Startup math: The key metrics you need to track

As you recline in your chair after the 9-5PM coding streak with your tech team, you put on the 5-9PM mantle of your startup’s captain. Your product vision is on track to take the market by storm, but your startup is more than just a compiled .apk: it’s a synergy of tech, sales, and numbers.

Your business likely produces pages of quantifiable data and numeric insights every day. Each one of your teams reports on a myriad of variables every month, and aggregating those insights into concise benchmarks is what defines not only your investor materials, but your vision of your business’ future.

The science of building businesses around data and years of VC experience give us a plethora of ratios and equations that give the most about your business’ health in just a couple of spreadsheet cells.

Now, what do you actually report on? What do your investors need to see first? What numbers will the investor look at even before checking your jaw dropping MRR in 5 years?

The answer is — your ‘metrics’.

Metrics are essentially a set of measures used to quantify your overall business’ health. Metrics give you a bird’s eye view of the efficiency of your capital resources allocation, sales strategy, go-to-market strategy, and product strategy.

However, we won’t just dump all formulas and definitions on you so you can mindlessly benchmark your business. We will look at metrics from the view of your startup’s growth stages, answering the question: “Right now, how do I know if I should scale?”

Two main types of metrics

Metrics measure your progress towards achieving certain sales, marketing, and financial goals. However, not all metrics can be useful in the short run. While some metrics can be tracked from day 1, some will need more time to properly reflect reality.

We can draw out two types of metrics:

• Lagging indicators: metrics that take time and larger data volumes to be used effectively
• Leading indicators: metrics that analyse actively changing variables and are effective in the short term

Because of the different time frames addressed by two types of indicators, it is vital you understand when and how you’re tracking a lagging metric, so that you can tailor a leading metric to guide your decision making in the short term.

Keep in mind though that it’s never one against the other: lagging and leading indicators are always used in tandem, and both are essential. It is your ability to properly report and analyse them together that defines your startup’s success.

Lagging indicators are metrics that measure large sets of historical data. You can only get insights from lagging indicators if you have a lot of previous data to feed the metric.

LAGGING

Advantages:

• Straight forward indicator of success. As you’ll see later, lagging indicators deal with familiar variables and have definite, clear benchmarks.
• Most universal metrics are lagging indicators. While leading indicators will vary sometimes depending on your sales and product strategies, lagging indicators are universal to any startup in any vertical.

Disadvantages:

• You cannot really base your in-the-moment decision making on lagging indicators, as they’re not reporting the real time situation of your business performance.
• It takes a while to break down the variables behind lagging indicators and trace a source of, for example, a negative turn in this metric.
• A myriad of variables makes it hard to estimate the impact of your decisions on the metric. Maybe it’s just a statistical deviation or chance?

Leading indicators, on the other hand, give early indication of performance. They’re your navigator in reaching your destination:

“You wouldn’t walk across an unknown town with a zoomed-out map. Lagging is the big picture, Leading is your guiding star”.

LEADING

Advantages:

• Give real-time updates on the health of your business as a whole and its separate elements.
• Simple, easily trackable and can be used to quickly set and monitor KPIs.
• Can be used as an interim measure of future performance.

Disadvantages:

• Require deep knowledge of your business model and processes. Leading indicators have to be tailored to each business activity or process.

How to use the right metrics depending on your startup’s stage

As you can see from the way your business works, it is easy to get lost in all the variables that you must track and report on.

Sometimes, if you fail to understand the difference between tracking lagging and leading indicators, you’ll be in dismay. In fact, if you skip this part of the article and go straight down to the list of metrics and their benchmarks, you’ll end up measuring the wrong metrics, at the wrong stage of your business.

Before becoming the next big thing in [insert your industry], you’ll go through 3 stages of experimentation and growth:

Let’s use this map to quickly navigate through your growth stages and the metrics that define said stages.

It’s fairly easy: In essence, you’ll start by experimenting with your product and sales strategies to get your desired results for retention and then achieving scalable unit economics.

After that you’ll only be looking at metrics that directly affect and result from your scaling and rapid expansion.

Stage 1: Product-Market Fit – Customer Retention

At the stage of achieving Product-Market Fit you’re largely experimenting with not only sales and marketing but also your product strategy. Your company is like a baby, awkwardly making its first steps, and here, not falling after each step is key – retain your customers!

Churn Rate

Churn is one of the key lagging indicators at this stage, and one of the most versatile. Churn is the % of your customers who “churn from your product”, aka – cancel or don’t renew their subscriptions over a certain period.

To measure Churn effectively you need a large set of available data, as it is a lagging indicator. While looking at your Churn you also need to consider the nature of your customer journey and the mechanics of how subscribing to your product works: churn will vary from company to company depending on when the customers have a possibility to churn

Churn is a key metric, as important as any other. It is essential to measure retention and your overall product, sales, and marketing strategy condition. However, because it is a lagging indicator, it will take time to reflect changes in your strategy.

