✋ Heartcore Insights
Hi there,
Welcome to the 106th edition of Heartcore Insights. Curated with 🖤 by the Heartcore Team.
If you missed the past newsletters, you can catch up here. Now, let’s dive in!
Metrics That Matter – Three Analyses for Startups and Scaleups to Track on the Path to Profitability
The rallying cry among the tech community in 2022 has been a shift from growth at any cost, to an increased emphasis on profitability.
Metrics which provide helpful diagnostics for startups:
1) Cash Burn Efficiency: if you are earning an incremental dollar of total Net New ARR for each dollar of cash burn you are in a strong position with a Burn Ratio of 1, indicating a healthy ratio relative to benchmarks. A Burn Ratio greater than 1.5x is best in class and below 0.6x Net New ARR to burn indicates that a closer look is warranted.
2) Incremental Profit Margin: often profitability is discussed in absolute terms but it’s important to keep in mind that companies typically show a progression towards profitability. One way to analyze this is to analyze the Incremental Profit Margin - at what rate revenues are converting to Operating Profit. Anything at or above 40% is best in class and anything at or above 20% is beginning to look healthy. It’s worth taking a very close look at your cost structure if your Incremental Profit Margin is trending at 10% or lower.
3) Pre-S&M Profit Margin: if you have a highly retentive product, Sales & Marketing (S&M) costs could be considered an investment in future growth and a variable expense as opposed to a fixed expense. One helpful metric to analyze cost structure is Pre-S&M Profit, which takes Operating Profit Margin and adds back Sales & Marketing Expenses. This tells you how much margin you have before making the decision to invest in Sales & Marketing. A Pre-S&M Profit Margin of approximately 20% or higher can be considered quite healthy because it means your company has the adequate budget to invest in S&M. 40% or higher would be considered best in class.
Tips for Talking to Your Investors about Bridges and Extensions - Charles Hudson
Discussing a bridge round/extension is one of the most challenging conversations between founders and investors. To get to that answer of a yes or no on a given bridge, many investors ask themselves (and often the companies) a subset of the following questions.
Is the company still going after a venture-scale outcome?
A venture-scale outcome is a company with a path to reaching $100M in revenue with good margins in the next decade. When the initial investment is made, most investors believe the companies they invest in can hit that target. Over time, investors and founders learn a lot about the probability of achieving that outcome.
Deciding not to pursue the venture-scale outcome shouldn’t be seen as a mark of failure though. Sometimes the market timing is such that it will be very difficult to create a company of that scale in your category. This does not mean that you should quit; there might be a sustainable, profitable business to be built or a smaller outcome available to the founders.
What’s the rationale for the extension?
Extension requests where the rationale boils down to the company wanting to keep going, largely on the same trajectory, with the same strategy, same team size, and the same burn rate fail to generate investor interest. A strong bridge financing ask paints a clear picture of what the company will do with the money that will change the company’s trajectory and answer some of the big outstanding questions about the business.
How much progress did the company make with the capital invested to date?
Did the company fail to achieve the milestones it set out initially? Or did they mostly achieve what they set out to do but find themselves in an unfriendly fundraising environment where investors have higher expectations for performance? From the investor’s point of view, it can often be difficult to believe that a company that was not efficient with the previously invested capital will become more efficient with the next tranche of investment.
Is this bridge coming on the back of a failed fundraise?
Bridges or extensions that come on the back of a failed fundraise are difficult decisions. The challenge for investors is figuring out whether the reasons why the company failed can be rectified with more time and resources or whether investors have identified a fatal flaw in the business that will continue to make it difficult to finance. In many cases, founders believe that more traction or progress is what’s needed to unlock the next round. But in many cases, investors can deduce other reasons why the fundraise failed and conclude that there are bigger issues at work and that more traction or progress is unlikely to change the decision the next time the company goes out to fundraise.
a16z guide to growth metrics
The Difficulty Ratio
The Most Common Go-to-Market Questions
How Notion Used Community to Scale to 20M+ Users
Learnings exploring the GPT/ LLM space
Uncovering Anti-Retention Patterns
Hustling to Save the Planet at Lowercarbon
🇪🇺 Notable European early-stage rounds
Twirl, a Sweden-based platform for data teams allowing them to deploy data pipelines, raises $2.6M with Creandum - link
Anotherblock, a Sweden-based making investments in music way easier, raises €4M with Stride VC - link
Apron, a UK-based fintech platform streamlining invoice payments for small businesses, raises $5.5M with Bessemer - link
CUR8, a UK-based startup establishing a global market for carbon removals, raises $6M with GV - link
Nivoda, a UK-based B2B marketplace for diamonds, raises $11M with Headline/EF/Abstract - link
Payrails, a Germany-based startup enabling high-growth companies to craft their payment experiences and financial services, raises $14.4M with EQT/a16z/HV/General Catalyst - link
Uncommon, a UK-based cultured meat startup, raises $30M with Balderton/Lowercarbon - link
🇺🇸 Notable US early-stage rounds
Rex, a US-based app making it easy to discover and share recommended places with friends, raises $3.96M with Accel/Khosla - link
Airspeed, a US-based team-building platform for modern companies to connect digitally, raises $5M with Lightspeed/First Round - link
Refuel.ai, a US-based platform for automating dataset creation & labelling for LLMs, raises $5.2M with General Catalyst/XYZ - link
Mach Industries, a US-based startup building hydrogen-based defense hardware, raises $5.7M with Sequoia - link
Rooms.xyz, a US-based browser-based tool for designing 3D spaces, raises $10M with a16z - link
Triumph, a US-based startup developing a plug-and-play real money tournament SDK for gaming entities, raises $14M with First Round Capital/XYZ - link
Contextual AI, a US-based company offering a pioneering approach to generative AI for the workplace, raises $20M with Bain/Lightspeed/Greycroft - link
Instabase, a US-based platform for businesses to build customizable apps for automating different parts of their business, raises $45M with Tribe/a16z/NEA - link
🔭 Notable later stage rounds
Hippocratic AI, a US-based startup developing an artificial health general intelligence, raises $50M with a16z/General Catalyst - link
GetHarley, a UK-based skincare telehealth and consultation platform, raises $52M with Index/Headline/Village Global - link
Charm Industrial, a US-based developing a technology it says more efficiently removes heat-trapping carbon from the ambient air, raises $100M with General Catalyst/Lowercabon - link
Zip, a US-based procurement startup bringing the ease of B2C buying to B2B, raises $100M with YC/Tiger/CRV - link
Blackpoint Cyber, a US-based provider of cybersecurity threat hunting, detection, and response technology, raises $190M with Bain/Accel - link
Anthropic, a US-based AI-driven research company focusing on increasing the safety of large-scale AI systems, raises $450M with Spark/Google/Menlo/Salesforce - link
