The Thinker by Rodin — 2006

Four ways to inflate your startup metrics — and why you shouldn’t

You are about to present to your dream VC. The metrics look good but not great. Actually, they are not that good — they look like every other startup metrics in the valley. But, you are tempted. Did Mark Twain not quip that there are lies, damned lies, and statistics? So why not push the enevelope a little.

You can — and it happens every day. But you really shouldn’t. Because, as I will explain, there is Karma in reporting a company’s metrics: It all comes back and haunts you. And the more you exaggerate your metrics during fund raising, the more likely your startup will fail as a result — Just more spectacularly.

1. Underestimating your CAC

Your Customer Acquisition Cost (CAC) looks, well, like everyone else’s CAC in the category. It is costing $2-3 to get a click from Google, and, with a solid 2–3% conversion, your CAC is somewhere in the $66-$150 range.

The most common approach is to report the optimistic story: Take your cheapest keyword and your best performing conversion metric, discount your marketing spend a little bit, and end up with a healthy CAC that’s sub $50.

Or, you can go all out: just divide your total marketing spend by the total number of new users in a given period and, all of a sudden, your CAC is a super healthy sub $20 per user (Notwithstanding that techcrunch article that generated half your users). Surprisingly, many investors will let it go. People like good news.

But don’t. Eventually you will report on this CAC in a board meeting. Investors will dive deep into your acquisition cost by channel. And that super low number will make you lose a lot of credibility. You will also have wasted a bunch of marketing dollars in the process.

2. Overestimating your Active users

Active users is a bit of an outlier among metrics: it is both very important and functionally meaningless. No one can define it for your application. Only you can. (Personally I chose to define an active user as one who genuinely engages with the product without aggressive re-engagement tactics.)

The simplest way to exaggerate active users is to define it as anyone who used the application. This works particularly well during periods of rapid growth when every new sign up, by definition, is an engaged user. If you happen to be raising money during a time of growth, your engagement numbers may just look stellar.

Founders often try to game the system further by either accelerating the marketing spend before a fund raise, or by pushing for a very aggressive re-engagement tactics via email and push notifications.

Again, don’t. Eventually you will need to report on the actual metric. And what could be an improving engagement will now look stale or declining.

3. Only reporting the interval with the hockey stick

Every startup goes through ups and downs. As a presenter, you get to pick a sliding window from your startup’s lifespan to report on. Investors don’t expect you to pick the worst performing window, but they do expect you to report on a window that is both current and historically relevant. So if your startup’s growth has had an S curve shaped trajectory, don’t conveniently trim the timeline at the point of peek growth. An experienced eye will ask uncomfortable questions. A lesser experiened eye will let it pass. But will notice the numbers a few months post invesment and feel tricked.

4. Not communicating the bad metrics

This is at tricky one. So you have cracked the nut on virality but not on engagement. Or the Life Time Value of a user is through the roof but your CAC is also absurdly high. Why not just report the positive news.

Telling half a story is not techncially lying. But it is misleading. And research shows that while most humans don’t like to lie, most don’t mind when others are mislead. But you should hold yourself to a higher standard. Tell the full story to the extent you can. Investors get less excited about most deal a few months in anyway. Don’t make yours stand out by being labled the one with the lying CEO.

Why this is all bad

With enough experience, you will eventually realize that there is no game. There are real companies and there are houses of cards. Don’t think fake it till you make it. If the business is bad, no matter how you sugar coat your numbers you will still fail — just more spectacularly.

What you should do instead

Present a compelling vision. Have a genuine plan for improving your metrics that you need funding to execute on. Build a great team. Tell a story that you believe, not one that you want the world to believe. If the stars are aligned you will succeed in raising a round. And if the numbers are not great but the investors can sense your integrity, they will genuinely ask you to come back with a better business. That may be the best outcome for you after all.

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