How do you interview potential customers?

You can download a PDF of this article from: How do you interview potential customers?

 Why interview potential customers?

You don’t want to spend time and money to build a solution for which there are no customers with a problem or need you can satisfy  You interview potential customers to understand their problems and needs, with an absolute focus on listening.  This is very different than trying to sell a solution.

The overall process is to:

  • Document some hypotheses: What are the characteristics of a potential customer? What are the potential customers’ problems and needs?
  • Test the hypotheses by interviewing potential customers. You may have to contact 10 or more people for each interview, which is best done face-to-face. The absolute minimum number of completed interviews is 10.  50 completed interviews are better.  One founder completed 300 interviews in a year.
  • The interview process will either validate or disprove your hypotheses.
  • During the interview process you will likely revise some hypotheses, as well as set down some facts (i.e. validated hypotheses).

You document your hypotheses in the business model canvas1.  This framework ties together customers, their needs, your solution, and what’s required to build your solution.  Your business model canvas will change as your hypotheses change, are validated, or are invalidated.

What are the dos and donts?

  • Do document and execute a structured process.
  • Do define your target customers and select potential customers who are representative. For example, if you are creating a venture capital fund which will focus on providing investor exits within 3 years, do not interview potential investors who seek a 20+ year exit in-order to facilitate inter-generational wealth transfer.
  • Do face-to-face interviews. Video calls are a distant second best.  Phone calls are a very distant third best.  Don’t do emails or surveys because those do no allow interactive dialogue and understanding.
  • Do get out and interview lots of customers. The absolute minimum number of customer interviews in 10.  50 interviews are a better number.  One founder completed 300 interviews in one year.  You will have to contact many people to get the necessary interviews because most people will decline.  They are strangers with busy lives.
  • Do ask potential customers if it’s OK to record the interview for later analysis. If not, have a second person take detailed notes.  Do not conduct a non-recorded interview by yourself.
  • Do document the criteria for assessing the answers. This will avoid confirmation bias, in which you’ll ignore information which invalidates your hypotheses.
  • Do not interview friends, family, or those you have a personal connection with. You need brutal honesty, rather than hearing from people who do not want to hurt your feelings.
  • Do focus on the people who actually have the problem or need for which you are creating the solution.
  • Do create questions which require quantitative answers or specific descriptions. Don’t ask for subjective or hypothetical feedback.
  • Do create questions that help you understand how customers think, and why they take the actions they do.
  • Do not talk about your solution in your initial meeting.
  • Do not ask about price or what customers are willing to pay. Do ask about the customers costs’, budgets, etc.
  • Do not use or send a survey form. These tend to ask closed-end questions, while you want open-ended responses to open-ended questions.
  • Do finish each interview with two questions: “Who else would you recommend I interview?”, and “What should I have asked but did not ask?”
  • Do create a data collection form for each interview. This will contain things such as: the description of the customer profile, your open-ended questions, which hypotheses were confirmed and why, which hypotheses were invalidated and why, which hypotheses you gained no insight into and why, what changes you should make for the next interview (target customer profile, hypotheses, questions to ask).
  • Do review and update your business model canvas as you validate your hypotheses regarding target customers and their needs.

Other customer understanding techniques to consider:

  • Watch the customers (or video record them) as they carry out their work.
  • Actually do the customer’s work yourself.
  • Focus on the user who is suffering the greatest pain and determine their work-around solution(s).
  • Understand what the customers’ required outcomes are, as well the problems in achieving that outcome.

What are the challenges in interviewing potential customers

  • The founders, or existing companies, passionately believe that they have created right solution. They believe there is no reason to interview potential customers. They are focused on building the solution and selling it. Their passion results in them being unable to listen to and understand what the customers are saying.
  • The founders, or existing companies, believe any sales and marketing problems can be fixed by changing the sales deck and changing the website.
  • The founders, or existing companies, are passionate that they have the right solution. Hearing brutal feedback from potential customers requires founders who are self-confident, self-aware that they don’t have all the answers, and have the ability to learn and adapt.  I’ve observed many people who are not able to learn and adapt.
  • The founders lack the personality and skills to contact a large number of strangers to setup and conduct interviews.
  • Doing interviews appears to be lack of progress. Building a solution is more fun and appears to be progress.


