The Ultimate Startup Metrics Guide: KPIs that VCs and Entrepreneurs Recommend To Grow A Successful Business

 By Martin Luenendonk| 2017-09-14T12:31:43+00:00 September 14th, 2017|

The world of business is full of different metrics.

When you enter investment negotiations, you’re constantly bombarded with questions about your monthly user ratios and return on investment.

You’re told to track your revenue, measure your user activation and keep an eye on your costs.

But you’re a startup – you have limited resources and limited time.

How the hell do you know what metrics are the most revealing and actually help you make good decisions?

Well, you’re not the first person to start a business.

The good news is VCs and entrepreneurs before you have realised that some performance indicators are better than others – the so-called Key Performance Indicators.

In this post, I’ll guide you through the importance of KPIs and explore the key metrics you need to track in terms of:

  • Your finances,
  • Your customers
  • Your product and engagement
  • Your market
  • And your team

Why you want to get KPIs right

Before I explain the KPIs you need to track, let’s first consider why this matter.

Can’t you just pick a random metric and follow it? Are some metrics really better than others?

Metrics come in all shapes and sizes – therefore, you want to focus on finding the ones that show you the actual growth and the growth potential of your startups.

Not just for you either, but KPIs help investors understand what’s happening in your startup.

So, if you want to raise money, you need to track and measure certain metrics.

KPIs have three important functions. They will:

  • Provide an analytical snapshot of the startup’s health. You and the investor will immediately see what the company is doing correctly and how the startup is performing – is it growing, how fast and what is driving the growth? KPIs will also help with accurate projections, something seed stage startups must focus on. Investors will want to have an idea of what is possible in the future – how quickly they might enjoy returns on investment.
  • Help you take action. Good KPIs are those helping you be actionable. All the below KPIs are chosen because they aren’t just a vanity metric – the figure helps you make decisions and change course if needed. An actionable metric is a metric that has an impact on your startup when it’s tweaked.
  • Improve understanding of the connections between different metrics and actions. With good KPIs, you understand how a single metric or action can impact another. For example, you understand that customer acquisition will naturally impact your revenue. If customer acquisition rate grows, your revenue should grow. Again, you can use this to make better decisions. Overall, knowing this connection will ensure you show professionalism to the investor – the VC will notice you’re on top of the metrics and the business decisions you make are carefully calculated and thought through.

Where should your focus with KPIs be?

So, KPIs matter – they will improve your decision-making and help you when pitching to investors.

But what KPIs are worth focusing on?

The world is full of different metrics – businesses could potentially gather data and measure many things.

But as a startup, you don’t have the time or the money to keep track of everything.

Startup growth is also unique – you are looking for quick growth in short space of time.

All of this means that certain metrics might not really help you take the startup further – even the investors are not interested in every single metric.

As I mentioned above, you must pick KPIs that help you take action – you need to focus on the areas that have the biggest impact on startup success; those figures that drive the most growth.

Four key areas influence startup growth:

Startup metrics

So, let’s now turn attention to the four sectors and the specific KPIs within these.

Show me the money: The key financial metrics

Let’s start by examining the finances.

There are plenty of purely financial metrics telling you what your startup is making and whether it’s growing in terms of the money you make or not.

These metrics give you the basic overview of your startup’s financial health.

#1 Revenue

Revenue is amount of money you are getting by selling your goods and serving your customers. It’s the money you make with your core business idea.

You can, of course, make other types of revenue as well.

Indeed, financial statements often have a section called “other revenue”. This simply refers to any other income you attract that doesn’t directly relate to your original business. For example, you might rent out some of your equipment.

As part of the revenue, you’ll need to understand a metric called revenue run rate (RRR).

Now, the metric takes your actual revenue from a specific timeframe and predicts your future revenue based on it. It annualises your revenue.

For example, you might only know monthly revenue for your business. You can use this information to calculate your quarterly or annual RRR.

For instance, you take the monthly revenue and multiple it by three to get projections for a quarter. For annual data, you multiple the monthly figure by 12.

Now, the RRR matters because it helps you predict future revenue and therefore, know whether your startup is growing according to plan.

If your RRR is low, you will need to take a closer look at your revenue and understand why it is stalling.

#2 Monthly recurring revenue

Monthly recurring revenue (MRR) is a closer snapshot of a specific period and the money your startup brings in during this time. It essentially tells the story of how much income your startup can expect every month.

Now, the MRR won’t work if your startup doesn’t provide an on-going contractual relationship model for the customer. If you don’t base the product or service on a subscription-based service, for example, you won’t need to worry about MRR as much.