Customer Retention

Yes, the best way to measure customer retention is the Customer Retention formula. Does your sales and marketing strategy work? Well, one of the ways to figure that out is by calculating what fraction of your customers keep buying your product.

Just like Churn, Customer Retention is a vital part of measuring your business’ health. But it is a lagging indicator too.

Leading Retention Indicator

The best way to measure retention at this stage is using a leading indicator, which you have to build yourself. A scientific, data driven approach tailored to your customer journey works best here.

Leading Retention Indicator is “True” if P% of customers achieve E (event) within T (days).

This way you can build a leading indicator that directly reflects your company’s entire customer journey. This is as tailored an indicator of your success as it can get.

Once you build a cohort analysis using this indicator, you’ll be able to easily isolate a time period when, say, a change to your sales process was implemented.

This indicator will bring a whole new perspective to your decision-making process. Not only it is leading, which means it is a real-time image of your business, it is also highly versatile and adjustable. Most likely, once Product-Market Fit is achieved and you go on developing your product and scale, you’ll see yourself altering this indicator to better cater to developments in your customer journey and sales.

Stage 2: Go-to-Market Fit – Scalable Unit Economics

After Product-Market fit stage, it is important that you adapt your sales engine to the reality of the market and your product. Thus, while achieving Go-To-Market fit, bettering your unit economics is paramount.

As you must know already, unit economics is a set of metrics that measure each unit’s (your product’s) cash inflows and outflows. Calculating unit economics is about seeing how much value each unit produces once sold and how much value it requires to be released in the first place.

Let’s look at key GTM metrics used at this stage:

LTV

Lifetime value (LTV) is a measure of how much cash value a customer brings a business over the lifetime of their subscription.

CAC

Customer Acquisition Cost is a vital business metric evaluating the cost of acquiring each new customer.

These two metrics create two highly important indicators that have a direct impact on your overall Capital Efficiency.

LTV/CAC

This metric basically compares how much a new customer will bring into the business over their lifetime, and how much you spent to acquire them in the first place.

A low LTV/CAC would be an indicator of you losing money in the long run, and it’s a great navigator to know how much you should be spending on acquiring new customers.

CAC Payback

A mainstream metric that shows you how long it takes to break even on customer acquisition costs for each new customer.

This metric has a great use case to see how well your sales and marketing strategy is performing: isolating CAC Payback by region or segment is a great way to see what’s drying out your budgets.

Stage 3: Growth & Moat – Revenue

At this stage, your routine and discipline tracking leading and lagging indicators in previous stages defines your survival. Your unit economics and other leading metrics make up your overall assessment on when and how to scale.

These metrics are of course best used earlier than later, but building up context on them up to this stage is a great idea.

Knowing these metrics at every stage will help you monitor your business’ health and swiftly secure the next round of venture financing.

Annual Recurring Revenue

ARR is a go-to measure of a subscription business’ condition. Forecasting is embedded into the nature of this metric, since it is a value of revenue that a startup aims to repeat.

Monthly Recurring Revenue

MRR is a predictable measure of total revenue generated by your living subscriptions in a chosen month.

Runway

A metric you must be tracking from Day 1 of getting your first capital from family, friends, and fools. Your Runway measures the number of months your business can run before you’re out of money. It’s not only a dreadful number that keeps you biting your fingernails, but also a great tool for budgeting, strategy planning and, of course, fundraising.

The longer your runway, the more likely you are to survive the months of trying to secure venture financing.

Capital Efficiency Metrics

All in all, your goal for this stage is to take all your metrics and stir them to achieve maximum capital efficiency.

Expectations of major deflationary measures have already taken a toll on the capital markets and investors are bracing for the next 9-12 months of tighter investment budgets, lower cheques, and a whole new way of evaluating new investment prospects. This means if the investors see your company as lacking success making the most out of every dime: you miss the raise.

Just a year ago 9 out of 10 VC meetings would be about growth. Today, 9 out of 10 VC meetings will ask you about how efficient your growth is.

Have a look at our article on Capital Efficiency metrics here to find out more about the next vital steps in your funding journey during these difficult times.

Track your metrics to define and measure success

Wrapping it all up, here at Waveup we again want to stress the importance of having your metrics under control. You cannot afford clumsy reporting in the first year of your project’s life. As you could guess, despite being inferior in terms of getting insights in real time, lagging indicators are essential, and the more valid data you feed them, the better.

Investors love startups who know their numbers and can quickly defend themselves with proper metrics. We hope our article and our success stories inspired you to get on a call with your teams right now and establish a rigid reporting routine.