The goals of a startup are in three steps: validate the problem you’re solving; develop a repeatable sales process; build a scalable business model. These early stages are typically a tough time, with the inevitable focus on managing the cash whilst holding a vision and searing ambition.
With a hundred and one things to do, one of the main issues I frequently come across with startup founders is that they don’t pay enough attention to their numbers, especially the critical ones. Numbers are second nature to me, but for many first time entrepreneurs they hold an inherent fear. However, it is something you need to learn and take the time to do on a weekly basis. Running your numbers keeps you accountable and will help you sleep a bit better at night.
It’s simply knowing and understanding the inner workings of your business model and the financial levers which generate the numbers, which then enable you to focus on acquiring new clients, leads and sales. If your start-up is getting some traction and generating leads or sales, you need to know your numbers to make sure that you are just not generating cashflow with no profit.
From the outside, it seems ridiculous that people don’t look at something so simple closely. Entrepreneurs who know their numbers have a tremendous advantage over those who do not. The financials tell a story, and understanding the story is one of the most important ingredients for long-term success.
But this isn’t boring, geeky stuff. Having the numbers at your fingertips will show you if the business is starting to work. Confidence must be tempered with the reality that we all make mistakes. We need to measure things all the time. That way we can correct those mistakes and make adjustments as soon as possible.
Entrepreneurs that do everything by gut instinct are missing a trick. Hunches will take you so far, but as you scale, you need to analytical too in order to make good decisions, and for that you need good information. So what numbers should you be looking at?
In the early days of a startup there isn’t much to measure, but that doesn’t mean you shouldn’t start building a dashboard and focusing on building key numbers right away. I think there are ten key sets of metrics that you need to keep at your fingertips: on the left hand, where are we today? on your right hand, where we heading?
This will give you insight into your current progress and operational cadence, and help short-term forecasting, whilst also ensuring you are focused on growth velocity and trajectory. It’s a combination that ensures you have a dual focus on the ‘business of today’, and the ‘business of tomorrow’. This current/future orientation is a good step toward focusing discipline and attention on the information needed that will lead to informed decisions.
On your left hand
For me, knowing where you are is just common sense. It’s all very well having moonshot ambitions, but you need to know the current pulse in order to know what to do next. Think about yourself as a pilot navigating a journey – you need to know altitude, speed and direction – do you know where you are today against your plan?
The vital signs should focus on current performance to budget, targets and milestones regarding customers, revenue, product development, cash, and operational gearing to answer the questions: are we creating stickiness in our market with what we are currently doing? Do we understand where we are, what’s working today, and what’s not?
Once we have a grip on the ‘business as usual’ drivers, we can then look to the horizon. So, for example, here are suggestions for key number headings of ‘today’:
Customer metrics: building traction Do you know your customer numbers, how much it costs you to attract each customer and your churn rate? It’s a good way to monitor the efficiency of your sales process. How is your customer base growing, how sticky is your base? The absolute value is important here, so is the trend. There are a wealth of other customer metrics that feed into these high level ones.
Revenue metrics: creating a growth engine As you grow, develop a working product and gaining customers you need to start measuring how your business is scaling. Your revenue run rate measures how sales are developing over time. It helps you see how likely you are to hit your forecasts, capture any trends or patterns and tease out potential problems with your pricing strategy.
Looking at average revenue per user is a starting point. An average can’t tell you anything about the quality of your sales, you need to get really granular, and do so on a weekly basis to get close to the drivers.
Product Development metrics: roadmap milestones Retaining a focus on building out your product is important and shouldn’t be put to one side whilst also seeking to build customer attention. It’s important to keep a line of sight on the product development roadmap milestones and creating a backlog of customer driven development from features identified. The agile development process has built in metrics around user stories, points and sprints, and these should always be in focus.
Cash flow: burn rate Staying on top of your burn rate – how much cash goes out the door every month – is critical. Running out of cash is an avoidable car crash, but needs attention. Knowing your burn rate is like looking down the track towards a finishing line with the stopwatch running. You need to know how much time is left before you run out of money.
Understanding your runway is vital – at the current burn rate, how many months of spend do we have remaining? Short runways cause entrepreneurs to be myopic, and removes the liberty to tweak and iterate when necessary. It also forces them to focus on the next fundraising round instead of growing the business. It’s a separate discussion from this blog, but fund raising should be focused on milestones, not the runway.
Operation gearing: learning The early stages are about trying things out, learning, and improving. How much operational efficiency does your startup have? In other words, are you getting a return on your spending or are you underinvesting in critical but areas? When you’re ramping up, you’ll need to spend more on marketing and hiring and to get traction, and you need to build these into your metrics.
