Intro to Startup Metrics

“If you can’t measure it, you can’t manage it.” -Peter Drucker

Throughout the first year after a baby is born, the parents take the baby to the doctor for monthly check-ups. The doctor weighs and measures the baby. If the baby is growing and getting bigger, then things are going well.

A startup is very much like a baby, as it needs to grow to become a real business.

But how do you measure growth?

You do that by defining metrics and KPIs (Key performance indicators). That is, you pick one metric, or a small set of metrics, and try to generate growth either weekly or monthly.

The difference between focusing on metrics and KPIs is the difference between building the business, and failing to do so. There is no successful company that does not focus on numbers.

In this post we dive into the basic framework for Metrics and KPIs.

1. Why are Metrics so important?

Setting and achieving goals. CEOs use metrics to set specific goals. Instead of saying to the team, we need to grow, or we need to make progress, the CEO can say, we need to increase the number of new signups by x percent or we need to increase the monthly recurring revenue by y percent. Every week, the company either grows or fails to grow by a specific amount, and which will determine whether or not the goal is reached.

Clarity and focus. What is our top priority? What is more important, task A or task B? In the absence of metrics, startups are ruled by vagueness and chaos. By establishing clear metrics, CEOs can help the team focus on what really matters. The team, in turn, has clarity on what is more important, and can plan accordingly.

Getting the team aligned. Metrics are also great for settling arguments and getting everyone on the same page. For example, when team members argue about whether to add a specific feature to a product, you can reframe the question. For example, ask, which of the features, if added, is likely to help hit the growth goal? This is a much more efficient way to evaluate features.

CEOs can use metrics to get the team on the same page quickly and objectively. A metrics-obsessed culture is a winning culture.

Raising Capital. Metrics are essential to all fundraising—even in the early stages. As an investor, I know that if a startup is not focused on metrics, I won’t be able to make a profit. This is because making money in venture is essentially an arbitrage—I am investing into something early with the idea that it will grow later, and I will be able to sell it for more money. However if the founders aren’t metrics-driven, how do they grow the business? How will investors see their investment grow? Without focus on metrics the company can’t grow and founders can’t create wealth for themselves and their investors.

Next, let’s look at some of the basic principles for startup metrics.

2. Metrics 101

Tie metrics to milestones. Metrics don’t exist in a vacuum—numbers shouldn’t be measured for the sake of measurement.

Metrics are a tool that helps a startup achieve its goals, and hit major milestones.

For example, say you are trying to raise seed round or become profitable. Both of these are major milestones. You can use metrics to achieve them. You can decide that to raise a seed round you need to have x users or y customers or z dollars in monthly recurring revenue. Similarly, to become profitable, you know exactly how much monthly revenue you need, given your expenses, so you pick a quantitative goal to achieve a milestone.

Figure out your trajectory, and measure progress often. In addition to using metrics to help hit a major milestone, startups use metrics for weekly and monthly goals. The idea is that once you decide on the numbers you want to hit, say a year from now, you can compute the entire path backwards and set monthly goals.

Now, every month you can check yourself against the overall goal. If you are on target or above, great! If you are missing the mark, then have a conversation to reevaluate.

Understand what you need to adjust. Are there are missteps in your execution? Was the goal you set not realistic? Regardless of what is not working, the key point is that using metrics allows you to detect the problem quickly and hopefully address it quickly too.

Decide and focus on 1 main and a few supporting metrics. Sometimes founders go all out and start measuring everything. Too many metrics are likely to derail and defocus your startup.

Measuring everything is basically like not measuring anything — useless.

Particularly in the early days of your company it pays to pick one main metric. Pick the one that you deem the most important for right now. The pick itself will trigger many debates, and that’s good and healthy. Once you decide it will be the number of new beta customers or new recurring revenue or new active users—whatever it is—set this as your main measure of progress and growth.

In addition, pick no more than three other supporting metrics you want to track. Why three? Because one main metric plus three supporting metrics will fit nicely on your weekly slide. It is a trick we use during the Techstars program—each company gets one slide to fit its metrics on. It is a little silly—of course you can pick more if you want, but the point is not to measure too many things because you will lose focus.

