LET’S GET STARTED
- 1 Defining Your KPIs and North Star
- 2 The Top 8 Important KPIs For Startups That VCs Will Audit
- 3 Punch can help you identify and dashboard your key metrics
90% of startups fail, for a myriad of reasons. Despite many an early-stage startup having a great business model and being profitable early on, they end up crashing and burning due to a lack of focus. That’s why it’s incredibly important that early on you’re establishing and making decisions around key startup metrics.
Having KPIs in place will help keep you accountable for your success, and make you more attractive to venture capital.
Failory, which interviews failed startup founders so current startups can learn from their mistakes, spoke with the founder of InoVVorX (2010 - 2016) Maxim Dsouza about how a lack of focus shuttered their business. They were a software service business that also developed and supported several products, without a proper plan to support the success of all three:
“Our focus was all over the place. We were running a service business along with 2 different products. Each of them was registered as a separate company on paper. Overall, we did a mediocre job at all three.
Besides, shiny object syndrome was running strong within us. We wanted to grab every possible opportunity at success. I have only spoken about two major products in this article. A common mistake among entrepreneurs is to over-engineer products or develop something which isn’t a good product-market fit. Our blunders went much beyond that. We built several products simply because we had the technical strength to write code rapidly.”
Even more damning, Dsouza admitted that their startup lacked a real vision or long term plan, simply pivoting whenever they felt it was necessary:
“We had no clear vision as to where we were headed. Our only plan was, “We want to make it big.” We could not specify what “big” meant to us. We were doing things adhoc. If someone asked us what did we intend to achieve that year, we would end up scratching our heads. We focused on what seemed right at the moment instead of setting a destination for the future.”
As a result of this lack of focus, the monetization model of their products was flawed, and they neglected the services side, leading to major cash burn and layoffs before ultimately shuttering. This could have been avoided if the leadership had taken the time to define their success measurably.
Defining Your KPIs and North Star
When it comes to defining your KPIs, it helps to look to the standard metrics that a VC will want to see as a part of their due diligence. These metrics fall into five overarching groups: financial, user, acquisition, sales, and marketing. A VC firm will audit KPIs across all the different business units in your startup.
When developing your startup metrics, it’s key for them to be SMART: Specific, Measurable, Attainable, Relevant, and Time-bound. In practice this means:
- Is your objective Specific?
- Can you Measure progress towards that goal?
- Is the goal realistically Attainable?
- How Relevant is the goal to your organization?
- What is the Time-frame for achieving this goal?
Another tip from Failory suggests that startups are more likely to succeed by solving a well-defined problem well, for a single, well-defined market. A startup should have a North Star KPI - a metric that the entire business is aligned towards:
“Each team should have their own KPIs that contribute to the North Star. Metrics drive behavior – so think carefully about what incentives that metric implies (and how the metric could be gamed). Use a metric that measures how you deliver value to the customer, not how you achieve revenue. Revenue can be gamed; value cannot.”
At Punch Financial we’ve worked with plenty of startups looking towards VC investment and helped them define their North Star and business KPIs. We’ve compiled a list of the top metrics a VC will look for so you can start thinking about your own KPIs and how to define them.
The Top 8 Important KPIs For Startups That VCs Will Audit
1. Activation rate
This term refers to the percentage of users who complete a specific milestone in the customer journey. For B2B this could be a request for more information, for SaaS companies this could be signup for a free trial. Onboarding needs to be as smooth as possible so that users don’t drop off during the process.
A strong activation rate indicates that you are attracting quality leads/traffic to your website and a strong conversion rate. If your activation rate is low, you need to be adjusting sales and marketing tactics to ensure you’re attracting the right audience.
2. Active users
This important metric should be obvious to anyone - the number of customers or number of users currently utilizing your product or service or accessing your website. This is different from total users, which also encompasses people who accessed your product or service and then dropped off. Active refers to current existing customers and users - although your definition of “Active” will vary depending on your business.
A higher number of active users accessing your product, service, or website regularly gauges how effective your product, sales, and marketing efforts are.
3. Avg. sales cycle
This metric is the average sales cycle length - from acquiring a lead to closing a deal. The ideal sales cycle will vary wildly depending on the type of industry (eCommerce vs. retail vs. SaaS business etc.).
Ideally, you’ll want to keep this as low as possible and keep it steady. If you’re seeing it rise suddenly, it’s a clear indication that you need to intervene in your sales cycle.
4. Burn rate
Ah, the dreaded burn rate, or - how fast are we spending money. Calculating and forecasting your burn rate helps you calculate your cash runway, which in turn helps you make decisions about hiring and initiatives to spend money on.
Burn rate is not constant and needs to be continually monitored. A spiking burn rate can be indicative of out-of-control spending that needs to be curbed.
Burn rate formula: Cash at start of the month - cash at end of month = burn rate.
5. Cash runway
Your cash runway is a forecast of how long your money will last. It is typically calculated in terms of how many months your current cash infusion will last, and can indicate the need for additional funding, more aggressive sales, or expense cutting.
Like burn rate, the calculation of a cash runway is a moment in time and needs to be continually recalculated as your cash balance and burn rate change over time.
Cash runway formula: Cash balance / monthly burn rate = cash runway
6. Customer Acquisition Cost (CAC)
The amount you need to spend to gain one new customer, usually broken down by channel or business unit. This takes into account sales and marketing expenses, including the overhead of the teams responsible for driving those results.
Monitoring CAC allows you to determine which efforts are the most profitable and which might need a deeper look.
7. Customer Churn Rate / Retention Rate
Your churn rate represents the percentage of customers you lose in a given period. For SaaS or subscription-based businesses, this may be a cancellation, and for eCommerce, these are customers who don’t make a repeat purchase.
The positive version of this metric is the retention rate. Your aim is to increase retention and lower churn, as it’s always cheaper to upsell an existing customer than keep onboarding new ones!
If your churn rate is high, you need to do some soul searching to determine what the cause is. High churn and low monthly recurring revenue (MRR) is a huge problem for any startup and needs to be remedied ASAP.
Customer churn rate formula: (Total customers churned during timeframe / Total customer at the start of the timeframe) x 100 = Churn Rate %
8. Customer Lifetime Value (LTV)
Your customer lifetime value represents an average of how much revenue a customer is projected to bring in overtime. This number may be different for individual customer segments. LTV is a useful metric to compare against CAC to see if you are achieving a return on investment.
SaaS LTV Formula: Avg. monthly revenue per customer x average customer lifetime = LTV
eCommerce LTV Formula: Avg. order value x repeat sales x avg. retention time = LTV
Punch can help you identify and dashboard your key metrics
The reality is most business owners do not know which startup metrics they should be monitoring and at what frequency. This means you can’t make timely adjustments to help improve your business’s profitability.
Punch works with the team to help identify the metrics to measure, how to measure them, and how to report them promptly so corrective business decisions can be made. A pilot cannot fly a plane without instruments to tell him/her key metrics like speed, direction, and altitude.
Our goal is to help create management dashboards to help you manage your business’s performance. What will you measure? Who will do it in the organization? How often? What tools should be used? These are all important details that you should know about your business.
Every client gets tailored flexible pricing. Let’s connect to give you a customized quote and free consultation. You have nothing to lose but so much to gain.