On your right hand
As your left hand holds metrics for today, so your right hand should hold numbers with a forward-looking orientation, focused on the ability to scale fast, and typically go through three stages – traction, transition and growth. Each of these stages requires different priorities that are reflected in different objectives, strategies, team etc., but all focused on your North Star – your overall aim.
The North Star has been used for navigation since man began sailing, and applying it as a metaphor to startups is useful to get clarity in the maelstrom of things to do. For me, your North Star is determined by answering the question: How many people are getting authentic value from our product?
So, on your right hand, hold a set of metrics that inform about progress on your North Star, capturing the velocity, direction and momentum on progress. It’s a simple goal and easy to measure. I use authentic value to avoid vanity metrics. The moment when a user gets authentic value means you are getting traction, and can anticipate revenue, and when you have paying customers, you have a chance to turn your startup from an experiment into a business.
Simply, traction refers to the initial progress of a startup, seeking product-market fit, gaining market share and mind-share from its target audience. If you achieve success in the traction stage, you have forward movement, finding what moves the needle of your initial growth, testing different offerings, and nailing down your product-market fit. Your aim is to maximise what makes you unique and what makes you valuable to customers.
The truth is that many startups make the same mistake of thinking if something doesn’t work, it must be everything, or they just guess the wrong reason why their business is not working. The truth is, any part of a customer’s experience can influence them. Here are some other metrics to consider, the 5C Scorecard:
Customer Numbers Growth A simple, binary index, set and measured for each period, provides visibility, clarity and simplicity of your North Star.
Conversion Rate Growth to be a very telling KPI in that it reveals a combination of the company’s ability to sell its products to its customers and the customers’ desire for the product. It is particularly instructive to track and review Conversion Rate over time and regularly run experiments to improve.
Customer Acquisition Cost Reduction is the unit cost of spend on sales and marketing, on average, to acquire a new customer. This tells us about the efficiency and effectiveness of our marketing efforts, and you need to be looking at this reduce as customer numbers uplift.
Customer Retention Rate Growth indicates the percentage of paying customers who remain paying customers during a given time period. When retention rates improve over an indicative time period, you know you have a sticky product that is keeping customers happy.
Customer Lifetime Value Growth is the measurement of the net value of an average customer over the estimated life of the relationship. Improving the ratio is critical to building a sustainable company.
For a company seeking outside funding, knowledge and management of these metrics is critical to allowing investors to understand your business and potential.
Clear data leads to productive conversations, recognising that whilst there are lots of moving parts in your startup which you need to stay on top of, a forward focus on customers forms the core of a dashboard of growth metrics. Over time, new financially based metrics can be plugged-in as it’s important to put an emphasis on the numbers you need to actively improve profitability.
But that’s the key: don’t use numbers to measure a startup financially at the outset, use them to guide and drive growth ambitions and the direction of travel and development of your business model.
Equally there is a ‘lead’ and ‘lag’ orientation to metrics, some track was has happened, others can be used to look forward. Progressions are far more important than numbers without any context: what was that number last month, compared to this month? How has it changed? What is the growth curve? Is it static? Is it dynamic?
Use your numbers to ask questions, the things you need to know to be sure that what you’re doing is having any effect at all. It is difficult to prioritise product and customer growth: Should we write a new feature? Remove a feature? Fix a bug? Redesign a user interface? Remove a step in the sign-up process? Write a blog post? Offer an e-book for a lead nurturing campaign? Change pricing? Hire a customer support person?
You must have an understanding of what levers can be pulled towards achievement of your North Star, which is then reflected in KPIs. The focus should not be on the KPIs themselves, but the meaning behind them and knowing what impacts each one.
In reality, the numbers should just confirm your instinct on performance and progress, but often they produce a reality check of where you are on the runway, offering a balance to the emotional ‘feel’ of what represents real progress on growth aspirations.
In my experience, startup founders can fall into the habit of innocently deceiving themselves with their own view on data, by only focusing on the KPIs and data that sounds positive and offers a positive outlook. We all have cognitive bias, tending to hone in on the metrics we know are improving over time, and ones that sound impressive without much context.
For example, I’ve seen startups ignore the hard stats of monthly active user numbers, but talk about the number of web site visits or downloads of white papers. Beware of ‘vanity metrics’ such as these, they don’t provide any meaningful indication on issues on which you should be making decisions. Focus on metrics and numbers that you can improve, and that inform you on your direction of travel in a meaningful, clear way.
To me, the indicators that matter most in the life of an embryonic startup are about customer development. If you don’t have a handle on these numbers, then you’re simply fiddling round the edges, and your actions will make far less of an impact on growth direction, velocity and scaling ambitions.
