Do You Really Know How Your Startup is Performing?
At every level of growth, startups are faced with an array of advice and suggestions: focus on this, not that; allocate your money here, not there; target these customers, not those. When resources are thin and big decisions could have big consequences, it is impossible to understate how important it is to use concrete data to make smart decisions.
There is one surefire way to track, measure, and demonstrate your company’s progress: find the metrics that matter, and know them intimately. This matters for two main reasons. First, the obvious: you will know your company inside and out, and can make more sensible and calculated internal decisions as a team. Second, you can better explain your company to an audience (most likely, potential investors), who will certainly want to base their investment decisions on rock-solid, quantitative indicators. Having them at the ready is never a bad thing.
A transparent pitch or a presentation includes these metrics. Your belief that your company will change the world might be inspiring to you, but numbers that show how you’re gaining traction, acquiring (and keeping customers), and generating increasing revenue month over month are far more convincing than broad idealism.
So here you are: eight of the most commonly important metrics startups should know, understand, and be able to communicate. (A quick caveat: different metrics matter for different companies, and it’s important to understand which are most important to your industry, your size, and you current stage of development.) Of course, there are others out there as well, but these are a good starting point.
The 8 Metrics Your Startup Should Know
Let’s begin with revenue run rate, which is like a forecast of your company’s financial performance. It’s a simple calculation: take revenues from your last month and multiply them by 12. Used correctly, a revenue run rate will be able to tell you how you’re scaling, how you’re growing over time, and can inform future fundraising projections.
Revenue run rate is different from monthly revenue growth, which is useful in showing how the company can grow given its current mode of operation. Of course, given the massively varying revenue levels of different companies, this metric can be somewhat misleading, but it at least affords some way to demonstrate your company’s potential.
Typical gross margins vary from industry to industry, but they are a very useful way of showing your level of profitability. Quite simply, it’s the number left when you subtract all the COGS (cost of goods sold) from revenue. Venture capitalists use it as a way of answering a simple question: how significant will my return be on my investment?
Customer acquisition costs let you know exactly how much you are spending to acquire a single customer. To calculate this important figure, you have to take every dollar you spend on reaching potential customers—from marketing to public relations and beyond—and divide it by the number of customers you actually acquire in a given period. This is obviously an all-encompassing number that has different subsets since not all customers come at a cost. For example, if your company is growing more organically, it would be useful to demonstrate the amount of free customer acquisition that has come via free channels, such as word of mouth.
The reasonableness of customer acquisition costs vary by industry, but a way to measure reasonableness is by showing the payback rate. This tells you how long it takes the revenue from the customer — how many orders they need to place, for example — to exceed the money you spent to acquire them in the first place. Again, it’s a number that varies, but generally speaking, a six-month payback rate is good (though immediate profitability is often ideal) and anything longer than 18-months is difficult to find attractive.
This leads nicely into what’s known as churn, or how well you retain your customers. The longer you keep them, the greater their revenue potential. If you find that your churn is unnaturally high, customer acquisition costs tend to go up as well. The month-to-month number is important, but so is the trend. As you might imagine, you want to see this number drop with time.
Your burn rate is another way of talking about net income: a measure of how much you’re spending each month (costs) relative to what you’re taking in (revenue). This matters immensely to investors, and shows a number of things: how quickly you might run out of money, break even, or become profitable. Among other values, these numbers can help set a fundraising timeline.
Knowing your company means knowing how it’s performing; these metrics will help get you there and secure funding.