How to calculate?

Your first option to calculating MRR is by looking at it through customer-by-customer basis. Your MRR is simply the sum of the monthly fee your customers pay to you.

So, if you have 1,000 customers paying you a monthly subscription fee of $50, your MRR would be $50,000.

Now, the other option is to look at the average revenue per account. For this, you’ll need to know the average revenue per user. Multiple the total number of paying customers by the average amount all of them are paying per month and you’ll get the average MRR.

Now, calculating the MRR might be tricky so check the informative post by Profit Well to avoid the most common mistakes.

Why does it matter?

By understanding your MRR, you can plan your finances better.

Similar to the RRR, knowing your predicted monthly revenue will help make the right choices and prepare your business in terms of the revenue streams you can expect.

It also shows momentum – if your MRR is slowing or declining, you need to figure out why. On the other hand, a strong MRR is a clear sign to investors that momentum around your startup is building up.

#3 Net income

Another key financial to understand is net income.

Your startup is not just making money – you also need to spend it wisely.

Therefore, the revenue you generate doesn’t all just flow to your pockets. Parts of it are reinvested or it is used to generate more (i.e. paying salaries or rent, etc.).

The money you actually earn is considered net income. Net income is the total earnings or profit for your startup.

How to calculate?

Calculating net income is straightforward. You do it by:

Net income calculation

For simplicity, you essentially take all of the money coming in your startup and subtract the money going out.

Your costs would include things such as depreciation, interests, taxes and other such expenses.

Why does it matter?

Net income essentially shows you how well your startup is doing in terms of generating profit. If your net income is negative, you are spending more than you are making.

For a startup, this can be common at the start. However, if your net income is not improving every month, you might have to look at your expenses more closely and figure how to operate leaner or how to start generating more income.

#4 Gross profit

Now, gross profit is another way to examine your revenue.

The figure simply looks at how much your startup is making by selling its product or service.

It tells the profit you make when you just take into account the revenue you make (with the product or service) and the cost of making the product or service while not considering your fixed costs.

How to calculate?

Calculate gross profit with the following formula:

Gross profit calculation

Now, knowing what to include to your cost of goods sold calculations can be difficult. Check out the video clip below to understand more about the metric:

Cost of goods sold (COGS) can, sometimes, also be referred to as Cost of Sales (COS).

Why does it matter?

Gross profit matters because it shows your efficiency in using resources to create your good. Even if your net income is negative, your gross profit must be positive or you’re doing a bad job.

This is because you are efficient at using labour and other resources to create your product and selling it at the right price. However, your startup might have other big expenses at the start.

Since gross profit doesn’t take into account fixed costs, such as rent, you get a better glimpse at your ability to be efficient with the more fluctuating resource costs.

#5 Gross margin

Gross margin is similar to gross profit.

The difference is that with a gross margin, you can better understand the variance between your startup’s revenue and the cost of goods. The above gross profit simply looks at the profit your startup makes.

How to calculate?

To calculate the gross margin, you need to use this formula:

Gross margin calculation

Why does it matter?

With gross margin, you get a clear idea at how the production costs of your product or service relate to your revenue.

It’s also effective in broadcasting your cash storage. If your gross margin is falling, you’re losing money quicker and won’t have much left to burn in the coming months.

#6 Burn rate

Burn rate is another crucial financial metric because it shows how fast you are losing cash.

In essence, your burn rate literally tells how quickly you are burning cash and declining your cash balance.

How to calculate?

There are two ways of examining the burn rate. You can look at the gross burn rate and the net burn rate.

Here’s how you can calculate the gross burn rate:

Gross burn rate calculation

If you want to examine the net burn rate, you’ll need to do the following things:

First, calculate the net loss for two months using the following formula:

Monthly net loss calculation

Do this for two separate months. Once you have the net loss for two months, you can calculate the net burn rate with this formula:

Net burn rate calculation

Why does it matter?

It’s rather obvious perhaps to state how important it is that you’re not burning a lot of cash.

If your burn rate is negative, you are essentially spending a lot more money than you are able to make. You don’t need to be a finance genius to realise this means you need further funding soon or you’ll get bankrupt.

The reason for your startup: The key customer metrics

You’ll also need to consider the metrics revealing more about your customers.

No startup would survive without customers and therefore, you must understand, first and foremost, how you get customers to spend money with you. What kind of monetary sacrifices must your startup make to get people interested?

