Almost 90% of startups fail, and 10% fail within their first year.
So, with the odds stacked against every founder out there, how can you evaluate the effectiveness of your strategies and make sure that your company is headed in the right direction?
The answer in one word is metrics.
After all, success is about more than just having an innovative idea or a dedicated team. Instead, it is rooted in understanding and leveraging the right data. Moreover, financial planning and analysis, one of the 10 pillars of finance, must be backed by robust metrics that offer clarity and direction.
And whenever we send a fractional CFO to work with a startup, they start by looking at the metrics that matter the most.
In this guide, we bring a wealth of expertise to the table, breaking down the essential metrics every startup should have on its radar. We'll delve into their significance, interpretations, and impact at various growth stages. This guide ensures you're not just running the startup but moving it in the right direction.
In a business setting, metrics are critical. They not only help in identifying a company’s financial viability but also establish what is to come next. Here’s why metrics are important in a new business setup, such as a start-up.
If you've ever tried to raise investment, you'll know that investors don't just throw their money at any idea. They want proof. And what better proof than cold, hard numbers?
Your financial statements show potential investors not only that you have 'the next big idea,' but you have the business savvy to go along with it. They show that you have a sense of where your money is going and how it's being used.
Would you operate a car without considering oil checks and a tune-up?
Well, operating a business without observing financial metrics is the same thing. Observing cash flow, burn rate, or profit margins will make you sure your start-up business isn’t just operating but flourishing.
These metrics are like a heartbeat to your business. Periodic check-ups will make sure everything is in order and will inform you if something is up.
Well, you know this experience. You have this awesome idea, but you don't know if it’ll work.
Here is where your financial metrics come in. They provide a very objective way of assessing if a particular strategy or course of action is effective.
For example, if you have launched a product or a service and want to know if your consumers are responding to it, you can do so by examining your sales numbers, cost, and profit.
And when faced with different tasks, your metrics will help you prioritize them in order of importance and impact on the business, making it easier for you to manage your time and focus on what matters.
It is important for you to be aware of the important factors your startup must focus on tracking. They are aspects you simply can't afford to ignore in order to make sure that each step you take leads you towards eventual success.
Let’s have a look at a few of these key ones!
To help your startup reach its full potential, you have to learn about important financial elements. These elements not only help you assess your level of current success but also assist you in planning your future growth. Some important financial elements you need to understand include cash flow, revenue, expenses, profit, and capital.
These are fundamentals. Where your revenue is concerned, you see how much your business is making. Where your expenses are concerned, you see how much your business is spending. Having a sound knowledge of these two will help you assess how your business is faring financially.
Generally speaking, when you deduct your expenses from your revenue, you can see how profitable your business is. This metric provides insights into the long-term viability of the business.
Your cash flow analysis takes a look at money entering and leaving your business.
Note, however, that your cash flow is not your income. Although your income measures your revenue and expenditures, your cash flow analyzes the amount of money moving in and out of your business. Therefore, if you make a sale of a product and the customer will pay you in two months, your income will go up, but your cash flow will not until you have received the money.
With this in consideration, you can see how a positive cash flow can signal a company’s liquidity, which gives it the capacity to repay debts, repurchase stocks, distribute dividends, and potentially expand operations.
Working capital represents the funds you have on hand to manage daily business operations, including paying salaries, satisfying debt obligations, and meeting any other short-term expenses.
For startups, tracking your working capital is vital. Without sufficient working capital, your startup's growth and success could be significantly stifled. Here are some metrics that could help you manage your working capital better:
Customer metrics allow you to gain insight into your customers' behavior, preferences, and sentiments. Typically presented in numeric form, they are a quick way to summarize a large amount of information related to your customers.
CLTV is a very important tool in measuring the total customer value over the lifetime of your business relationship with a customer. CLTV is important because if you know the total amount of value a customer provides to your business, you will also know how much you can spend to access this total amount of value. With this information, you can perfect your marketing game for your business.
This number reflects the cost associated with acquiring a new customer, taking into account marketing and sales expenses.
The CLTV/CAC Ratio is basically a magnifying glass for your business. This is a major indicator of your customer acquisition strategy’s profitability, reflecting how effectively you are acquiring customers and how much they are worth.
