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A note from Lewis:
As you prepare to pitch investors, a good idea and even a good product are not likely to be enough. VCs will want to know whether you can turn that idea or product into a successful business. To make that case successfully, you have to be able to tell a good and credible story about your business — one grounded in hard metrics. But figuring out which metrics matter most — the ones that can make or break your startup and that you can use as levers to control your business — is not necessarily easy. We asked founders and VCs for what you should focus on. Here's their advice.
After noticing how much his wife loved borrowing maternity clothes from friends during her pregnancy, Rakesh Tondon founded a fashion subscription service called Le Tote, where women could rent clothes. After bootstrapping the business for a few months, the former investment banker began a project to analyze Le Tote’s hazy future. He focused on identifying the “key performance indicators,” or KPIs, that would drive the company’s long-term success. The ultimate goal: get a solid grip on the levers affecting his business and prepare to make a compelling pitch to investors.
With limited data of his own, this meant talking to other founders and his suppliers. He found out that volume discounts on shipping wouldn’t kick in until he passed 100,000 deliveries, but would quickly rise to 50 percent after that. Reaching that number would matter to his eventual profitability. Volume, however, would have little impact on the price of cardboard boxes, so that metric would not affect how he ran his business. Upon learning that the cost of clothing made by other brands also wouldn’t come down much with volume, Tondon decided to create his own private label. That way, he’d have more control over manufacturing costs and could make sure inventory was stacked toward the most profitable garments.
Tondon’s deep dive into the metrics driving Le Tote’s business allowed him to get a handle on the startup’s KPIs and paved the way for the company to hit its ambitious targets: gross margins have nearly doubled from 26 percent in 2015 to almost 50 percent in 2019. It was also critical as the company sought to raise venture funding at around the one-year mark. “Before we went to investors, we wanted to have a good sense of what the business would look like in 2015, 2017 and 2019,” Tondon says.
Investors liked what they saw. “We were impressed with how much they’d thought about the long-term drivers of their business,” says Michael Kwatinetz, a partner at Azure Capital Partners, who led Le Tote’s …