Understanding Your Industry, Its Metrics, and KPIs
Key performance indicators (KPIs) are metrics that provide useful data for making decisions, determining the health (or lack of health) of a business, and assessing the direction it’s going so changes can be made before it’s too late. Without measuring key indicators of a business on a daily, weekly or monthly basis, you would be flying blind.
You may have confidence in your business, feel good about your team, get some traction in the market and have an aggressive roadmap, but still be measuring the wrong things or nothing at all. This creates risk for your business and, unfortunately, it tells investors and potential investors that you are not quite knowledgeable about how to manage a startup for growth, which is what investors want.
Not only do metrics allow you to understand, track and manage your business better, but they help you understand the cause and effect of why and how your company is growing and whether or not it’s heading in the right direction. It’s great to grow your company, but you need to know why you are growing, what factors are at play and how you can maximize those factors for greater growth over time.
You need to figure out how product quality or customer satisfaction is affecting your financial metric, such as your revenue growth rate. When you deliver a product or service that customers buy once or more, you are creating value for them. You need KPIs to track the linkage between the financial measurement and the value creation.
Your KPIs should be linked to your overall objective for what your company is trying to achieve. You need to be continuously evaluating the drivers of your business, adjusting your team’s activities and taking action to solve problems.
For example, customer churn rate is a KPI that tells you the percentage of customers lost during a set period of time. This includes customers who cancel subscriptions or did not make repeat purchases. This data provides insight that will help you make changes, either eliminating the reason why customers don’t buy a second time or adding more value to the offering. The cause of the problem (i.e. cancelled subscriptions or one-time-only purchases) can be determined in order to change and improve the effect.
Another example is knowing your Activation Rate—how many visitors are engaging with your app or website—and Active Users Rates—the “stickiness” of your product (how often people engage with your product). These KPIs provide insights on what specifically is working with your customers, going back to the cause-and-effect relationships. What is causing the customer satisfaction or dissatisfaction (effect)?
As the founder and CEO of a startup, you need to have your finger on the pulse of your business, but even more significant is your need to know precisely how fast your company is burning through money—the Burn Rate. It determines how much cash you need to operate and survive. So, KPIs are vital to planning, fundraising and, yes, surviving.
Different industries put a different emphasis on certain metrics. If you are a fintech startup, you are more likely focused on financial value creation. If you are in a consumer tech industry, you could focus on different KPIs, such as customer loyalty. You need to know what KPIs are most commonly used and valued in your industry, especially among investors in your sector.
In general, the number one thing that most investors are looking for in an early stage startup is the ability to accelerate and grow monthly revenues with a path to sustaining operations. Your full commitment to using and managing KPIs positions you to make a strong case with investors as to why they should invest in your company.