With this constant awareness, you will be able to determine if you are making money from your clients and make any necessary adjustments to ensure a constant income stream. To illustrate, with a ratio of 3:1, you make three times more money from a customer than you did to acquire them.
NPS measures customer satisfaction and loyalty; it helps your startup gauge general sentiment around your product or service.
The way it is measured is that a customer is sent a one-question survey, asking them, “On a scale of 1 to 10, how likely are you to recommend our company to a friend or colleague?”
Now, people giving a score of 0 to 6 are labeled detractors, those giving a score of 7 to 8 are considered passives, and only customers giving scores of 9s and 10s are considered promoters.
After you have collected all of the responses, you calculate your company’s NPS score by taking your percentage of promoters and subtracting the percentage of detractors from that. What remains is your NPS score.
Product metrics provide quantifiable data on how customers interact with your digital product. These data points offer insights into the product's success and reveal the impact of user interactions on your business. Let's have a look at some of these metrics:
This metric shows the percentage of users who take the vital actions necessary to derive actual value from your product. It is a direct measure of initial user engagement and product fit.
You can evaluate the success of a new product or feature rollout with the adoption rate. It quantifies the number of new users or adopters over a predetermined timeframe, indicating feature relevance and market demand.
Retention rate is a fundamental metric that gauges customer loyalty and product stickiness. It quantifies the percentage of customers retained during a specific period, emphasizing the long-term value and satisfaction delivered to your users.
Marketing metrics quantify the performance of your campaigns, serving as essential tools to assess their effectiveness. While the most relevant metrics differ between campaigns, they generally evaluate the impact of your strategies on audience behavior.
Here is a quick look at some of these metrics:
This gauges the efficacy of your ad campaigns, measuring the revenue generated for every dollar spent.
These metrics provide insight into the cost-effectiveness and performance of advertising campaigns.
Growth metrics can help you better understand your company’s growth and make informed decisions about revenue trends, product and service capability, regions needing polishing, and most profitable projects. Although a plethora of metrics can be used for measurement, it is important to identify key ones:
How often are your existing customers referring new ones, and how quickly are these referrals leading to new sign-ups? These are questions that you can answer by evaluating these metrics.
For instance, virality measures how many new sign-ups come from existing ones. More accurately, the viral coefficient looks at how many invitations each customer sends out and multiplies that by the conversion rate of those invitations.
So, if your company has a viral coefficient of 2, each customer eventually brings in 2 new customers, creating a virtuous cycle of exponential growth, a founder’s dream.
To see the effect of the virality coefficient on growth, take a look at the following graph:
K represents the different virality coefficients.
This is a measure to compare your company's performance in one period to its performance in a previous period, helping you to highlight growth trends.
This metric focuses on the number of actual customers rather than just revenue, offering a different perspective on growth. It usually represents the ratio of new customers acquired in a given month compared to the total customer count from the end of the previous month.
While there are some universally valuable metrics that every startup should monitor, the reality is that different types of startups often have unique KPIs (Key Performance Indicators) tailored to their specific business models. Understanding the core of your business and its revenue streams is pivotal in discerning which metrics are most crucial for you.
Let’s look into some of these Startup types and their metrics.
Given that SaaS businesses rely heavily on subscriptions and recurring payments, their metrics often revolve around understanding and predicting revenue, as well as customer behaviors:
The MRR is a critical measure indicating the monthly predictable revenue generated from subscribers.
Although your MRR calculates how much your subscribers make each month, your ARR focuses on how much your subscribers make in a given year. This is important when observing financial trends over a longer time span.
This shows the percentage of customers or subscribers ceasing to use the SaaS service over a given time period, which is a major warning flag if this is high. For example, if you have 100 customers but lose 7, your churn rate will be 7%.
The NRR is an important metric that balances new revenue against lost revenue, providing insights into customer satisfaction and product value. It also helps you track how fast your SaaS business is growing or shrinking.
