Acing Your Marketplace Fundraise: Series A
How to Ace your Marketplace Fundraise - Late-Seed & Series A
At Speedinvest Marketplaces & Consumer, we see thousands of marketplace pitch decks each year from truly remarkable founders with fantastic and innovative business ideas. Over the years, we have noticed several key areas where founders could really make a difference in the quality and impact of their pitch.
We have collected those learnings in a series of three blog posts, one for each of the three stages Speedinvest invests in: pre-Seed, early-Seed and late-Seed/early Series A. We define those stages as follows:
- Pre-Seed: A marketplace that is still in development mode and pre-revenue
- Early-Seed: A marketplace that has been live for less than twelve months and has started to monetize
- Late Seed & early Series A: A marketplace that has been live for more than twelve months
In this blog article, we will be focusing on the late Seed and early Series A stage. However, you can also check out our top tips for acing your early-Seed and pre-Seed marketplace fundraises on our blog.
Raising at Late-Seed / Early Series A
As your marketplace transitions to the later seed stage, several new topics in addition to the ones we discussed in our earlier blog posts, come into view. This includes growth, the relevance for customers and growth efficiency. Important metrics to look at include:
- Top-line KPIs
- Share of wallet
- Growth efficiency metrics / unit economics (CAC vs. LTV)
Share of Wallet
A KPI that we wish we saw more often in pitch decks is share of wallet. Share of wallet essentially tells you how vital your business is becoming to both the demand and supply sides of the marketplace.
Check out the cohort below.
This set of customers is conducting more and more transactions on the marketplace over time. However, we don't know how much of their total potential business the marketplace is capturing. This concept is called share of wallet. It’s a powerful tool to understand the true relevance and engagement of your customers and therefore product market fit.
Common pitfalls we see when calculating CAC
The first side of the equation when we talk about growth efficiency is CAC - how you are acquiring customers, what is it costing you and what are your customers worth?
The vast majority of founders do talk about CAC in their fundraise, but most also make some mistakes. Some of the common pitfalls that we see are:
- Not looking at CAC on a fully-loaded basis (i.e. costs of salaries, marketing overhead and marketing tools are missing)
- Not including media costs, the costs for referrals, free trials etc. which do have a financial cost
- Only considering demand-side acquisition and forgetting to consider the supply side acquisition
- Only looking at a blended CAC and not distinguishing between paid CAC vs. blended CAC
- Looking at CAC as an aggregate number rather than by channel.
How to calculate CAC correctly
Fully loaded CAC:
For us, CAC should include any cost for paid acquisition, plus organic acquisition costs or those associated with SEO, content, PR etc. and any costs associated with supply-side acquisition.
It should also be a fully loaded number, including salaries, tools and other overhead. This is usually the number that investors look for when they analyze your business.
Going a step further, when you divide that number by the number of total customers acquired, you get blended CAC - what it costs you, on average, to acquire a new customer.
Most companies stop here, but we recommend showing paid CAC as well. This shows the cost of acquiring a new customer through paid channels. It is a better representation for the true cost of acquiring a marginal customer. In the later stages of a company, paid acquisition becomes increasingly important to monitor as your marketing budget grows and paid CAC becomes a key driver of sustained growth.
CAC by channel:
We frequently observe CAC in pitch decks presented as a single number aggregated across all channels. However, we recommend looking at CAC channel by channel - looking at the acquisition costs on Facebook vs. Instagram vs. SEM, etc. It’s really important to know which channels are scalable versus which are not. This helps you to see where you can accelerate or pull back on spend.
Organic, product-led acquisition:
Is your marketplace designed in a way that it essentially promotes itself? This could happen through social- or community-based growth loops or great content marketing. But there are several other forms which this can take. Ultimately, a lot of your long-term growth and margin potential will come from these organic growth loops, so it is important to be clear about them when you are fundraising.
In summary, what we are looking for:
- First is diversity of acquisition channels - any concentration we see in any one channel is a potential concern
- At least one paid channel that is performing well and scalable at a relatively stable CAC number as absolute marketing spend grows. We really want to ensure that the additional capital you raise is spent in places that we know works well
- Increasing or growing share of organic acquisition, which has the very beneficial effect of driving down cost of acquisition and driving efficiency over time
- Stable CAC as absolute marketing spend grows
Lifetime value (LTV)
The other side of the equation when we talk about growth efficiency is LTV - and we generally see two common pitfalls:
- Assuming an infinite customer lifetime or calculated simply as the inverse of churn
- Looking at revenue LTV instead of looking at gross margin LTV, which we think is a much more accurate representation of the marginal value of a customer.
To correctly calculate the LTV of a customer, we recommend looking at the average number of orders per customer over a 24 or 36 month period and multiplying that by the gross margin per order, accounting for all the cost of sales and variable costs associated with generating revenue.
Calculate the LTV:CAC ratio
The LTV:CAC ratio is considered to be one of the best measures of unit economics and growth efficiency.
- <1x is considered bad
- 1-2x needs improvement
- 2-3x is ok
- >3x is great
Investors sometimes can live with a company at Seed stage that has a ratio lower than 3x. However, what we want to see is a positive trend and a very credible plan on how to improve the unit economics - how to increase LTV and how to optimize CAC.
An equally important metric that we do not see enough is payback. The payback period is the length of time needed to recoup the customer acquisition cost. Typically, the shorter the payback period the better. Most investors will look for payback periods of less than twelve months. However, the way payback period is assessed is also dependent upon the type of business you run. For example, marketplaces that see infrequent transactions, such as Booking.com, require instant or at least much quicker payback vs. those that have much higher frequency, UBER for example.
Take the time to build an excellent pitch deck. It’s worth it.
These exercises are a great opportunity for you, as a founder, to better understand the key drivers of growth in your business as well as the market you are operating in.
We hope you found this 3-part blog Series marketplace fundraising helpful. If you are reading this because you are currently fundraising or planning to soon, we look forward to receiving your pitch at speedinvest.com/pitch!