The product data VCs want to see before investing in your startup

Today’s rising borrowing costs and dipping public markets are putting a squeeze on startup fundraising. In October 2022, Crunchbase reported that funding rounds for private companies have dropped 53% year over year. If your startup is vying for an investment when there are fewer dollars to go around, it makes coming up with a compelling product idea and showcasing demand for it with data even more important.

VCs look for signals that you have the right product, in the right market, at the right time, with the right team at the helm. Good product data, anchored by strong product analytics via a tool like Mixpanel, can offer the hard metrics and insights that validate those signals—all things that investors have come to expect to see before handing over any amount of capital.

But it can be hard to know which product metrics or data, specifically, matter most when pitching for your fundraise. What’s important to you might not be what investors want to see—or it might not be all they want to see. While there’s no one right answer, we spoke with venture and growth investors from some of the world’s top firms to understand what they look for in product data and how they use that information to evaluate a potential investment. Some of the key takeaways from these conversations:

When it comes to convincing investors why they should write you a check, the proof is in the product.

Good product ideas are sometimes ignored (or even laughed at). But that’s less likely to happen when you have data that proves there’s demand for it. To wit, investors have learned to pay attention to things like user retention and engagement rates across different layers and levels of products they’re considering investing in.

“We’re essentially trying to understand how many people are using a product,” Meka Asonye, Partner at First Round Capital (over $1B invested for seed funding rounds), told us. One of his favorite measurements to determine an app’s stickiness is to calculate its daily active users against its monthly active user numbers (DAU/MAU).

“How often are they using this product? Is it ingrained in their day-to-day behavior? Do people love this thing? Do they need it?”

“The most important thing is seeing user activity grow within a product organically.”

From there, startups should show investors that their users are here to stay. A product’s user retention rate shows what percentage of customers return to use a product again and again. Sam Richard, VP of Growth at OpenView (over $2B invested), calls this data point “key to understanding product-market fit … especially at an early stage.”

Of course, investors also fear user churn rates, or how often people use the product and never come back. As a warning sign, VCs have gotten especially sharp at investigating it in products.

“If you see a segment [of users] that has churned, it’s great to be able to go one level deeper and find indicators that establish the drivers of account health.” said Quinn Schwab, an investor at Bain Capital. “You compare that segment to a cohort that hasn’t churned and layer in product data to understand what the drivers really are.”

Janelle Teng, VP at Bessemer Venture Partners ($20B assets under management), summed up her firm’s product metrics research with a “flywheel framework” of adoption, engagement, retention, and bliss. It’s a good overview of how many firms use product metrics.

Startups will tell you, too: The “pitch your metrics” approach can pay off. When we reached out to Antoine Creuzet, the founder of French healthcare app May, he told us that product data was a big part of his company’s recent successful fundraise. “I would share access to Mixpanel Dashboards with potential investors,” he said. “Obviously, economic data is important, but the younger the startup, the more important product data is in the fundraising process. … It shows the startup has the ability to make the right decisions.”

Having a great product and a great business are two different things. That’s why showing strong product analytics data related to things like paid user conversion rates can make all the difference in the world for investors. And the more granular you can get about the path users are taking to get to the point of wanting to dish out money for your product, the better.

“[We] really need to understand the journey a user takes to find value in the product and eventually purchase it,” Richard said. “Companies interested in raising from a VC should help investors understand this journey and supply data that supports the points of conversion from prospect to user.”

“Product metrics hold immense power as ‘leading’ indicators for ‘lagging’ financial outcomes.”

Zach Berger, a Technology Investor at Bain Capital, added that breaking down the details of the user journey can open “visibility into future conversion rates,” something that simply looking at bookings totals from a company’s finance side can’t inform as well. Since investing capital is essentially a bet on future conversion rates, it’s obvious why these data points, and other revenue-tied metrics like rate of retention and average order value, can be very helpful to be able to show.