You will fail if your customers do not believe your solution addresses a key problem or need.


1 “What is a business model canvas?”  The following is a link to my article




Do you have product/market fit? (V2)

How do you know you have product/market fit?

You have product/market fit if:

  • Your customers are so delighted that they are recommending it to others.
  • Your customers would be extremely disappointed if your solution disappeared.
  • Your customers can describe the big problem they had and the big benefit they achieved from your solution.
  • There is clear demand in the market place for your solution.

You do not have product/market fit if:

  • Your customers are not recommending you to others.
  • Your customers would not be extremely disappointed if your solution disappeared.
  • You customers cannot describe the big problem they had and the big benefit they achieved from your solution.
  • The marketplace is not demanding your solution. You have to persuade/educate your customers that they have a big problem with a big opportunity.
  • You are not clearly and obviously differentiated from competitors in terms of the value customers achieve. Your only differentiation is price.

 How do you measure product/market fit?

The single most important question is asking  “Would you recommend our solution to others?”  (Follow on questions could be “If so, why?  If not, why not?”) This metric is known as NPS (Net Promoter Score).  What is your NPS? Above 0 is good. Above 50 is excellent. Above 70 is world class. How do you compare to your industry and competitors? What has been your NPS trend?  You can find links to more information about NPS in the Further Reading section at the end of this document.

A more detailed question for customers 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 five questions to ask them are:

1) who are you (demographically)?

2) why did you seek out our product/service?

3) how are you using our product/service?

4) what is the key benefit you’ve achieved?

5) why is that benefit important?

How large is your TAM, SAM, and SOM?

Having the facts to demonstrate that you have product/market fit is not enough to make the decision to invest capital to grow your business.  You need to have facts regarding your TAM, SAM, and SOM.

What is TAM (Total Addressable Market)?

What would be your company’s revenues with your current solution if 100% of the global customers demanding a solution to their problem bought your solution? You would have no competitors.  The focus here is on your current solution, not the solution you might have in five years time.  Note the phrase “demanding a solution”.  You must not include in TAM ghost customers who are not demanding a solution.

Is your TAM large enough consider growing your business? For example, the global smart phone TAM is huge, but the global TAM for smart phones that have a keyboard is tiny.

What is SAM (Serviceable Addressable Market)?

This is the portion of the TAM that is within the reach of your distribution channels and partners, and your ability to deliver and support your solution. Geography may be a constraint.  This still assumes 100% market share of those customers demanding a solution.

How will your customers connect with you?  If they are seeking a solution, how will they find you?  How will you make customers aware of your solution?  How will your customers and you connect?

What is SOM (Serviceable Attainable Market)?

SOM will be lower than SAM for two reasons: you may have competitors, and every customer who is demanding a solution may not actually buy a solution.

How do your customers perceive your competitively differentiated value proposition?  How hard is it for a competitor to copy your solution or to provide a better value proposition to your potential customers?  What is your retention rate and your churn?

Will you company make money?

You must now build a cash flow financial model for your company, to determine if your business will make money. Some of the components of the model include:

  • Current results and future targets for TAM, SAM, and SOM.
  • LCV (Lifetime Customer Value).
  • CAC (Customer Acquisition Costs).
  • Costs to deliver and enhance the solution. Many startups overlook the ongoing need to enhance the solution by fixing bugs, keeping pace with evolving customer needs, and staying ahead of the competition.
  • Financial costs and investor exits.
  • The costs of acquiring, retaining, developing, and exiting. Talent is the greatest challenge.  Unlimited capital is available for a successfully growing business.  Quality talent is the scarcest resource.

My Observations:

  • Most startups don’t actually achieve product/market fit with a large TAT, SAM, and SOM.
  • Many startups are not able to successfully scale, because the founders are unable to transform the company and themselves.
  • Many existing large companies have lost product/market fit and are in a fight to survive, often with declining TAT, SAM, and SOM. These companies don’t recognise they are in this situation and devote the bulk of their resources to resolving secondary issues, leading to decline.

