How To Run Your Company Based On Metrics
I review a lot of board decks with a beautifully hand-crafted page with metrics for the company. That makes me nervous.
I prefer to see a screenshot of an internal dashboard, not something created for the board, and I prefer to see that same dashboard in the same format at every meeting. The reason is that the real value of the board deck is not (ironically) for the board; it’s for management to track their own performance. So I want to see that management is using a dashboard every day, not just for board meetings.
Good metrics are comparable across industries; comparative; readily understandable; and help drive decisions. Comparative means that you can compare a metric across time periods, groups of users or competitors. A good metric leads to the answer to one question: “What will I do differently based on this information?” Exclude the metrics that are “vanity metrics,” e.g., Facebook likes or pageviews (for many companies). Vanity metrics do not inform, guide or improve the business; they are not actionable.
Paul Arnold of Arnold Capital observes, “For most metrics, I split out absolute values and changes over time. Operations should focus relentlessly on the latter.”
The best CEOs run their companies by their metrics. But for many CEOs, that is not their natural inclination. It means looking at numbers all day instead of people. And it means holding yourself and others rigorously accountable, which can be painful. So how do you do it?
Identify the metrics that matter. The most common financial metrics we ask companies to compare versus budget are gross revenue, cost of goods sold, gross profit, payroll expenses, net income (loss), cash burn, available cash and remaining runway.
For early stage companies, the metrics that matter might typically center around activation, engagement and retention. For them, the key thing to measure is if the product is serving users’ needs in such a way that they will continue to use it (and ideally, find life without it hard to imagine). Josh Gebhardt, CEO, MetricStory, observes that horizontal spread across and within an organization’s functional silos is a good metric for B2B products.
In addition, we typically ask portfolio companies to report on the following non-financial metrics:
- Universal metrics: Headcount, number of users/customers, customer acquisition cost (CAC), customer lifetime value, churn percentage, monthly recurring revenue (MRR), sales pipeline and conversion to sales percentage.
- Metrics for certain categories of startups: Company-specific KPIs, app downloads, unique visitors, SaaS-specific KPIs, SaaS quick ratio, net MRR churn percentage, LTV/ CAC ratio, months to recover CAC, average revenue per account, average contract length and months paid upfront.
SaaS startup CEO Steve Cody of The Better Software Company (an ffVC company) observes, “To drive the growth numbers that we need and reinforce our culture, we keep our key sales metrics up on three live monitors in the office. Customers, MRR and key activities are the firewood to keep us going.”
Lean Analytics recommends this set of metrics for some of the major categories of startups:
Create a management dashboard. I suggest looking at dashboard tools such as Anaplan, ChartMogul, Domo, Fathom, Geckoboard, GoodData, RJ Metrics, Microsoft Power BI, Mode Analytics or Tableau. TrustRadius has a helpful high-level overview of business intelligence tools, as does G2 Crowd.
Benchmark against comparables. A metric is much more valuable once you have established a benchmark. This will let you know what is ideal or normal for the metric that you are tracking. Google Analytics just announced a benchmarking capability. Compass.co and PayScale offer industry metrics.
Report your company’s performance against your planned financials and pre-determined metrics in your board meeting. Even if you don’t have a formal board of directors, I’d strongly recommend that founders create an informal board of advisors and run it like a formal board of directors. I’ve previously posted a template board deck; also see a16z’s preferred startup metrics.
Our firm’s CFO Group actively helps companies become more metrics-driven. My colleague Cristian Valbuena, Controller of Portfolio Accounting, recently spent three days on-site at an ffVC company working on their metrics and other issues. During this time, Cristian also explained to the CEO why some of the metrics he originally preferred were not appropriate.
For example, “number of visits to your website” doesn’t tell: 1) how many people are visiting your site — one person visiting the site 100 times, or 100 people visiting once each; or 2) what action did they take (convert or bounce).
A better metric is a combination of number of unique visitors and conversion rate. Not only are they better metrics to help you understand your sales funnel, but also can be used as valid assumptions to help you predict future sales.
Consider that from the first month after a VC invests in a company, they are getting to know that company’s management team better. We have found that one of the best predictors of the company’s success is whether the management team implements and uses rigorously logical metrics. I hope you will join that group.
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