In addition, you want to focus on understanding the spending power of these customers. This reveals you a great deal about the future growth potential of your startup.

#7 Cost of acquiring a customer

One of the most important startup metrics is the cost of acquiring a customer or CAC. This is sometimes also known as the customer acquisition cost.

The CAC tells you how much money you need to spend – on marketing, sales and so on – in order to acquire a single new customer.

How to calculate?

To calculate CAC, you should:

Customer acquisition costs calculation

It’s important to note you can calculate CAC for a specific period.

For example, take the sales and the marketing costs of a single period and divide them with the number of new customers your startup obtained during this period.

What entails sales and marketing costs? It includes things such as:

  • Paid advertising
  • Website design/hosting/maintenance
  • Salaries for sales personnel
  • Fees to sales and marketing related contractors
  • Travel expenses for sales and marketing personal
  • Marketing licences and software

Why does it matter?

The CAC matters because it shows the efficiency of your customer acquisition. If the CAC is high, you’re spending a lot of money just to gain a single paying customer – you are essentially throwing a lot of money in the air just to gain a single customer.

#8 Lifetime value of customers

Lifetime value of customers (LTV) shows the net value of your average customer over the estimated life of the relationship between your startup and the person. It essentially tells how much profit your startup is expected to make by having the customer.

How to calculate?

In order to calculate the LTV, you need to use the below formula:

Lifetime value of customer calculation

As an example, your average retention period could be four years. Now, if the customer spends $10 for a single purchase and he does so every single month, the LTV would be calculated like this:

$10 x 12 x 4 = $480

Why does it matter?

Helps you adequately understand how much revenue your average customer brings. If the figure is low, you want to find ways to keep the customers spending for longer, more frequently or more in terms of capital.

#9 The market size-specific metrics

In terms of customers, you also need to understand the market.

There are a few KPIs VCs and entrepreneurs recommend you track when it comes to understanding your market.

The first is total addressable market.

It is essentially the revenue opportunity available for your product or service. All the people who could potentially buy your product or service.

For investors, total addressable market matters because it shows the potential of your startup. If your startup’s TAM is small, you probably won’t excite many VCs.

More about TAM, as well as introduction to your segmented addressable market (SAM) and the share of the market (SOM), check out the Bplans post by Caroline Cummings.

The other important market metric is the average wallet size.

TAM tells you the revenue available for your product or service as a whole, while the average wallet size looks at particular customers and indicates you what their spending power is.

It’s the money a single customer is able to and willing to budget for shopping with you or using your service.

This is important because it helps you calculate the right price for your product or service.

Bringing customers salvation: The key product and engagement metrics

Of course, you can’t just focus on how you get the customers. You also need to pay attention to how good your startup is in engaging with the customers.

You, essentially, want to know how well you succeed in keeping the customers happy and spending money on your products and services.

#10 Repurchase rate

One of the key rates to figure out is the repurchase rate.

The rate will immediately tell your startup whether your customers are loyal to your product or service.

If your business is not based on a subscription model, the repurchase rate will analyse how often your customers keep buying your things.

How to calculate?

A simple way to calculate the repurchase rate is to use the following formula:

Repurchase rate calculation

There’s also a slightly more complicated format, which you can find from the MergeLane blog.

Why does it matter?

If your repurchase rate is low, your startup is not able to maintain paying customers. This probably means you need to spend a lot on finding new customers.

It can also reveal a lot about the health of your product or service. If no one is making repurchases, you clearly don’t have an appealing product. On the other hand, if your repurchase rate is high, customers are clearly happy with what you are offering.

#11 Retention rate (churn)

Of course, not all of your customers are going to return.

However, the ideal situation is to have enough old customers returning to ensure you’re not constantly just spending cash in order to gain customers.

To know how many of your paying customers remain your customers after the initial purchase, you need to calculate the customer retention rate or churn rate.

The retention rate indicates the percentage of paying customers that continue being paying customers over a period of your choice. For example, you could examine it over a month or a year.

How to calculate?

You can calculate the customer churn rate by:

Retention rate calculation

For the retention rate, you need to know:

  • The total number of customers at the end of a period
  • The total number of customers acquired during the period
  • The total number of customers at the start of the period

To calculate the rate of retention, you need to use the below formula:

Retained customers calculation

Then you take that figure and divide it by the total number of customers at the start of the period. If you multiply it by 100, you get your retention rate.

Why does it matter?

