Metrics to consider when on the journey to Series A
January 16, 2024
Adam Wakefield

A startup’s journey is marked by its different funding stages, with Series A being a critical milestone. It’s a statement to the market that says, “I have arrived. My potential as an enterprise is self-evident.”

To get there, a startup would have gone through its pre-seed and seed funding rounds.

One danger for an African founder (or any founder for that matter) is as their startup moves from concept to Series A, an awareness gap develops between a founder’s perceived place on the startup maturity curve and their actual position. Many founders on the continent, including those in B2C and D2C, think they are ready for Series A when the underlying fundamentals suggest otherwise.

In B2C and D2C, founders need to walk before they can run

For founders operating in B2C and D2C, there are a few metrics or benchmarks they can lean on to better understand whether or not they are ready for a Series A. They carry weight with investors and analysts because past experience shows that the firms that reach these landmarks are robust ventures with real scale potential. When a startup opens a funding round, investors are paying for future revenues as much as those in the present. It’s important to note that the metrics below are just some of the ways a founder can measure where they are on the startup maturity curve.

In the e-commerce space, useful metrics include revenue and their supporting GMV or GTV. For a SaaS business, margins are a great signal if a startup is Series A-ready. For B2C founders, businesses that have annual revenues of $500,000 or more are in good shape to proceed to Series A. If these revenues reach and cross the $2 million mark, the general expectation is that Series A has already come and gone.

Investors and analysts also look at growth metrics. For month-on-month growth, multiples that suggest (but not definitively) that a startup is ready for Series A are 2x to3x growth. This is because, when a startup readies itself for real scale once they pass Series A, higher multiples up are needed to support planned growth.

For a D2C business, average basket or order size is also important, with this figure ranging from $15 to $300 depending on the nature of the business and its cost drivers. If the basket size is too small, cashflow will not be robust enough to support scale and reach the benchmarks necessary for investors to comfortably support a Series A.

Every metric or benchmark tells a critical story about a startup

Margins are crucial for D2C founders. While B2B ventures have more margin wiggle room because they operate at a scale that compensates for a lower margin, a margin of 25% is a promising sign for D2C founders. A high gross margin suggests that a startup is generating revenue that can be invested back into the business to support its marketing and customer acquisition activities. A venture ideally should be able to qualify that spend in their financial statements because when they go to market for funding, the raise can be used to support growth and scale instead of baseline sales.

If a D2C’s margin is anything north of 40%, the venture can consider raising at a larger round. Conversely, if a D2C startup is trading at a margin of 5% to 10%, it’s a sign to go back to the drawing board and reconsider the fundamentals that underpin the business.

Other useful metrics within the B2C and D2C space are customer lifetime value (LTV) and customer acquisition costs (CAC). Generally, LTV and CAC show how efficiently a startup attracts and holds onto a customer. LTV and CAC work in tandem as a ratio: LTV over CAC. If a startup’s LTV-CAC ratio is 3 or less, that suggests that a startup is spending too much capital on customer acquisition and is not ready for a Series A.

Lastly, within the B2C and D2C space, organic customers are an important benchmark that founders should keep an eye on. If more than 40% of a startup’s first-time customers are organic — customers that heard about the business through previous or current customers — it’s a positive sign that the product or service is sticky. Conversely, if 50% or 60% or more of a startup’s customers are acquired, that suggests a traction and sustainability problem, with the startup likely overspending to qualify traction to the market.

Again, the benchmarks and metrics highlighted here are just some of the metrics a founder within the B2C and D2C space can use when thinking about their next funding round, especially Series A.

If you are a pre-seed or seed founder interested in finding out more about Founders Factory Africa and the support we offer our founders, click here.