likely be paying in order to gain a customer and eventually spin out profits.

 

Financial Records

This may be obvious, but all investors will be interested to take a look at your company’s financial records before investing. For example, balance sheets, profit and loss statements, cap tables, and cash flow statements are just a few financial records that would be of interest to a potential investor. These records will give valuable information on the liquidity, revenues, profits, debt, Pakistan tax payment, and dividend payouts that your company has.

 

Lifetime Value Analysis (LTV)

Customer lifetime value shows how much profits your business earns, on average, from a single customer over their course of your business relationship. Investors want to know how much profits they can expect to earn from each customer in your business, so it is particularly important during your business valuation. LTV often goes hand in hand with CAC, as they both show the total cost and expected profit of customers in your company.

 

These are just a few ways that investors will evaluate your business. If you would like to learn more, contact us today! Here at Vixperts, we offer the best accounting, bookkeeping, and financial services to Pakistani businesses. Get in touch today for a free diagnosis of your startup’s financials!

731 thoughts on “How Investors Evaluate Startups”

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