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Inside look into how VCs assess early-stage consumer-tech startups

June 21, 2021
Company Building

Southeast Asia is home to the fastest-growing internet market globally with 300M+ mobile internet users and 40M+ new digital consumers added in just 2020. The region’s online retail penetration at 5% has surpassed India’s (4%) but still has so much upside for growth to reach 20% in the near future. Not surprisingly, there are thousands of consumer internet startups founded each year to capitalize on these unique and favorable market conditions.

At Jungle we have built an enviable portfolio of consumer tech startups, most of which we had invested at a very early stage. Every year we evaluate thousands of consumer tech startups and in this article, we would like to share the metrics we look for while assessing early-stage consumer tech businesses.

Did you know 42% of the startups fail because they misread market demand and only 2 in 5 startups are profitable, and other startups will either break even (1 in 3) or continue to lose money (1 in 3) (Source).

So in order to determine whether your business is not only hot today but here to stay, we look at both your Product/Market Fit (Degree to which your product solves the market problem) & Sustainability (Can your business continue to grow in a sustainable and profitable manner over a long period of time).

Rate of Growth & Nature of Growth

The speed at which you acquire customers is a fantastic indicator that there is an appetite for your product in the market. However, to get a fuller picture, we need to understand whether you are buying growth or earning it through referrals from existing customers or an inherent virality in the product proposition.

The most attractive businesses to investors are those that demonstrate an ability to acquire customers based on their reputation rather than through heavy investment in sales & marketing.

Customer Retention

If your consumers keep coming back it is a clear sign that your product is delivering real value, and helps determine your core audience to whom your product is delivering value.

Retention is often measured as the number of customers who are active on the platform 7days, 30 days, 90 days & 12 months from the day or month of their acquisition, but this may vary depending on the specific nature of the category you operate in & your product proposition.

Depth of Engagement

Founders who can show their product is sticky become meat & drink to investors. You want to show that your customers are not just visiting your platform but engaging with it. Staying on-site longer, viewing more products, using more services, sharing more content. All of these measures tell us you are beginning to earn a share of consumers’ lives. This gives a sense of how deep the product is becoming in the customer's mind space and journey to solve their problems.

Unit Economics

This is not as complicated as it sounds.

Unit Economics simply tell us whether there is a clear path to profitability by analyzing the economics of the business at the unit level.

A unit is often a user but it might equally be an order,a geography or a cluster of users. We look at the margins you are making on a unit basis to achieve each of the business goals, ie the Customer acquisition cost, revenue per customer, margin on unit level, if not making a positive margin initially, then how many times does the customer have to come back so that the business can be profitable at a customer level.

This is important because this unit economics aggregated over all users is what will make it a sticky and profitable business over the long term.

A business with strong Unit Economics can invest in growth with confidence & even hold off monetising the service if free access is the smart way to grow in the first instance.

Remember, your business does not have to be profitable at the start- you would need to invest capital to hire the right people, building the right infrastructure and team for growth, it does not even have to monetise.. But there should be a path to profitability with scale.

As you grow, many more metrics become important as you will have more customer data to prove your model and growth. When you are preparing for your next VC meeting keep these metrics in mind in order to make a really persuasive case for why yours is a high-value business that will stand the test of time.

Good luck!

Watch the full video here

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