Now, the retention rate matters because it shows you two things:

  • How good your product or service is – if customers are not staying with you, there is something wrong with the product or the service.
  • How efficient your startup is in terms of spending capital – If you don’t constantly have to spend money in order to gain new customers (i.e. your old ones continue spending), your startup is capital efficient. It costs much more money to attract new clients than ro retain existing clients.

#12 Measure of virality

Virality is a new, funky metric that measures your ability to generate revenue without the cost of acquisition.

Above, I told you how to measure the cost of acquiring a customer through marketing and the like.

But virality refers to the moment when you acquire a customer without spending any money on it.

It’s about referrals and other such organic ways of gaining new customers.

You can read more about it from this Medium post by Vasiliy Sabirov.

The post also has some important pointers on how to calculate it. The calculations depend quite a bit on your startup and the kind of organic ‘marketing’ you use.

For example, do you send referral invitations; use a lot of social media or post content online?

Now, the metric matters quite a bit because it helps you understand how good you are at reaching new customers without spending any more money. I’ll talk about this more in relation to the next few metrics.

#13 Product metabolism

Product metabolism is a bit more unusual metric.

It’s created by Dustin Dolginow, who essentially wanted to have something to measure the speed at which your startup makes decisions.

Now, product metabolism is useful for early stage startups – you need to make a lot of decisions quickly at this stage. However, you want the product metabolism rate to start slowing down as your startup matures.

How to calculate?

The product metabolism rate is not really calculated, but rather analysed. To understand your product metabolism, you need to take a set of decisions you’ve made and see how quickly you made those.

You should also keep track of any current decisions. How quickly are you moving on?

Why does it matter?

Product metabolism is important because it shows the speed at which decisions are made.

And for a startup, decisions are everything.

If you make them too fast, you risk of making the wrong ones. On the other hand, spending a lot of time thinking about decisions can hinder growth.

Investors will care because it reveals information about the business: are you able to find a balance between moving at speed to taking time to calculate the different outcomes?

#14 Viral coefficient

Viral coefficient is another cool quantitative metric your startup should care about.

It essentially looks at your startup’s ability to grow organically without any money spent on marketing. Viral coefficient simply studies how effective your current customers are at referring new people to buy your products or services.

How to calculate?

In order to calculate the viral coefficient, you need to know the following things:

  • The number of your current customers
  • The number of referrals your current customers have sent to friends
  • The percentage of the invited friends who became customers

You’ll first calculate the number of total invites sent with the following method:

Number of referrals

You can then calculate how many new customers these referrals attracted by using the formula below:

New customers from referrals

With this in mind, you can calculate the viral coefficient by:

Viral coefficient formula

Why does it matter?

The higher your viral coefficient, the better your customers are at attracting new customers to your business.

Why would you want this?

Because happy current customers are the best marketing tool for your startup – they are effective and cheap. You’re not going to have to spend a lot on marketing; you simply need your customers to do the promoting.

This means your current customers are not just spending money buying your product or service. They are also bringing in revenue by referring new paying customers to your business. In effect, this lowers your average CAC.

#15 Referral rates

Now, a similar spin on viral coefficient is the traditional referral metric. This is essentially just a percentage of your customers that are the result of being referred by current customers.

It essentially tells how many customers are products of organic growth and not the result of your good marketing efforts.

How to calculate?

Referral rate is more of an analysis of your customer base rather than a result of a formula.

What you want to do is survey your customers and ask them directly how they became your customers.

Was it down to advertising? A friend mentioning the business to them? Seeing a family member post about your products on social media?

This can give you referral rates in specific categories such as word-of-mouth or social media, for instance.

Why does it matter?

Referral rate tells you how your customers became your customers.

It reveals the channels that attract people to your business. Knowing this will help you improve your efforts and optimise your marketing and sales strategies.

For example, if your referral rate is low, you might want to boost your referral system or optimise your customer satisfaction. On the other hand, if the referral rate is high, you might be able to spend more on product development and lower your marketing budget, for example.

#16 Activation rate

Activation rate essentially tells you how active your customers are at using your products or services.

It looks at what happens when people are in touch with your startup – do they continue engaging with it and ultimately make a purchasing decision?

How to calculate?

You can easily calculate any type of activation rate by using the following formula:

Activation rate calculation

For example, if your startup has a website, you could take the number of website sessions and divide it with the activities completed on the site to get an activation rate.

Why does it matter?

It shows how attractive your product or service is.

If your activation rate is low it means people are viewing your website (for example) but don’t engage with it – i.e. buy the product or service.

