It’s not all crowdfunding and pitch decks if you’re an early-stage startup – there is also usually a lot of number and data crunching to be done. It’s especially true when convincing investors about your potential to become their next unicorn.
Now, if at some point you’ve had your finger in some ‘Wall Street’ pie, you may have heard startup jargon like accounting rate of return (ARR), EBITDA and so on. At their core, these are all the key performance indicators companies deploy to track and measure financial health and potential for business success.
KPIs are even more crucial for startups. Why so? It’s mainly because, being at the forefront of innovation, startups are the most prone to the unforgiving variables of operational risks and market fluctuations. This leaves them needing a 360-degree view around their operations, and to gain a clear direction for growth.
So, startups must be extra careful in crafting their business strategies by actively setting and measuring performance indicators, if they are to even have a decent shot at being one that survives beyond their first few years.
In this post, we outline what key performance indicators are, how to create them, and then spell out a few concrete examples.
What are KPIs?
Put simply, key performance indicators are elemental values that companies apply as tools for measuring their progress, as they navigate towards business success.
Picture this: You’re embarking on a 1000-mile road trip from Alabama to New York. The endpoint for the trip is akin to overall business success (say, a profitable financial year), the mile markers on the road represent the small goals that get you ever closer to your endpoint. And the speedometer in your vehicle? That’s the KPI that shows you how well or poorly you’re doing in your bid to reach your destination.
For the average startup in early growth, things can get pretty rough as you try to juggle product development, marketing, customer service, investor relations with often overbearing VCs and so many other things at the same time. But setting goals with KPIs is the best way to ensure that you stay on top of your game. Sure, you may not always reach your goals, but that’s not an indication of failure.
Now, on the trip to New York, if you were supposed to reach mile marker 3 in 2 hours, and you notice that you’d been driving at half the required speed for about 30 minutes, you don’t quit, you simply rev up your speed and keep accelerating. The key here is that the speedometer hints you about when you’re not moving fast enough. That’s exactly how KPIs work—and that’s why you need them!
How to set and measure KPIs
It’s easy to get caught up in the web of blindly planning & setting KPIs. But, to increase your chances of success, we advise that you follow these few guidelines:
While it seems utterly impressive to have a 20-item-long list of KPIs, it really doesn’t work. You must set for yourself a short and concise list of action items that can realistically be achieved within the selected timeframe. We recommend that you keep your KPIs down to between 4 and 9 items.
Streamline with overall strategy thrust
Your KPIs must align with your company’s overall strategy, and more importantly, must clearly align with specific employee roles. This way, you can ensure that your KPIs don’t just remain as some abstract overarching anthem but are actually directly linked to employee performance.
Your KPIs must follow the ‘SMART’ formula:
- Specific: Each KPI must clearly outline what it measures.
- Measurable: The progress made on each specific indicator must be reliably measurable
- Attainable: KPIs mustn’t be synonymous with building castles in the sky. Your KPI should be reasonably achievable.
- Relevant: Indicators must correlate with your organizational goals
- Time-bound: KPIs must be directed linked to an exact timeframe for execution.
So, following this template, an ideal KPI would be something along the lines of this: “we aim to reduce customer acquisition costs by 20% over the next 2 quarters”.
What are good KPIs for a start-up?
There is a never-ending list of metrics that you could track with KPIs; all grouped into 4 major classes.
- Financial KPIs: First and foremost are the metrics that measure the financial health of the company. Examples are profit margin, gross and net revenue, financial runway and monthly burn.
- Customer-focused KPIs: Businesses revolve around customer satisfaction, so this class of metrics measures the health of a company’s relationship with its customers. Examples are customer acquisition costs and customer retention rates.
- Employee-focused KPIs: To run a business, you need talent. This class of KPIs measures your relationship and ease of access to vital talent pools. Examples included employee turnover rates, employee satisfaction and response to open positions.
- Process-focused KPIs: the final class of metrics measures the health and efficiency of your internal processes. Examples are frequency of product defects, efficiency and frequency of customer support requests.
As noted earlier, it’s always advisable to keep your action agenda down to only between 4 and 9 crucial deliverables. So, below we list some KPI examples that we think are the most relevant, especially for startups seeking early growth and success.
Total addressable market
If they are to stand any chances of survival, startups need to find a market fit. So, the very first thing to do would be to evaluate the total addressable market, which is the entire target audience of the product or service that you offer, and then determine how much market share that you can possibly take control of in a specific time frame.
Customer acquisition costs
Customer acquisition cost is the total average cost of making a sale to a new customer. It is calculated by adding total sales and marketing costs and dividing the sum by the total number of new customers. The goal here is to keep the figure as low as possible, and by tracking this KPI, you can incrementally reduce your customer acquisition costs.
The monthly burn rate and funding runway
It’s not critical for startups to turn profits in their early stages; frankly speaking, it is quite rare. So, in place of profitability, startups’ financial health is measured by the rate at which they burn through their funding, and how much money they have left to run on.
The monthly burn rate is derived by subtracting monthly expenditure from monthly revenue. Then, the runway is presented by calculating how much time is left going by the current burn rate.
As the name implies, this KPI tracks the number of customers that engage with your product or service. However, startups must be careful to only measure metrics that are directly tied to user engagement. Too many startups get caught up in tracking so-called vanity metrics that do not directly translate to revenue.
For example, as tempting as it might look, the number of views on your YouTube channel is not exactly a customer engagement metric; and the number of transactions conducted on your app is more important than the number of app store downloads.
Track the right KPIs for your Campaign
KPIs are crucial monitoring & evaluation tools that startups need to monitor the overall health and efficiency of their business. When setting KPIs for your company, it’s vital that you pick indicators that not only align with your business’s overall mission and strategy but also are compliant with the SMART template.
Just like too many cooks spoil the broth, multiple, blindly chosen KPIs will only leave you disorganized and directionless. Try to keep them as few as possible. With properly set KPIs, together with a brilliant product or service, you’ll set yourself up for celebratory wins and successes.
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