Investing in speculative startup stocks? 10 alternative fundamentals to consider

You’ve just bought shares in a promising startup company whose share price has the potential to skyrocket. As a responsible investor, you now need to do your homework and regularly evaluate the company’s fundamentals.

You’ve just bought shares in a promising startup company whose share price has the potential to skyrocket. As a responsible investor, you now need to do your homework and regularly evaluate the company’s fundamentals.

1: What is Serviceable Observable Market (SOM)

?For some companies, the Serviceable Addressable Market (SAM) may still be too big a goal. Therefore, the company is likely to focus only on one part of it – the Serviceable Observable Market (SOM). How to use it: Once you have a more realistic idea of ​​the market share your company can achieve, you can use it to forecast growth potential and evaluate market performance. How to calculate: SOM = (SAM) x (Percentage of Realistic Market Share)

2: What is Total Addressable (or “Available”) Market (TAM)

?Have you ever wondered how much a company would make if it captured 100% of the market share?This metric shows the monetary value of the entire global pie. How to use it:This benchmark number shows the size of a company’s total market opportunity. The company probably won’t get it all, but it could get a significant portion if it’s successful or first to market. Calculation: TAM = (Total number of potential customers) x (Average revenue per customer)

3: What is Customer Acquisition Cost (CAC)

? How much does it cost a business to acquire a new customer? CAC solves this. How to use it: This metric can be used to determine if a business’s new customer acquisition strategy is effective. How to calculate it: CAC = (Total Revenue and Market Cost) / (Number of New Customers)

4: Serviceable Addressable (or “Available”) Market (SAM) What is

? SAM focuses on the market share that is within a company’s geographic reach. This metric is more relevant than TAM if a company targets local markets before competing globally. How to use it: SAM gives a more realistic picture of what a company can achieve if it decides to target local markets first. How to calculate: SAM = (TAM) x (percentage of TAM within a company’s reach)

5: What is Monthly Recurring Revenue (MRR)

?For businesses that rely on subscriptions, MRR indicates the predictable monthly revenue from subscriptions or contracts. Essentially any recurring revenue source. How to use it: Because this revenue occurs monthly, it can be used to forecast a company’s growth and evaluate revenue stability. How to calculate it: MRR = (Number of subscribers) x (Average revenue per user per month)

6: Net Cash Burn Rate

What is it? This metric shows how much of a company’s cash reserves it spends on operating expenses before it becomes cash flow positive. How to use it: The burn rate can help you predict whether a company will run out of cash before it has a chance to support itself with recurring revenue. Does the company have enough reserves or will it need to raise capital through investors or loans? How to calculate it: First, you need a gross cash burn rate, which is your total monthly operating expenses. Net cash burn rate = (total monthly operating expenses) – (monthly income)

7: Customer Lifetime Value (LTV)

What is it? This metric predicts the total revenue a customer will generate over the lifecycle of their interaction with the company. How to use it: You can use it to evaluate the long-term profitability of a company based on the revenue generated by its customers. However, this also requires some historical data, which may not be sufficient for new companies. How to calculate it: LTV = (average revenue per unit per period) x (gross profit per customer) x (average customer lifetime)

8: Churn Rate

What is it? If you want to know what percentage of customers abandon a company’s product or service in a given period of time, this is the churn rate. How to use it: Use it to analyze customer loyalty and whether they are likely to be satisfied with a company’s products and services. How to calculate it: Churn rate = (number of customers lost during the period) / (total number of customers at the start of the period).

9: Net Promoter Score (NPS)

What is it? The Net Promoter Score, or NPS, is a metric that attempts to measure customer satisfaction and loyalty by asking whether they would recommend a company’s products to others. How to use it: Every business strives for a constant flow of customers. Repeat customers are even better. But if a company succeeds in turning customers into brand promoters and influencers, the benefits of word of mouth can be a real force multiplier for its marketing. NPS is a look at the early stages of converting customers into brand loyalists. How to calculate it: NPS = (Percentage of Supporters) – (Percentage of Detractors).

10: Burn Ratio

What is it? This metric shows whether a startup is burning money too quickly or spending it efficiently. How to use it: The net cash burn rate (discussed earlier) can help you determine whether a company will survive financially before it starts turning a profit. The burn ratio helps you evaluate a startup’s potential for long-term growth by assessing how efficiently it converts its cash burn into revenue. How to calculate it: Burn rate = (net cash burn rate) / (annual recurring revenue).

Without hard data on revenue and profit (which most startups simply don’t have), traditional metrics don’t tell the story of the company. Even among the alternative measures, some may be prioritized depending on the company and industry. Some industries have their own preferred metrics – a social platform may track daily (or monthly) active users, for example. But at some point the company is expected to turn a profit if it wants to remain viable. And for every success story like Amazon (AMZN), which didn’t make its first annual profit until its tenth year, many others never make it over the profit hump. When the economic cycle turns from boom to recession, such companies often file for bankruptcy. Follow the basic principles of alt and invest when you see an opportunity. But also keep an eye on economic trends and find out where the smart money seems to be heading. If your startup looks like it’s going to fail, make sure you’re not one of those left empty-handed.