Metrics to decide whether to invest in a startup or get it out of your head

Uncertainty about the evolution of the global economy is affecting startups, as with other sectors. In fact, according to data from the specialized investment fund Atomico, startup funding has decreased, since investors are more cautious than ever. Specifically, global funding fell by 35% in 2022 compared to the previous year.

Investor flows are declining. And one of the reasons may be that only 1 out of 10 startups survive, while the other 9 will fail during the first few years of business, most (6 out of 10) for creating products and services that the market does not need. However, not all countries have such a high percentage of failure. In Switzerland, for example, 35% of start-ups manage to land on their feet.

Start-ups that survive take an average of 2-3 years to turn a profit, and almost double the time to eventually go public. According to Statista, 5.3 years in the US. The United States is precisely the country with the most emerging enterprises, with over 72,500, followed by India (nearly 14,000) and the United Kingdom (6,300).  In Switzerland’s case, according to the radar for Swiss start-ups, over 3,000 emerging enterprises are operational.

According to IEBS (Innovation & Entrepreneurship Business School), the main sectors on which emerging enterprises will venture are renewable energies, mobility, applied AI, foodtech, technology related to Web 3.0, and bioengineering.

To support this type of company in funding rounds, experts want metrics and evidence instead of investment based on faith or intuition. There is no infallible formula to calibrate the evolution and potential for success of a technology-based company. However, if the startup is already up-and-running, there are some indicators that can help us easily understand whether they will grow over time, and by how much.

• The first of these metrics is the company's financial information. Knowing its turnover and income and expense structure, as well as whether it has earned a profit or continues to make losses, will give us a good insight into the company's position. 
• You need to have information on the funding rounds to find out how much money the company has raised, and at what stage it is in. This will give you clues on its ability to raise money and what needs it will have in the future. 
• In this regard, it is also important when assessing the investment to know how quickly the funds it earns are spent. This indicator is called the burn rate, and it is usually measured monthly. The lower the amount, the more efficiently it uses its funding.
• As for customers or users, it is not only key to quantify their number - this is easy through registration data or app downloads - but also their level of activity and retention. In other words, you must check that these customers use the product, how and how often. 
• But the really important metric here is the ability to monetize the product, i.e. transform user appeal and retention into income, the ultimate goal of a business. 
• In addition, experts recommend taking into account the cost of customer acquisition, an interesting metric to see if it is evolving downwards or if it is higher than the cost in other companies or sectors.
• In the case of a company with a sales model for products or services, it is essential to know the economic margin that is sought. This means the difference between the average selling price of a product and the cost for the company to create it. 
• And finally, study how money is retrieved, and to what extent other investors have already done so. It is not the same to have to wait to get a dividend or to be able to divest.

The metrics discussed here will be important as the project grows, but if the company is still in the seed phase and not up-and-running, we will not have data on many of these indicators. 

In this case, we will have to rely on more subjective questions that should always be taken into account before deciding on an investment. For example, which entrepreneurs are behind the project, what is the business plan, analyze the product on which the business idea is based and the characteristics of the target market.