Use a simple dashboard.  Arrange your metrics on a simple and clear dashboard. Make them easy to read and understand. Many Techstars companies use electronic dashboards that display metrics in real time. These dashboards can be great to motivate the team.

People love numbers and love celebrating wins. The metrics dashboard can help align and empower your team to do great work.

Question and change your metrics. It is actually okay to change what you measure. Startups pivot; they change direction and focus. As you learn more about your market and business, things will change. It is okay to change your key metric and your supporting metrics. In fact, it is completely fine.

For example, in the early days of your startup, you obsess about building a strong, passionate user base. You are racing to acquire your first customers. The key things you are focusing on are customer satisfaction and retention. You focus on repeat use because you want to make sure you have product market fit. In that case you want to make sure the customers sign up and stay, so you focus on retention or non-churn.

Later, once you are sure the product works, your priorities may shift. You may need to focus on driving more and more customers to your product, and your key metric may change to be new customers.

One person owns metrics, but everyone talks about them. Designate one person to be in charge of your metrics, but have everyone talk about them. In the super early days, this is the job of CEO.

Metrics aren’t separate from the business; they are the business.

Because the CEO uses metrics to set goals, manage the team, and raise capital, the CEO is the right person to own the metrics in early days.

Use metrics, but make gut decisions. Lastly, use metrics to make decisions, but don’t be blinded by numbers. The CEO should use common sense and human judgment to make the final calls around critical directions of the company. Don’t get me wrong, metrics are very important. But it is even more important to trust and celebrate the power of the human brain, heart, and gut to make critical, out-of-the-box decisions, despite the numbers.

3. What to Measure?

By now, I have hopefully convinced you that metrics are important and you are ready to start measuring. So what do you measure?

In a nutshell, avoid measuring totals—measure changes.

Measure Changes instead of Totals. For a startup to get off the ground it needs to grow at an accelerating pace. When you measure totals, you are creating a false sense of growth. Of course the total number of customers or users is growing (if it is not, your business is definitely not working), but the totals do not tell the growth story. For this reason, totals are called vanity metrics—they make you feel great, but they aren’t really that great.

Measure new weekly and monthly revenue customers and users. When you measure changes, you are focused on growth. If your new monthly revenue is a flat line, you are still growing. If your total revenue is flat, you are stagnating. If your new monthly revenue is a 45-degree line, you are growing at an exponential pace. If your total revenue is a 45-degree line, you may or may not be experiencing linear growth.

Measure Active Use and Churn. Aside from measuring growth, it makes sense early on to measure active usage and churn. The reason is that often times, startups get customers, but fail to keep them. This is known as a leaky bucket situation. On one hand, it is great that customers are coming. It is not great, however, that they are leaving. As you will read in the follow-up posts, it costs money to acquire customers at scale. A good business must retain its customers to make up for the cost of acquisition and to generate profit.

In addition, intuitively, if you get the customers to try your product or service, but they don’t stick around, there is something wrong. There is not enough value created for your customers—the product is not right. Paying attention to active use, stickiness, and non-churn is an important thing.

Measure conversion funnels. It turns out that funnels are quite magical things to master for startups, and funnels will be a topic of a separate post in this series. Whether you try to convert site visitors into beta users or try to use your sales funnel to turn leads into paying customers, the setup involves a multistage funnel.

In all of these funnels you have a top and a bottom. The top is wide and typically unqualified, and the bottom is narrow and represents the goal stage. In between, there are stages where users and customers fall off. The goal is to fine-tune the funnel to move as many users or customers from one stage to another. The trick is to and keep measuring the conversion and improve one stage of the funnel at a time.

4. Let’s build your dashboard

Now is the time to put this knowledge to work. If you already have a dashboard for your startup, have it handy and ready to review. If you don’t have one, let’s start from scratch.

Write down:

1. Your next big milestone and the metrics you think you will need to hit it.
2. Metrics you think will be important to your investors (this is a trick question, it should match the metrics from bullet one above).
3. One key metric that will drive your business.
4. Three supporting metrics to help drive your business.

Discuss this with your team—do they agree?

Next, please share your key metric, supporting metrics, and, if you feel comfortable, share your whole dashboard. Tell us why you picked it and how it is helping you drive your business.

Reprinted by permission.

Image Credit: CC by Dave McClure