To calculate your company’s NRR over a period of time, here is the equation you would use:
NRR = (MRR at the beginning of the period + New subscribers during said period + any extra revenue from upgrades or additional purchases - churned customers during said period - revenue lost due to downgrades or else) / MRR at the beginning of the period
ARPU (Average Revenue Per User)
ARPU shows how much money a business can make from a customer during a given time. It can be used to estimate how much a customer is worth to a business. The most basic difference between ARPU and CLTV is that, while a customer lifetime value considers how much money is being generated by a customer within their lifetime relationship with a given business, ARPU focuses on a given time, such as a month.
Specific to SaaS platforms offering a free version and following a product-led growth strategy, it reveals how many free users upgrade to a paid subscription, elucidating the effectiveness of your freemium model.
For startups in the e-commerce sector, metrics often center around customer interactions with products and the overall shopping experience. Here are the metrics to track:
This represents the average amount a customer spends in a single transaction, helping startups gauge their pricing and sales strategies.
This metric shows the percentage of visitors who purchase after visiting your page, providing insights into the effectiveness of your website or sales funnel.
This reflects the percentage of visitors who added items to their cart but did not complete a purchase – a critical pain point to address for e-commerce startups.
Unit economics reveal the value each item, or "unit," brings to the business. Especially for those holding or manufacturing inventory, understanding the direct revenues and costs associated with a single unit is pivotal.
For startups manufacturing products, this metric represents the total direct costs of producing the goods sold by a company.
Marketplace startups, functioning as intermediaries, require metrics that track both sides of the platform – the providers and the consumers:
Here are the metrics to track:
This represents the total sales value of all items sold through the marketplace over a certain period.
MAU is a pulse check on the platform's health, indicating how many users actively engage with the marketplace monthly.
The reason MAU matters so much for marketplaces, more so than SaaS or e-commerce businesses, is due to the power of network effects. Simply put, the more people who frequent or use a marketplace, the more valuable that marketplace becomes. After all, if I’m a vendor selling my goods, I want to put my products on a marketplace that will provide me with the highest number of eyeballs possible.
The provider-to-customer ratio indicates how many customers a single vendor can cater to, reflecting the balance between providers and their customers. It ensures balance in the marketplace, indicating whether there are enough providers to meet customer demand or vice versa.
As a startup progresses from ideation to maturity, its objectives and priorities will shift, and so will the importance of specific metrics. Understanding which numbers to prioritize at various stages ensures the startup remains on the right track.
In the early stages, a startup is testing the waters, refining its product, and trying to understand its market. Here, the goal is to determine if there's a demand for what the startup offers. Metrics at this stage are often about understanding the product and the initial audience:
Once a startup identifies its product-market fit, scaling is the next step. Now, it's about reaching more people, entering new markets, and ensuring sustainable growth:
For mature startups, it's no longer just about growth. It's about sustainability, reputation, and brand loyalty:
While metrics are essential, startups frequently encounter difficulties in using them effectively. It's a balancing act for startups to maximize the benefits from these metrics without becoming overwhelmed or misguided. Here are some typical challenges they face:
Although you are bound to face challenges when measuring the metrics that matter the most, the trick is to start small and go from there. After all, as a startup founder and leader, you must always have a growth mindset and ask yourself, “The business might be tracking these metrics, but what other metrics should we look into so that we can do an even better job?”
While innovation and passion are key in startups, being practical and reliant on numbers when a company is in the early stages of growth is important. As a matter of fact, being practical and relying on numbers will have a direct impact when you are assessing your financial performance, learning more about your customers, or measuring your product performance.
As described, the impact of these numbers transcends financial significance because they help shape the trajectory of a startup, prove a point during financial rounds, and can make all the difference in securing funding. Moreover, a startup may have different priority sets of numbers depending on the nature of the startup, which could be a SaaS business, an ecommerce platform, or a marketplace. A very important part of understanding these numbers for a startup is recognizing that depending on a startup’s stage of evolution, from a thought to a mature organization, different numbers have varying significance.
And, if you want to learn more about how a fractional CFO might be better able to help you wrangle and make sense of all of the numbers telling your startup's story, then we recommend you check out these content pieces:
Or, better yet, you can reach out to us directly for a free consultation, and we would be happy to help you figure out which option is best for you.
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