Your next steps, regardless if you’re a startup or a long established company:

  • Document the facts and assumptions regarding product/market fit, TAM, SAM, and SOM.
  • Validate assumptions, resulting in facts. It is critical that product/market fit is based on facts rather than dreams and hopes.
  • Build your cash flow model.
  • Do all of the above in the context of a documented value proposition and business model. The further reading section contains links to workbooks from MaRS, which will guide you through the documentation.

Further reading

The Net Promoter Score concept was initially developed by Bain.  The following is a link to the Bain website homepage for Net Promoter Score, which contains several short articles:

The following is a quick overview of using Net Promoter Scores:

Business Model Design Workbook from MaRS:

Crafting your value proposition Workbook from MaRS:


How do you determine employee talent requirements?

If you don’t have the right talent, your company cannot survive or prosper.  You cannot put in place talent recruitment, development, compensation, and exit plans until you know what the talent requirements are.

This document focuses on management and staff, excluding the board of directors, founders/C-Suite, and advisory board. The following is a broad framework.  You need to customize it for your specific situation.

To succeed, a company’s target customers must perceive they are obtaining competitively differentiated value over time.

The four 4 questions you must answer are:

#1 What is that competitively differentiated value?

#2 Which components of the business framework1 are required to deliver that value?

#3 What roles are required, and how will each role help deliver that value?

#4 What are the characteristics of the person in that role?

The answers to the 4 key questions depend upon the specific situation of the company.

Where is the company now, what’s the future direction, and what are the upcoming challenges? Some of the possible situations include:

Startup has no MVP2 (Minimum Viable Product) yet, is targeting a major market, and hopes to grow to 100+ employees.

#1 What is that competitively differentiated value?

At this point the founders are still figuring this out.

#2 Which components of the business framework1 are required to deliver that value?

The startup is focused on just a few components of business framework, and only a few pieces of the business model – who are target customers, what are their needs?

#3 What roles are required, and how will each role help deliver that value?

There are no detailed role descriptions. Everyone working on everything.

#4 What are the characteristics of the person in that role?

Everyone must be comfortable in chaos, dealing with daily new problems, have the ability to make rapid personal changes, and be relentless in overcoming obstacles.

Startup, has Product/Market Fit3, a small niche market, and will grow to a handful of employees.

#1 What is that competitively differentiated value?

The founders have determined this.

#2 Which components of the business framework1 are required to deliver that value?

The founders have identified and documented this.

#3 What roles are required, and how will each role help deliver that value?

There must be clearly defined roles for a stable business. The days of chaos should be over.

#4 What are the characteristics of the person in that role?

What are the necessary skills, experience, values, morals, and ethics to carry out that role?  Each person must have the ability to learn and change over time as the company continues to evolve.

Large company, with Product/Market Fit.

#1 What is that competitively differentiated value?

This must be documented.

#2 Which components of the business framework1 are required to deliver that value?

All the components are required for continued success.

#3 What roles are required and how will each role help deliver that value?

For each role, there must be a clear definition of the future challenges, issues, changes, obstacles to overcome and expected outcomes for that role.

#4 What are the characteristics of the person in that role?

Focus on the skills, experience, values, morals, and ethics to carry out the role.  Every company has a small number of roles that enable the bulk of competitively differentiated value. These roles are not based on management hierarchy.  You must identify and target these roles.

Large company that has lost Product/Market Fit, the market is shrinking, there is intense competition, and the company must be transformed.

#1 What is that competitively differentiated value?

At this point the company does not have competitively differentiated value with a large percentage of customers recommending the company to others. The leadership must rethink who the target customers are, what their problems are, and how the company can provide a solution which solves those problems.   In some cases, such as many paper-based publications, there is no future value and the company will disappear at some point.

#2 Which components of the business framework1 are required to deliver that value?

All components are required. It’s likely all components will undergo major changes.

#3 What roles are required, and how will each role help deliver that value?

First there must be the right board of directors and CEO.  The current board and directors got the company into this situation.  Leadership transformation begins at the top.

#4 What are the characteristics of the person in that role?

The board of directors and CEO are dealing with the same issues as an early stage startup.  Everyone must be comfortable in chaos, dealing with daily new problems, have the ability to make rapid personal changes, and be relentless in overcoming obstacles.

