KPIs to measure in your startup and why you need to know them
When pitching your company to investors, it is important to speak the same language, or you risk to sound unprepared.
The underlying technology and service or product your startup is offering is the most important value for investors, but if you don’t understand their questions or the jargon used during the conversation, you may end up wasting your time.
KPIs give management and investors analytics and measures to compare against other potential investments and startups, giving a snapshot of the state of the company. It is not possible to show growth and improvement is you don’t create the necessary data points.
The earlier as a founder start tracking these KIPs, the more data points and history you will have to present and work with. This will show your growth in numbers and facts, which is hard to argue with and gets you ready for the due diligence before receiving investments.
Please understand that the list presented here is not a complete list and some of these KPIs may not fit all types of startups. This should be seen as a starting point to do more research and understand what your industry and type of investors you want to attract are interested in.
Customer Acquisition Cost (CAC)
CAC is the amount of money you need to spend on sales, marketing, and all related expenses to acquire a new customer. You need to make sure you track all relative expenses to have the full picture. Anything that is connected to acquiring a customer needs to be accounted for, or your calculations will be skewed. As a founder, you need to know what the industry average is and what your competitors are reporting.
It is also very important to know and measure the CAC recovery time – the time needed to recoup the expenses to acquire a customer. Each service and type of business will have different needs to recover the CAC expenses – usually the higher the revenue from a customer the longer the recovery time.
Customer Retention Rate
This KPI works hand in hand with CAC. It indicates the percentage of paying customers who remain as paying customers during a given period of time.
Why is this important? You may have a great conversion rate as a result of your marketing efforts, but if you cannot keep the customers you acquired, you have a serious problem to resolve.
The converse to retention rate is churn (attrition), the percentage of customers leaving your services for a given period of time. Your goal is to keep a high retention rate and reduce the churn. The question about customer retention rate (or churn) is often asked if you have a SaaS-like company or anything that requires membership and subscription payments.
Lifetime Value (LTV)
This number measures the net value of an average customer to your business over the estimated life of the relationship with your company. In simple words, who much you make during the average time a customer stays with your company before they leave. LTV is closely related to CAC and understanding the relationship between the two is critical to building a successful business.
CAC to LTV ration
One may argue that measuring CAC and LTV are important only to calculate the ratio between the two. The ratio shows the capability of your startup to turn X into K*X. The higher the K, the more attractive business offer you have. It also needs to be predictable and repeatable to be considered a sustainable solution.
This represents the net amount of cash flow for a month when the net cash flow is negative. Simply put, this shows the amount of cash you need to run your operation every month. For example, if at the beginning of the month you had $10000 and in the end only $5000, your monthly burn is $5000. You need investments to cover for your monthly burn until your startup becomes profitable. The monthly burn needs to show a reduced rate with time after you start generating revenue.
The investment you get divided by the monthly burn gives you the runway. Focusing on the runway is critical to the survival of any startup. Once you get to the end of the runway, you run out of cash and this is where most of the startups die. The end of the runway should be seen as a wall, where you will simply crash and burn unless you find a way to increase your runway. In fact, any company – startup or not, has a runway. The difference is that a startup has a very short runway, usually about 18 months, whereas big established companies have runways that are years or even decades.
Here we reviewed just a few of the important KPIs a founder needs to keep their focus on. These KPIs should be the base and reasons for constant experiments and your goal should be to always optimize them.
KPIs help investors and strategic partners understand the state of the startup, its needs, and perspective. These numbers show the value of a potential investment and eventually show the potential ROI and the timeframe for investment. That is why it is extremely important for a founder to measure these KPIs constantly and keep statistics of their changes and improvements.