If this is the case, you need to work on creating a more compelling argument as to why your product is worth buying.

#17 Daily active to monthly active users

The metric examines the relationship between your daily users and the monthly users.

It examines how often the users who engage with your product every month also engage with the product in a single day window.

How to calculate?

To calculate the daily to monthly active user ratio, you simply need to do the following:

DAU to MAY ratio

Why does it matter?

Looking at the two metrics alone won’t really reveal you anything.

On the other hand, when you look at the ratio, you notice whether your product or service is able to have a high number of daily users that correlates to monthly use. If it does, your user engagement is good.

The ratio reveals how engaged and dedicated your users really are.

#18 Sales-specific metrics

Finally, you need to spend a bit of time understanding your sales-specific metrics.

These look at your actual sales and its impact on your startup growth and revenue.

Your first focus point should be on the ROI on sales and marketing.

This refers to the rate of investment on sales and marketing. You examine the amount of return (i.e. revenue) you generate with investments.

For example, watch the below YouTube video to understand how to calculate and track this essential metric.

Obviously this KPI matters to investors – you need to know how effective your past investment has been to understand how good your future investment will be.

The other sales metric to focus to is the sales cycle.

The sales cycle reveals you the length it takes from the initial contact with the customer to closing the deal. You reveal how quickly customers move from potential customers to paying customers.

You can calculate it by dividing the total number of days for all sales combined with the number of deals. This gives you the average sales cycle in days.

The brains and brawns behind it all: The key employee metrics

Finally, you should also focus on key performance indicators that directly involve one of the most important pieces of the startup puzzle: the team.

You want to know what impact the team has on the financial health of the startup to ensure your precious team is generating growth not hindering the chances of success.

#19 Salary

Salary is just about the capital reward you give to employees for the labour they do.

A salary is any payment you make for labour – whether it is based on performance or a specific timeframe.

How to calculate?

The most common formula to calculate salary is this:

Salary calculation

Why does it matter?

Salaries tend to be the biggest expenses of a startup and therefore, you want to understand how much you are spending on monthly salaries.

Your salary is also a potential point of interest for investors.

Why?

Because a low salary might raise questions, whether you are going to:

  • Be able to retain employees
  • Hire new talent in the future

Competitive salaries that aren’t breaking your budget can help your startup grow quicker by having the right team in place.

#2 Revenue-per-employee

Perhaps more importantly, you should also pay attention to revenue-per-employee.

This figure shows how much revenue your average employee is generating for your startup. It essentially shows the efficiency in which they operate.

How to calculate?

You can calculate the revenue-per-employee with this simple formula:

Revenue per employee formula

Why does it matter?

Revenue-per-employee matters because it shows how effective your workforce is in generating income. If your figure is high, then you’re able to create a good amount of income without spending a lot on labour costs.

On the other hand, a lower figure might be a sign you’re spending too much on salaries and that your team is not operating efficiently.

How to present your metrics

Now you know the metrics to track, but what are the other things you need to keep in mind when looking at metrics and presenting them to investors.

First, setting goals is essential.

The KPIs work if you have objectives for them and for your startup as a whole.

Ask yourself:

  • What do I want to achieve with the startup?
  • What does success look like?
  • What does failure look like?

Think these questions in terms of overall success and each of the above metric in more detail.

For example, what is your objective in terms of referral rate? Perhaps your objective is to obtain 500 new referrals within two months. Success to you might mean getting every third customer to refer someone, while it might be a failure if you fail to obtain five new daily referrals.

When you are on top of your objectives – the overall startup objectives – you will also have a better idea on the metrics that actually matter to you.

The key is to focus on the actionable metrics.

These metrics change things in your startup’s performance when they are tweaked. They show an actual effect – a repeatable task tied to a performance.

They are the opposite of vanity metrics – figures that don’t really mean anything.

For example, your activation rate means more than your monthly website visitors. Monthly visitors don’t really reveal anything beyond who visited your website.

On the other hand, your activation rate tells how many of those visitors became users or made a meaningful engagement.

Furthermore, as a startup, your focus shouldn’t be looking at the above metrics with a too-wide timescale.

You don’t want to find out quarterly results.

Instead, focus on the small changes – view your metrics on a weekly and monthly basis. It’ll help you understand how well your startup is growing.

With monthly trends, you’re more able to make realistic predictions. Predictions will naturally play a key role in pitching to investors.

Overall, don’t be afraid to tweak your approach to the above metrics. See how they change when you try different strategies – it can help you stay lean and grow faster.

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