Some of the challenges in determining talent requirements include:

#A Many large companies do not realize they no longer have Product/Market Fit, and are hiring the talent based on invalid historical requirements.

#B Many startups attempting to scale don’t understand that the talent that got the company to this point is not what is going to help them create a successful future

#C Many startups simply do not have the CEO and founder talent to succeed. There is some combination of the founders: not understanding the customers problems, not understanding what solution is required, and not able to attract the necessary talent and help that talent work together.

Your next steps:

Define your current situation, based upon facts.  Your advisory board can challenge your thinking and help you understand your company’s situation.


1 Business Framework has inter-related 10 components:

#1 What can only the CEO do

#2 Company purpose

#3 Values, morals, and ethics

#4 Customer perceived value proposition

#5 Business model

#6 Talent management

#7 Capital and cash management

#8 Investor management

#9 Exit management

#10 Governance

2 A product or service with just enough features to delight early customers, and to provide feedback for future development.

3 Product/Market Fit.  Marc Andreessen’s definition of product/market fit:

“The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can.” On product/market fit for startups




Successfully scaling startups are different from public companies. V2

I observe major differences between long established public companies and successfully scaling startups.  The two major things that strike me are:  the startups have an in depth understanding of the customer; and the startups are incredibly focused on having the right talent: talent in management, on the board, on the advisory board, as well as talented investors.

This version 2 of my document includes 3 key concepts:

  • Startup board of directors are focused on creating value. Public company boards often focus on “oversight”
  • Startups make 5-10 minute “pitches” for investments, focused on “What is the customer problem” and “What is the solution the customer will pay for” Public companies often have very long presentations regarding “business cases”.
  • Startups are constantly re-inventing themselves and transforming. Public companies often view transformation as a one time event and create temporary organizations such as “The Transformation Office” and “The Chief Transformation Officer”.
Successfully scaling startups Long established public company
Planning driven by: what is the customer problem or need; how does the customer perceive that the solution is significantly differentiated. Planning driven by vision and mission statements.  Often little differentiation among competitors.
Often clarity as to the beneficial impacts on society. Beneficial impact on society is not a consideration.
Focus on meeting the needs of customers Focus on growing shareholder value
Every member of the board of director is focused on growing company value.  They have previous experience in growing value. Board of directors has an “oversight” role.  There often the concept of “noses in, fingers out”.
Investors make decisions based on talent: talent of the founders and management team, talent on the board, talent on the advisory board, and talent of the other investors. Talent does not play a major role in deciding on whether to invest or divest.
Most things are broken most of the time.  The focus is on solving the daily issues which arise from scaling and meeting evolving customer needs. Risk management and Enterprise Risk Management play a major role.  Focus on “mitigating risk”.
Transformation is an ongoing and integral part of the business. As the company grows from a few co-founders to 10 people to 50 people to 150 people to 500 people, the company re-invents itself every 6 months.  Everything changes: the role of the CEO, who you hire and how you hire, how internal meetings are structured and organized, the technology, the business processes, etc.

There are no such things are “Chief Pivot Officer” or “The Pivot Office”.

Companies launch stand-alone transformation initiatives.

The is a Chief Transformation Officer and a Transformation Office.

Transformation is views as a focused one-time event,

The start-up is the disrupter due to deep understanding of the customer and providing solutions which the customer sees as very superior and different. Companies are “disrupted” because they no longer understand customer problems, needs, and why the customer should buy from them.
Uses advisors and experts who can help invent (and re-invent) and create what will be successful in a future which is very different from what was successful in the past. Use advisors and experts who understand in detail what has been successful in the past in the industry, with other companies.  The phrase “best practices” is often used.
Pitches to justify investments are often 5-10 minutes long.  The focus is on:

One-on-one interviews with potential customers have validated that there is a problem and customers would consider for a solution.

Minimum Viable Products are piloted until the there’s validation that customers will actually pay for the solution.

Then major investors are made in growth

Business cases to justify  are built, with long and detailed presentations.

Often years pass in building a solution before launching to initial customers.



