How do you measure the success of your startup?

The critical metrics are focused on the customer.  If you don’t understand your customer, you cannot succeed.  The second set of metrics is your monthly cash flow forecast and tracking.  Your business will shut down without cash.  These two sets of metrics depend upon your financial processes and General Ledger structure as well as your Customer Relationship Management processes.

The following illustrates the metrics as your company progresses from pre-seed to seed to Series A.

Pre-seed stage – beginning

You have no customers using a pilot or beta version of what you hope will become your MVP (Minimum Viable Product).  You may just be at the idea stage.  You may not be clear on who your target customers are.  You do not have product/market fit. You have some written assumptions as to who your target customers are, what their problems are, and your potential solution.

Your goal is to validate your assumptions by understanding your customers problems.

  • Meet with 20 customers one-on-one.
  • Ask them questions to understand their demographic fits.
  • Ask them to show you how they currently solve their Problem.
  • Ask them what their issues and challenges are.
  • Present BUT DO NOT TRY TO SELL your solution.
  • Ask for feedback about your solution i.e. What do they perceive as your Value Proposition e.g. to what degree does your solution address their problem, what do they see as the benefits (financial and non-financial) to them, what are the customer costs (financial and non-financial) to implement your solution and achieve the benefits?
  • Document all of the above for each customer.
  • Analyze the results.
  • What changes do you need to make in your assumptions?

Your key metrics are:

  • Documented customer problems.
  • Documented customer perception of your value proposition.

Monthly budget and tracking

You must have a monthly cashflow budget and tracking.  Cash is king. You are likely funding from your life savings, friends and family.  You have to budget to until you have more capital (from yourself, friends, and family) or some customer revenue.  You must track every expenditure.

CRM (Customer Relationship Management)

You must have a CRM process.  The software supporting this depends upon the number of people in your ecosystem (potential customers, investors, employees, suppliers, etc.)

Pre-seed stage – close to the end

At this point you have some pilot customers and perhaps a few paying customers. You have not yet validated product/market fit.

Your goal is to measure and validate product/market fit

The single most important question is asking “Would you recommend our solution to others?”  This metric is known as NPS (Net Promotor Score).  Follow on questions could be “If so, why?  If not, why not?”

A more detailed question would be (Sean Ellis developed this). “How would you feel if you could no longer use our product or service?

  • Very disappointed?
  • Somewhat disappointed?
  • Not disappointed – it’s not really that useful?
  • I no longer use?

At least 40% of your target customers must say “very disappointed”.  If it’s less than 40% you need to reposition/change your product.  One approach can be to segment the answers to find a customer segment where the response is above 40%.

You must understand the group above 40%.  The 5 questions to ask them are: 1) who are you (demographically) 2) why did they seek out your product/service?  3) how are they using it 4) what is the key benefit 5) why is that benefit important?

Your key metrics are:

  • NPS

Continue to measure:

  • Documented customer problems.
  • Documented customer perception of your value proposition.

Monthly budget and tracking

Your monthly cashflow budget and tracking.  Your forecast now is tied to your business milestones.

CRM

You must have CRM software supporting your CRM processes.  At this point you will have many relationships with many different types of people in your ecosystem.  You CRM approach will help you to communicate with your ecosystem in a variety of ways (social media, newsletters, email, etc.).  Your CRM will enable customer surveying and keeping track of the survey results.

Seed stage – midway through

You have a MVP (Minimum Viable Product) with some satisfied customers proving some revenue.  You have found some distribution channel enabling consistent customer acquisition.  Monthly churn rate is 1-2%.  There is still a lot for you to figure out. You might still be measuring and validating product/market fit.

Your two goals are:

  • Grow MRR (Monthly Recurring Revenue). Annual subscription fees need to be allocated by month, not just when the cash comes in.
  • Control churn. Churn is the % of paying customers who leave each month.  Your target should be at most 2% per month churn.  5% per months means you are in trouble.  You must figure out and fix the churn problem if you hope to grow your company.

Your key metrics are:

  • MRR
  • Churn

Continue to measure:

  • NPS
  • Documented customer problems.
  • Documented customer perception of your value proposition

Monthly budget and tracking

By thus point in time you need to have your GL (General Ledger) set up.  You need advice from an experienced SaaS CFO (Chief Financial Officer) to help set up financial system and associated software.  The software would ideally support both financial and non-financial metrics.  The need to set up the GL at this point (which is the very latest) is to both create historical results for the late seed stage as well as cope with the fact you have both cash flow and accounting forecasts and tracking.

CRM

Your CRM, operational metrics, and financial metrics processes and supporting technology are integrated.  This is key to having accurate data at low cost.  Your CFO has the plans to achieve this.

Late Seed stage or early Series A stage

Your churn is under control and you’re either ready to scale or starting to scale. You have validated product/market fit i.e. the right product for the right market.

Your two goals are to:

  • Keep customer acquisition costs to no more than one third of LCV (Lifetime Customer Value).
  • Each customer must be profitable within 12 months.

Your key metrics are:

CAC (Customer Acquisition Cost), and LCV (Lifetime Customer Value).

Continue to measure:

  • MRR
  • Churn
  • NPS
  • Documented customer problems.
  • Documented customer perception of your value proposition

Additional metrics

You will have additional metrics to manage your business.  Thank you to Christoph Janz, a Partner at Nine Point Capital, who has an excellent illustration of SaaS metrics via a dashboard  http://christophjanz.blogspot.com/2013/04/a-kpi-dashboard-for-early-stage-saas.html Christoph gave me permission to share this with you.

Monthly budget and tracking

Your budgeting and tracking become more complex.  You may have: multiple offices, multiple distribution channels, starting to open in different countries, multiple currencies, etc. Your processes and enabling software must be able to cope.

CRM

Your ecosystem is more complex. You have different types of customers, different types of investors, multiple distribution channels, perhaps multiple languages, etc.

Understand how sophisticated investors and other define metrics

I have heard stories of startup founders who incorrectly allocated CAC and COGS (Cost of Goods Sold) to G&A (General and Admininstration), which results in artificially inflated gross margins and artificially low CAC.  I have also heard stories of founders deliberately misallocating.  The reputation you want to build in your ecosystem is that you understand metrics, you understand what drives value in your company, and that you are someone investors can trust with their money.

What are the definitions of the metrics?

CAC includes all the costs to acquire a new customer:

  • Sales
  • Marketing
  • Onboard
  • Related compensation of the people.
  • Overhead associated with the people.
  • Technology to support CAC.
  • Legal expenses associated with sales and marketing

If you have a freemium business model, then all of the costs associated with the “free” service fall into CAC.

LCV = (Average MRR per customer)/monthly churn

What comprises cost of COGS? Everything required to meet the direct needs of current customers.  E.g.

  • Customer support people, and software
  • Technology e.g. software, cloud services, communications costs.
  • Bug fix and minor enhancement to the software – after all you do need to retain current existing customers.

What comprises G&A?

  • Payroll administration
  • Recruiting administration
  • Finance
  • IT security
  • Corporate development e.g. M&A
  • CEO salary/benefits
  • Legal expenses (both in house and external), other than those associated with sales contracts

Let’s use QuickBooks to illustrate the concept of the financial metrics.

There is a GL line item for salaries.

Then then there is a class i.e. where does the salary belong?  (i.e. QuickBooks class)

  • CAC?
  • Cost of goods sold?
  • R&D/Engineering/new Development?
  • G&A?

 

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