Natalia Navas, an associate at Latin American-focused venture capital firm Kaszek (over $6B invested), told us these revenue-predicting product metrics can be completely different across business models. “For example, conversion retention is important for a subscription-based model, but that’s less important for e-commerce,” she said.

May said it showed its earning potential through metrics like paid subscription conversions over multiple timespans, post-signup retention rates, and time spent by subscribers in the app.

When it comes to overall business health, investors have also learned that product analytics insights can sometimes provide more actionable information than general financial performance measurements. Segmenting user engagements to see whether new features are being adopted by your tastemaking power users, for instance, can help determine whether product development resources are being put to best use.

“Product metrics hold immense power as ‘leading’ indicators for ‘lagging’ financial outcomes,” Teng explained. “Unlike defined financial metrics which follow generally accepted accounting principle (GAAP) or International Finance Reporting Standards (IFRS) guidance, there are innumerable product metrics that can be tracked and quantified in different ways.”

As investors have gotten savvier about scrutinizing startup product data, they’ve learned to filter out “vanity metrics,” or data points that look good on the surface but don’t actually contribute to the overall success of the product. 

“I believe vanity metrics occur when you give a relevant data point but omit a huge part of the context, like talking about acquired users without talking about active users. For example: a debit card company including ‘distributed cards’ without mentioning active users or churn,” Navas said.

Creuzet went one step further and said that presenting investors with metrics that don’t mean much can be counterproductive to your pitch.

“Highlighting the number of signups without putting it alongside the activation, retention, and conversion indicators is totally useless,” he said. “It is very easy to make a lot of signups by targeting low-qualified audiences …  and putting it forward in an investor deck risks discrediting your startup.”

The line between vanity metric and value metric can obviously vary across different types of companies and products. The team at Bain likes startups to err on the side of including as much meaningful data in their pitches as possible.

“Usually, most metrics presented are quite valuable, and we generally view more data to be better,” Schwab explained. He added that “fruitful conversations” can come out of discussing all the product data startups have to show. 

No matter how data-informed founders want to be, sometimes funding needs to come in before a product is complete and has attractive product analytics to show off. At First Round, Asonye has worked with plenty of early-stage startups in that position. His go-to: gathering qualitative data about the people who are or will be using the product.

“I have this right now with a startup that has maybe eight customers,” he said. “Digging into active users or retention rates wouldn’t make sense. … In these cases, we’re interviewing and looking for qualitative feedback.

“We’re trying to figure out things like: Are they using the product for something that’s a pain? How important is the product to them? If this product went away, on a 1-10 scale, how would you feel?” 

Even when mature product analytics is a big part of a company’s pitch, investors like Asonye still like to engage directly with users to get the human sense. “Often you want those qualitative measures to line up with quantitative measures,” he confirmed. “There are as many human components as quantitative components. … An investment is never going to be 100% data-driven.”

Bain also looks to things like user surveys for when quantitative product analytics isn’t available. Schwab said it can still help gather useful data on whether a product is “mission critical” for its prospective user base.

“There are as many human components as quantitative components. … An investment is never going to be 100% data-driven.”

And don’t forget about all the data that investors like to pour over about the people behind the potentially soon-to-be-funded product.

“We do a lot of due diligence around founders. … We try to get to know people from their personal network. Those are generally the most insightful pieces of data because you cannot replace two years of knowing somebody,” said Navas.

Investors we spoke to said the potential challenges that economic downturns can bring don’t necessarily change their data-informed methods for picking winners; they still expect to see healthy metrics and insights from startups seeking funding.

“The targets don’t change,” said Asonye. “We still want to see massive month-over-month user growth. We still want to see lots of people who are coming back to the product really frequently.

“We’re looking for the next multi-billion dollar idea. We firmly believe that any startup right now at the stage we invest that’s using macroeconomics as an excuse probably isn’t a multi-billion dollar business.”

Richard summed it up: When startups find themselves with fewer bites at the fundraising apple, they should have all their product data, and the story it tells, ready to make a splash at a moment’s notice.

“It’s founders that understand what questions their data might create for investors and proactively answer them that stand out.”