What is the status of your startup? (V2)

You can use this framework to enable startup stakeholders establish a common understanding of the current status of the startup, which stage it is in (pre-seed, seed, or Series-A), and the next milestones in its evolution. This framework is not intended to be a cast-in-concrete structure for every single situation.  The start-up stakeholders may adapt this to their specific situation.

Version 2 of the framework includes:

  • An illustration of how to complete the framework.
  • A description of why it is critical to have documented interviews of potential customers.

The simplest way to use the framework is:

  • Go through the framework, component by component.
  • Clearly and simply describe where the startup and place the description in the appropriate stage.
  • Outline the key milestone, to get to the next stage and identify who is accountable for each milestone.
  • State any critical issues.

The facts and assumptions you assemble will feed into the startup’s monthly cash flow forecast.

The framework reflects technology enabled services startups intended to grow into businesses with a valuation of at least $100 million. You can adapt this to other situations. This framework does not address fundraising.

You can download the complete template from my website:

What is the status of your startup (V2)

The column headings refer to where the startup is at the beginning of that stage. The following is the defined framework.  You will use this to position your company, state the future milestones and outline any critical issues.

Component Pre-seed Seed Series A
Product/Service Idea MVP (Minimum Viable Product) – A product or service with just enough features to have satisfied early customers, and to have obtained customer feedback for future development. MVP has been revised until market/product fit is proven. Product/service ready to scale.
Value proposition: This is the customers perception.  What are all the benefits achieved (financial and non-financial) achieved by the customers?  What are all the costs incurred by the customer (purchase costs, costs to switch to your company, other adoption costs, ongoing costs)?


Not validated with customers. Customers have validated the value proposition.

Have documented experience with customers to prove satisfaction with MVP.  Alpha launch completed and customers in place for Beta launch.

Completed Beta launch.

Start to grow, month by month.

Revenue 0$ to < $5K/month >$5k/month >$100k/month
Market Traction -Customer/Revenue growth None. Might be a pilot customer. Starting to generate revenue, increasing month by month 6+ months of 10% growth per month
Distribution channels i.e. how are you going to get it into the customers hands. None Initial identification and discussion with distribution channels. Distribution channels in place, with low volume.
Profitable? No No No.  May be profitable 18-36 months in the future
Scalable? No No Technology enables scaling at low marginal cost.

Processes in place to enable growing talent.

Intellectual property Maybe Maybe Must have legal or other protection in place
Co-Founders team 1-4 co-founders, could be part time. 2-4 full time co-founders 2-4 full time co-founders
Overall team Co-Founders with relevant skills and experience. Co-founders + 1-5 people with relevant skills and experience? Co-founders plus 5-20 people with relevant skills and experience.
How long until run out of money Personal cash flow plus friends and family will sustain co-founders. 6-18 months 6-18 months


Advisory board, with regular communications processes in place. 1-2 industry credible experts 3-6 successful entrepreneurs, industry experts 6+ successful entrepreneurs, investors, industry experts
Board of Directors None 1-2 co-founders 1-2 co-founders, 1 successful entrepreneur, prominent investor or industry leader


Corporate governance: decision making, etc. Informal Clear decision-making roles.

Incorporation results in legal, financial, reporting requirements and policies.

Decision making roles clear for investors, shareholders, board, and management.

Having employees drives requirement for talent policies and processes.

Is the business viable Unknown Unknown Yes. The question is, can the business scale successfully?
Source of funds Personal, family, friend, fans, incubators, accelerators, government Angel investors, lead investor. Investors with deep pockets who can fund future rounds. Startup debt providers.
Financial ask <$50K – $250K $500K – $2 million $2 million to $10 million
Market place communications Little or none Website, newsletter, and social media begun. Enhanced website, newsletter, and social media processes.
Investor engagement and relationship management Little or none Defined the characteristics of target investors and investor introduction approach. CRM technology and processes in place to manage investor and investor ecosystem relationships.
Cash Flow Forecast


Likely none Monthly cash flow forecast and tracking. Monthly cash flow forecast and tracking.  Ties to key milestones.
Financial and operational metrics


Likely none Know what the metrics should be.

Initial targets set.

6+ months historical reporting of financial and operational metrics.


