I often have conversations with founders that go as follows:

Me: That sounds like terrific progress with customers and revenue, how does churn look?

Founder CEO: A number of our customers are upselling very quickly and they all love the product.

Me: Excellent, and how does that net out in churn?

Founder CEO: We also think our product works a bit differently than most SaaS products.

Me: Okay, I’m sorry to be pedantic [I use that word] but what is the churn number?

Yeah, VCs are like toddlers. If you don’t give us what we want, we will keep asking for it.

So what’s wrong with this conversation? Before you conclude that I was “asking too soon” and that the founder is simply demurring politely from being probed for numbers too early in our relationship, let’s assume that we have already been sharing data and the founder is comfortable with telling me details about her/his business. Assuming that, the problem with this conversation is that in my mind I’m thinking that s/he either (1) doesn’t know the number, (2) doesn’t know the number is important or (3) thinks the number looks bad and (4) is therefore worried about telling me.

None of these four possibilities bodes well for the entrepreneur raising money. Let’s parse it out:

1. Doesn’t know the number: At an early stage, a CEO should know every key metric for their business as well as understand how and why each is changing.
2. Doesn’t know the number is important: Every CEO should know what KPIs apply to their business. Of course, these are different by business model: SaaS, e-commerce, marketplace, etc… More on this below.
3. Thinks the number looks bad: If it’s not bad, then telling me will prove that. If it is bad, sometimes that’s just the reality, and we will both learn a lot from discussing why. Remember, early-stage investors are accustomed to imperfect businesses.
4. Is therefore worried about telling me: *Most* investors like to work with entrepreneurs that are transparent — with good news and bad alike. While perhaps it’s understandable to be putting on the best face you can for potential investors, remember that all of these investor pitches are simply dress rehearsals (in both directions) for your first post-financing board meeting together. You are certainly going to want to be transparent at that point.

You’ll note that the founder in the dialogue above says something we hear on occasion to explain away metrics: “our [pick one: SaaS, e-commerce, marketplace] startup works differently than most.” There are rare cases where that is true and so a standard metric or threshold for “best in class” doesn’t apply, but most of the time there’s nothing different or special about the economic model… except that it’s not working, at least yet. And that’s okay. We are early-stage investors; we get our hands dirty; we pick the entrails off the floor and help make sausage.

Indeed, for these reasons and others, I cherish that building relationships with entrepreneurs is not just about getting to the number — that’s not my point. I want to hear the context, how it fits your big picture and ultimately your vision… for sure! But investors do need to know the number, know that you know it’s important and believe you are transparent.

Originally published at https://vcwithme.co on June 27, 2019.

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