Monthly Archives: March 2013

The dangers of presenting irrelevant metrics

This post is going to be short and sweet. If you’re part of the tech startup scene, you’ve very likely come across the distinction between vanity metrics and actionable metrics. In a nutshell, vanity metrics don’t drive value for your startup and actionable metrics do. You would think that startups would only track and measure their performance against those metrics that drive value, but this is far from being the case. In the last week alone, I’ve met with three startups whose pitches focused exclusively on irrelevant metrics.

The reason why startups, especially at the earliest stages, present irrelevant metrics to investors is because the metrics that matter often have yet to be realized. A startup that has only been around for six months might have a lot of visitors to their site, or even a lot of registered users. However, these users may not be spending any time on the site. If the startup is a social network that plans to monetize through advertising, this isn’t a good signal. Buyers may not be engaging with sellers at another startup. This is a cause for concern if the startup is a marketplace that generates commissions from transactions.

Since founders are trying to sell their startup’s performance to the investor, they want to paint as favorable a picture as possible. Unfortunately, there are two problems in overlooking the metrics that matter during an investor pitch. The first is that the smart investors who you want to be working with will realize this. You may raise your round, but you’ll essentially be self selecting those investors who are unlikely to understand and add value to your business. The second problem is much greater. If you repeatedly emphasize irrelevant metrics during your presentations, you may start to believe your own fairytales. Perception may eventually become reality and you may work on optimizing your startup’s performance on those metrics that don’t drive any value.

Somewhat unexpectedly, the solution is not to include only those metrics that matter in your presentation. You should also include baseline numbers like visitors and registered users even if they are not indicative of user engagement as they show that you have the user base necessary to be successful if you solve the engagement problem. However, it’s vital that you complement these baseline numbers with what really matters. Although it’s best if what really matters is also on solid footing, this does not need to be the case. Acknowledging that the metrics that matter have yet to be realized, showing what you’ve tried to improve them in the past, and demonstrating what you will be doing for them to reach successful levels in the future, is far better than simply ignoring them.

The value of industry experts

Each VC has a set of fields where they have the previous exposure and investment experience necessary to confidently evaluate a startup’s prospects. Similarly, there are some areas which are off limits because they require specific knowledge and expertise that takes years to accumulate. But what about those startups that are addressing a market that falls in the middle? While you may not be an expert in the market, perhaps you have experienced the pain point that the startup is attempting to solve in your daily activities. Should you consider investing in these markets?

This is a question that I have been struggling with for a while now and I have decided that the answer is yes, but a qualified yes. While I may not be an expert in a startup’s target market, if what they’re doing makes intuitive sense to me, I do evaluate the investment opportunity. However, I do so with the assistance of friends who have extensive experience in the field. These friends, who have studied the field for years, or worked at companies in the same market, or served on the boards of similar startups, are able to see the nuances of a startup’s strategy to solve a specific problem. While these nuances would go unnoticed to the untrained eye, they are second nature to people with years of experience in the market.
In the past week alone, I have relied on three friends to provide their insights into markets where I believe there is an opportunity but am not sufficiently confident in my ability to understand whether a startup’s specific approach targets this opportunity in the right way. There is no guarantee that my experienced friends’ evaluations are correct since some of the best startups emerge from an outsider realizing that an assumption which industry veterans held to be true for tens of years should have actually been open to debate. However, even if this is the case, an expert’s perspective is valuable as it helps establish the contrast between the status quo and the improvement that the startup is attempting to achieve. After internalizing the thoughts of both the startup and the expert, it is ultimately up to the VC to form his own version of reality.