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.


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.


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 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.


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?


Survey – How do asset managers assess Private Equity fund managers?

I asked asset managers the following question: “How do you assess PE (Private Equity) funds, and their leaders) to determine which fund to invest in?”  Asset managers included: pension funds, large global asset managers, and family offices.  Insight was also provided by advisors to asset managers.

The following illustrates the consolidated set of assessment approaches used.  Many asset managers use similar approaches.  Some approaches are used by only one asset manager.  This document is focused on what is done, not on how assessment is done or specific analytical techniques.  (Some asset managers shared their techniques.  That information is confidential). There is no recommendation as to what is a good or bad approach.

Analysis of performance

  • PE firms may provide detailed financial and operational data on all portfolio companies.
  • What is the consistency of returns over time? Many respondents noted that persistence of returns is declining, perhaps due to high purchase valuations leading to difficulty in PE partners achieving significant value increase.
  • What have been the exit results? What have been the successful and unsuccessful exits?
  • How much additional return has the PE fund been generating, taking into account both financial leverage and public market returns of similar companies?
  • Avoid funds and firms with historical returns in the 3rd or 4th

Analysis of strategy

  • Industry focused or generalists?
  • Limited range of deal size?
  • How consistent has the strategy been over time?
  • What is the leverage being used? 3-4 times or 7-8 times?
  • Is the strategy to have similar returns from all portfolio companies or depend upon one company to provide outstanding returns which compensate for poor returns with other companies? This impacts the volatility of the portfolio.
  • Is the PE firm due diligence approach supporting the strategy? Do reference checks with the portfolio companies confirm the stated due diligence approach and fund strategy?

Analysis of PE fund partners

  • How long have they been with the fund?
  • What’s been their previous history?
  • What have been their personal achievements, rather than the achievements of the companies they’ve been with?
  • What has been the partner experience with business operations, rather than finance or investment banking?
  • If the strategy is changing, how has the PE team talent changed to bring in the experience with the new strategy?
  • How much of the fund capital is provided by the partners?
  • How have the partners increased the value of portfolio companies, in addition to providing capital?
  • How do portfolio company CEOs like working with the partners?
  • Run background checks on the partners: social media and publicly available records.
  • Hire a third party to work with the PE partner to conduct a deep psychological and historical analysis. This could include questioning colleagues, subordinates, other asset managers, friends, and family.  This could conclude with a multi-hour walk through with the partner of their entire life

Relationship Management – Between asset managers and PE funds.

  • Proactively seek out emerging PE funds.
  • The asset manager re-underwrites each new PE firm deal with different staff, to avoid the bias of personal relationships.
  • The asset manager maintains a long-term personal relationship with the PE fund partner(s).

Observations that were made to me

  • There are lots of good PE firms and partners. Asset managers can only deal with a small number of PE firm.  Each firm requires management time.
  • There are not enough good opportunities for PE funds. There is over a trillion dollars of PE capital not invested, with valuations at all time highs.
  • Sovereign wealth funds are a partial enabler of high valuations, because some funds are satisfied with single digit returns.

My observations

  • Some asset managers make a major effort in assessing the talent of individual PE partners.
  • Some asset managers are heavily focused on performance metrics.
  • The nature and degree of quantified, comparative (or benchmark) analysis varies enormously among asset managers.

How can the the board of directors create value? (V3)

I have added a 4th article to the “Further Reading Section” of my article “How can the board of directors create value?”

This 4th article suggests enhancing the board’s role in value creation three ways: assessing the full suite of options for value creation; evaluating how strategic options affect total shareholder return; and understanding long-term shareholders’ views on value creation.  The authors are from: Norton Rose, BCG, and RBC Capital Markets




Long-term value growth demands a talent driven board and C-Suite.

Business competition is intense.  It is competitively differentiated board and C-Suite talent which develops differentiated strategies, business models, plans, and successfully executes them.

 Few companies survive the competition.

Most public companies will not survive. A

  • A Fortune 500 company will survive an average of 16 years.
  • The typical half-life of a North American public company is 10 years.
  • Global public companies with $250 million+ market cap have a typical half-life of 10 years.
  • 50% of all U.S. companies survive for 5 years.

