For a Seed Round, Focus on Repeat Customers (sales don’t tell the whole picture)

As I’ve chatted about in the past, we don’t expect founders to have figured out the key to his or her business right at the Seed stage. The Seed stage is for testing a couple hypotheses to develop the ‘Playbook’ for Series A. Given this, a company raising a Seed round likely doesn’t have much money and won’t have a massive marketing budget (if they do, they probably don’t need to raise a Seed round!). And to further this, because a company often won’t have a ton of traction, it’s hard to show really stellar revenue numbers.

While impressive sales growth will always be appreciated, at a relatively small scale, keeping the customer is more impressive. Further, having customers come back (especially without a marketing budget), is key to proving a winning product. I’ll break this down further, below, but first some definitions.

What is Repeat Purchase Rate?

Depending on the type of business, the ideal metric to measure may either be repeat purchase rate or retention.

Repeat purchase rate is meant for businesses that have single purchase events. Think of eCommerce retailers without recurring revenue, such as Allbirds, Sweetgreen, Glossier, etc. There is no obligation for their customers to return, except because they like the product. One of the reasons these three companies have been so successful is because they’ve had loyal customers who have returned. In other words, their repeat purchase rates are high. Keep in mind that the rate of repeat will be different at all companies (i.e. Casper’s repeat rate certainly won’t be what Sweetgreen’s is) and shouldn’t be taken in a vacuum.

For subscription or SaaS businesses, the metric to pay attention to is retention. A healthy subscription or SaaS business will have healthy retention, meaning their customers keep paying for numerous months.

Why does this matter?

There are a couple of reasons we look for repeat purchase rate/retention early on. All have to do with the health of the business and can add further context to a small, growing business.

Cost

Acquiring a new customer should be most costly. Once you’ve got the customer in the door, they should be much easier and cheaper to retain. With each purchase these customers make, the marginal value they provide increases. This can be thought of in a CAC:LTV ratio. The CAC piece of this equation is ‘customer acquisition cost’. The initial spend to get the customer to buy once will be fixed, and any additional purchases on top of that only increases their value in the ‘lifetime value’ component of the equation. Theoretically, it should be much cheaper to get them to come back once they’ve already tried the product.

Strong product/market fit

Although marketing is vital to growing a business, customers should want to make purchases based on the offering the company provides. Marketing can convince a customer to purchase once, but it gets increasingly hard for marketing alone to keep a customer. At the early stages of a company, this is an indication that the product is working and that customers are pleased. As an investor, this gives us confidence that there’s at least early product-market fit and that with increased marketing budgets later on, sales will grow nicely.

Early ‘Playbook’ proof

As I mentioned above, we look to the Seed round as laying the foundation for the ‘Playbook’ that’ll be implemented after a Series A. We expect a large chunk of a Series A will get allocated to marketing and want to know that at that point (some 18 months after a Seed) that the founder has a reasonable idea how their customer acquisition cost will look and how well they’ll be able to predict sales. Repeat purchase rate plus initial customer acquisition cost is a very solid expectation of future sales. As an investor, I then know that if the repeat purchase rate is looking healthy, a large marketing budget will help to drive customers to the company and then product will keep them active.

Why Not Sales?

I hope this article hasn’t been misleading; sales are very important and a crucial piece to the startup equation. However, sales alone aren’t super exciting at the early stage. It’s very easy to ‘double’ sales if you go from $5k one month to $10k the next. In addition, if a company is spending $20k in marketing to get $10k in sales, it’s not telling me a good story.

I don’t expect Seed stage companies to pump a lot of money into marketing, so then I don’t expect sales to blow me away. Instead, I want to get a clearer picture of how customers respond to the product, with a limited budget. Organic acquisition is always higher quality than paid acquisition, and so if an early-stage startup can prove that to me, I’m intrigued.

Go Deeper

Shopify wrote a great post on customer retention strategies that highlights what retention should look like for different businesses, what the outcome of incremental retention looks like and how to actually keep customers.

Corigin Ventures is a Seed-Stage fund based in New York City, investing in founders defining the future of daily living. We are active from Pre-Seed to Post-Seed.

May, 02, 2018

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