Tag Archives: KPIs

Facts and stories

Some stories are based on a comprehensive review of all available facts. However, most stories are, at best, collections of cherry picked facts pulled together with the goal of convincing the reader to adopt a particular view. At their worst, many stories don’t contain any facts.

However, the facts are always there. Sometimes they emerge and a story based on cherry picked facts, or no facts, collapses. Sometimes they don’t and such a story continues.

Which outcome prevails depends on a combination of the power of the people telling the story, the availability of the facts, and the degree to which a comprehensive review of the facts supports a single view.

In the context of startup investments, most news articles about startups are stories. A startup’s financial statements and KPI’s represent the facts.

KPI’s, company before investor

After an initial meeting with a founder, if an investor decides to dive deeper into the startup’s performance, there are two ways to go about it. You can either request specific KPI’s and analyses that you’d like to use to evaluate the business, or request that the founder share the company’s KPI dashboard.

While the former approach may make you feel better because of the sense of control that it provides over the process, I prefer the latter. The reason is that the company’s KPI dashboard shares how the founder evaluates and seeks to improve his business. Whether you agree with it or not, since the founder will be driving the business forward, understanding how he thinks about and measures the company’s performance is more important than how you would do it.

That said, after initially getting the company’s KPI dashboard, you should certainly ask for the additional KPI’s and analyses that you believe are necessary to evaluate the business. If these are different than what the founder presents, the ensuing debate might help you uncover the reasons for the differences.

The founder might convince you as to why his approach is better, you might end up helping the founder, or you might realize that your views are too far apart to partner.

Knowing your numbers

I regularly meet startups who don’t have a good handle on their core metrics like contribution margins, retention rates, and customer acquisition costs. When I ask them why this is the case, there tend to be two answers.

The first answer is “we’re growing”. Although Paul Graham wrote his Startup = Growth post with good intentions, unfortunately it now serves as an excuse for many founders to overlook other equally important metrics. While startups certainly need to grow fast, growth is just the tip of the iceberg. There are many different ways to grow and great startups have either found cost-effective ways to grow or have a good handle on why their current growth isn’t cost-effective but will be in the future.

The second answer, which is related to the first, is that it’s too early to optimize metrics like contribution margins, retention rates, and customer acquisition costs. While this is true for most startups, there’s a difference between measuring numbers and optimizing them. Although you may not need to optimize them now, you will need to in the future. And doing so requires that you understand their history so that you are familiar with their drivers and know which drivers to focus on when the time is right. You won’t be able to optimize in the future what you didn’t measure in the past.

In the end, the reason why you need to know your numbers isn’t because they determine your fate right now. It’s because they will determine your fate in the future. Although the numbers will change as your startup gets older, if you don’t get into the habit of tracking them and seeing how they change in response to different actions now, you’re unlikely to do so in the future, and even if you do, it may be too late.

You may have fallen into a goldmine of a market where the numbers work out without you even knowing them, but the odds are slim.