How Investors Evaluate Traction & Metrics: The "Reality" Audit

How Investors Evaluate Traction & Metrics: The "Reality" Audit

In the boardrooms of London, New York, and Toronto, we have a saying: "In God we trust; everyone else must bring data." At the Seed stage, your story gets you the meeting. At Series A and beyond, your metrics get you the check.

The brutal truth? Most founders use "Vanity Metrics" to hide a lack of "Venture-Scale Traction." I’ve seen thousands of decks claiming "100,000 users" or "Signed LOIs," but when we dig into the raw data, the retention is zero and the LOIs aren't worth the paper they're printed on. Behind closed doors, we aren't looking at your total numbers; we are looking at the Slope and Sustainability of your growth. If you don't know the difference between "Growth" and "Scale," you aren't ready for institutional capital.

This sub pillar is part of our main Pillar 4 — Investor Psychology

The VC Lens: The Search for "The Magic Machine"

When I’m sitting in an IC (Investment Committee) meeting, I’m trying to determine if your company is a "Magic Machine." If I put $1 in at the top, does $3, $5, or $10 come out at the bottom?

1. The US Perspective (SF/NY): We are looking for Velocity. We want to see that you are capturing the market faster than anyone else. We are willing to tolerate higher burn if the CMGR (Compounded Monthly Growth Rate) is north of 15%.

2. The UK/Canadian Perspective: We are looking for Efficiency. We want to see a clear path to profitability. We focus heavily on LTV/CAC and Payback Periods. If you’re burning $2 to make $1, you’ll struggle to raise in London.

The hidden risk is The Cohort Decay. If your new users are growing but your old users are leaving, you don't have a business; you have a "Leaky Bucket." We will find the leak in due diligence, so you might as well address it in the deck.

The "Trench" Report: The $15M "Vanity" Trap

A New York-based e-commerce platform pitched us with a beautiful "Hockey Stick" growth chart. They had reached $10M in GMV (Gross Merchandise Volume) in record time. On the surface, it looked like a winner.

The consequence? During the metrics audit, we realized their Take Rate was only 2%, and their CAC was $40 for a customer that only generated $10 in lifetime margin. They were "buying" revenue with VC money. The "Traction" was a mirage. We passed, and the company folded six months later when they couldn't raise a follow-on round. Traction without unit economic integrity is just an expensive hobby.

The Tactical Framework: The "Metric Hierarchy"

To win the metrics evaluation, your deck must present data in this specific hierarchy of "Signal":

1. The Core Growth (The Slope)

Don't show "Cumulative" charts. Show Month-over-Month (MoM) Growth in MRR (Monthly Recurring Revenue) or Active Users.

• The Signal: 10–15% MoM is the "Venture Standard" for early-stage SaaS.

• The VC Thought: "This has momentum."

2. The Retention (The Stickiness)

Show a Cohort Heatmap. I want to see that users who joined 6 months ago are still active and, ideally, spending more.

• The Signal: Net Revenue Retention (NRR) over 110%.

• The VC Thought: "This is a product people can't live without."

3. The Efficiency (The Unit)

Show your CAC Payback Period. How many months does it take for a customer to pay back the cost of acquiring them?

• The Signal: Under 12 months is the gold standard.

• The VC Thought: "This is a scalable machine."

Semantic Depth: The Mechanics of "Deep-Dive" Metrics

Beyond the basics, we screen for "Secondary Signals" that prove you understand the technical nuances of your business.

1. The Hype-to-Efficiency Ratio (LTV/CAC)

In 2025, we look for a 3x LTV/CAC ratio. But we go deeper: we want to see it calculated on a Contribution Margin basis. If your Gross Margin is 50%, your "Revenue LTV" is a lie. We only care about the cash that stays in the bank after the cost of service.

2. The "Survival Quotient" (Runway Sensitivity)

We calculate your Cash Runway against your Net Burn.

• Calculation: Runway= Total Cash

  Monthly Net Burn

  If your runway is less than 9 months, you have no leverage in a negotiation. We want to see that you are raising before you need the money.

3. The Viral Coefficient (K-Factor)

For B2C or PLG (Product-Led Growth) companies, we look for the K-Factor.

• Formula: i X c (where "i" is the number of invites sent per user and "c" is the conversion rate).

  If your K-factor is > 1, your growth is exponential and free. If it's < 0.2, you are purely dependent on paid ads.

Key Takeaways for Founders

• Kill the Vanity: Remove "Total Downloads" and "Registered Users." Replace them with DAU/MAU (Daily/Monthly Active Users) and Paid Conversion Rates.

• Own the Cohorts: If you have a "churn" problem, don't hide it. Show how you’ve improved retention in the most recent cohorts.

• Marginal Contribution: Prove that your next 1,000 customers will be cheaper and more profitable to acquire than your first 1,000.

• Be Specific: "Over $1M ARR" is a signal; "$1.24M ARR" is an audit-ready fact. Use specific numbers.

Expert FAQ: The "Metric Audit" Reality

Q: What if I’m "Pre-Revenue"?

A: Then your traction is Momentum. Show the velocity of your product development, the number of "Design Partners" (unpaid beta testers), and the growth of your waitlist. VCs invest in the line, not the dot.1

Q: Is "Engagement" a metric VCs care about?

A: In B2C, it’s the only thing we care about before revenue. Show us Session Frequency and Time in App. If people are using your tool every day, the money will follow.

Q: How do I handle "Seasonality" in my traction?

A: Normalize the data. Use a 6-month Moving Average to show the trend line. Be transparent about why December was slow or why January spiked.

Q: What is the biggest "Metric Red Flag"?

A: High Gross Churn disguised by High Growth. If you are adding 1,000 users a month but losing 900, your business is a treadmill. We look for Net Negative Churn, where your existing customers' expansion revenue outweighs the losses.2