Most venture-backed start-ups will fail.B

  • Three quarters of venture backed firms in the U.S. don’t return investors capital.
  • 30-40% of high potential start-ups lose all of the investors money. Many start-ups do not have any venture-backing. The overall start-up failure rate is very high.

 Few companies generate significant value.

  • McKinsey analyzed the world’s 2,393 largest corporations from 2010 to 2014. The top 20% generated 158% of the total economic value (i.e. profit after cost of capital) created by those corporations.  The middle 60% generated 16% of the total economic value.  The bottom 20% lost 74% of the total.C
  • Mark Leonard, CEO of Constellation Software, his final annual CEO letter. “Qualified and competent Directors are very rare, and not surprisingly, the track record of most boards is awful. According to the 2017 Hendrik Bessembinder study of approximately 26,000 stocks in the CRSP database, only 4% of the stocks generated all of the stock market’s return in excess of one – month T-Bills during the last 90 years. The other 96% of the stocks generated, in aggregate, the T-bill rate over that period. This means that 4% of boards oversaw all he long-term wealth creation by markets during that period. Even more disturbing, the boards for over 50% of public companies saw their businesses generate negative returns during their entire existence as public companies.”

 CEO and leadership development programs are ineffective.

7% of CEOs believe their companies are building effective global leaders.  Only 10% of CEOs say their leadership development initiatives have a clear business impact.  Just 11% of global executives agree that their leadership-development interventions achieve and sustain the desired results.D

 Board direction selection and development processes are broken.

A McKinsey survey of board directors revealed that “Only 16 percent said directors strongly understood the dynamics of their industries, just 22 percent said directors were aware of how their firms created value, and a mere 34 percent said directors fully comprehended their companies’ strategies.”E

 Boards must also consider the company’s role in society.

Larry Fink articulated the challenge in his 2018 letter to the CEOs of Blackock’s investee companies. “Furthermore, the board is essential to helping a company articulate and pursue its purpose…..Companies must ask themselves: What role do we play in the community? How are we managing our impact on the environment? Are we working to create a diverse workforce? Are we adapting to technological change? Are we providing the retraining and opportunities that our employees and our business will need to adjust to an increasingly automated world? Are we using behavioral finance and other tools to prepare workers for retirement, so that they invest in a way that will help them achieve their goals?”F

1981 US Business Roundtable Statement on Corporate Responsibility: “Corporations have a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs, and build the economy.” “Business and society have a symbiotic relationship: The long-term viability of the corporation depends upon its responsibility to the society of which it is a part.  The well-being of society also depends upon profitable and responsible business enterprises.”G

 External talent must also be part of your talent pool.

No company has all of the talent it requires.  External talent can include: your personal network, advisory board, strategic advisors, consultants, lawyers, accountants and other experts.

 What do you do about it?  

  • Determine the talent needed over the next 5-10 years on the board and in the C-Suite, in order to grow long-term value and beat the competition.
  • What’s the talent your company has (both internally and externally)?
  • How do you close the gap with a combination of internal and external talent?
  • What talent and processes need to go in place to ensure the gap does not reappear?

This sounds easy, but incredibly difficult to do in practice.


A “Corporate Longevity”, Credit Suisse, February 7, 2017

B “The venture capital secret : 3 out of 4 start-ups fail”, Deborah Gage, Wall Street Journal Small Business, September 19, 2012  discusses research by Shikhar Ghosh, Harvard Business School

C Chris Bradley, Martin Hirt, and Sven Smit, “Strategy to beat the odds”, McKinsey Quarterly February 2018, , Tom Koor analysis

D Claudio Feser, Nicolai Nielsen, and Michael Rennie, “What’s missing in leadership development?”, McKinsey Quarterly August 2017,

E Eric Kutcher, “Corporate Boards need a facelift”, McKinsey May 4, 2018,

F Larry Fink, “Larry Fink’s Annual letter to CEOs.  A sense of purpose”, Blackrock,

G Ralph Gomory and Richard Sylla, “The American Corporation”, April 2013, page 6, The Wall Street Journal

 Further reading

My website has several points-of-view relating to value growth and talent.