KPIs to Forecast the Future as a Start-Up Founder
Establishing goals in any company is a critical element in that company’s success but selecting the most appropriate Key Performance Indicators (KPIs) are just as essential for measuring success or difficulties. One of the biggest traps a business — especially a startup — can fall into is not respecting the importance of operational management, often manifested in the mishandling of KPIs.
In our Series A round, we met with several investor groups, many showed interest in the company. One of the people I spoke with was Kent Thexton, a managing partner for ScaleUp Ventures.
During our initial meetings, one of the things Kent spoke passionately about was his experiences with implementing successful KPI programs. Frankly, prior to this, I had never really spent much time thinking about KPIs or the value they could have on for our business.
Shortly after closing our Series A round, we announced the investment from ScaleUp Ventures and made Kent our Chairman of the Board. Kent quickly came in and helped us put a formal KPI program together.
Why are KPIs so important for your business?
Since Fusebill is a SaaS business, our focus has tended to be on growing our monthly recurring revenue (MRR) — not surprising. Consequently, our KPIs are centered around MRR and other key SaaS metrics. We started small and chose three KPIs to put in place, which essentially act together to form our north star. This is the path that we use to measure the health of the company and drive the direction of our focus.
KPIs are generally considered table stakes, as Kent explained, but the true effectiveness and impact is your ability to forecast KPIs out 4 quarters with a level of accuracy you wouldn’t have without this program in place. It shows what is going to impact the future, instead of simply reporting on the past. As forecasting accuracy increases, problems in the business are identified much earlier, with enough runway to take corrective actions.
At Fusebill, we track our KPIs religiously. If you get good enough at them, you get the feeling of being able to predict the future which is a feeling like no other for an early stage SaaS founder.
But how do you start out determining the appropriate KPI program?
1. Select the right KPIs at the right time.
“The KPI’s are balanced across 3 stakeholders; employees, customers and shareholders”, Kent explained. But for earlier stage companies we suggest the KPIs be over weighted towards the shareholders. This is simply because the other stakeholders tend to be generally satisfied at that early stages of the business. The test for shareholders, that we offer up to the management team, is to look out 18 months. ‘What will satisfy my shareholders in 18 months?’”
The suite of KPIs will be adjusted as the company matures and the selection will represent a balance of all stakeholders.
2. Assign executive level KPI ‘champions’.
It is appropriate and important that senior executives are responsible for the KPIs in your company. This drives accountability and ownership of the health measures of your business. Also, the people who have the biggest impact on a KPI should be contributing to the forecasting and eventual outcome of that individual measurement but not always the owner of the KPI.
As Kent explained with a successful KPI program, “There needs to be a degree of visibility and ownership across the organization. But there needs to be one owner, one champion. You can’t have two or three people managing a KPI, because it’s simply not efficient.”
Above all, though, the CEO of the company must be the ultimate champion of the KPI program in its entirety.
“From the outside looking in, Tyler is a great example of a CEO who has embraced the importance of building the KPI program. We don’t always get that type of awareness and commitment to this operational program. He’s an exceptional example.” Kevin Kimsa, General Partner, ScaleUp Ventures.
Thanks, Kevin! It is humbling to hear his words as I have a tremendous amount of respect for Kevin, having founded a few companies himself — one which exited to the tune of $1.15 billion, but it does validate how important I feel the right KPIs are to the growth of our company, and what an asset a program such as this is to the health of any company, especially in its early years.
You are probably wondering by now, just what are the KPIs that we have selected here at Fusebill?
They are:
1. Monthly recurring revenue (MRR), the predictable revenue that is coming in every month due to new and current customer bookings. In our company, the VP of Sales oversees this KPI. Here is one free MRR calculator you can use to figure out your own MRR and growth rates.
2. Customer acquisition costs (CAC), which are the fully loaded sales and marketing expenses divided by the number of new clients that you close in a month. Basically, this KPI measures how much it costs to acquire a new customer. Fusebill’s VP of Marketing is accountable for this KPI.
3. Churn, measured by the dollar value of any customer leaving us. Customers are generally leaving because of project being cancelled or product/functionality gap, so our CTO oversees the churn KPI.
3. Start off with modest KPI volume.
For a company our size and at our level of growth, Kent recommended 3 to 4 KPIs, something that Kevin also heartily agrees with. In fact, a robust KPI program is a critical function for any company but it should not be seen as being painful to implement.
“When we conduct due diligence on prospective companies,” Kevin says, “we assess the maturity of their KPIs (if they in fact have any).. and determine the most appropriate ones for where they’re at for their growth and start to shed some light on how they should structure their operations.”
With only a few KPIs to focus on, we ensured that we were not biting off more than we could chew. Once the program is set up, it becomes easier to get into a cadence of updating and reforecasting every week.
At every weekly management meeting, we ask,
· What has changed?
· Is the business on plan or behind plan?
· If behind, what can we do as a team to get back on plan?
· If ahead, what can we do to accelerate?
Sometimes the KPI portion of our meetings are quick, and sometimes they may take an hour or two to dig into. The resulting information is shared downward with all company employees and upward to the board of directors.
It might appear that the time spent on KPIs is excessive, but a healthy company will embrace the KPI culture and devote the time to understand the numbers for future growth.
For example, if our VP of sales reports in Q1 that he is taking $100,000 off his forecast for Q4 because we lost a large opportunity, we can immediately look at how to make up for this change. With forward looking KPIs, we still have Q2 and Q3 to figure out how to fill that gap. It certainly helps you when you are looking down the road.
This works well when a company has selected the most appropriate KPIs, but unfortunately, many businesses make the mistake of using the wrong KPIs or do not look forward 12 to 18 months to measure their business. Instead of pointing the ship toward the north star, they are looking in the wrong direction and are in danger of leading their company adrift in an ocean of competition.
Sometimes, a business might have selected the most appropriate KPIs, but they also picked several others as well. “One of the biggest problems is when there are too many KPIs,” Kent explained. “Companies want to measure too many things and a lot of time is going to be wasted.”
However, when a business is more mature and has moved onto other growth patterns, then it’s time to add other KPIs.
Warning signs that your KPIs heading down the wrong path.
As you can see, KPIs are powerful tools in every phase of business growth. But what happens when a company selects the wrong KPIs?
Imagine putting together a bookshelf that came with Phillips-head screws, but you only have a standard screwdriver. Or worse, a hammer. Best case scenario, you might be able to put that piece of furniture together eventually, but it’s going to be a tedious process and certainly isn’t going to look pretty.
“We’re realizing that often, KPIs are poorly implemented,” Kent explained. “Most organizations know they should have some KPI selection, but many don’t choose the right ones.”
As mentioned before, KPIs in an early stage company should be geared toward what the shareholders will want to see to demonstrate company strength. In fact, Kevin and Kent were part of a very successful exit in the early 2000s that exited for hundreds of millions of dollars more, because of that company’s strong KPI system in place and the fact that they could demonstrate predictable revenues well into the future.
Making KPI driven U-turns for your SaaS business.
It’s critical for all the executives in a business to get on board with the KPIs.
For example, when we started the KPI program at Fusebill, we had one individual who missed his forecast every month... and missed drastically. It served to shine a flashlight on that person’s skillset as well as flaws in our sales process. Consequently, we knew we had to make some changes, both in management and our process.
One of the things our MRR KPI had demonstrated was that we were initially going after leads that were too big and complex from a requirements perspective. At the time, Fusebill was wasting an extraordinary amount of time going after companies that were not a good fit for us.
As a company, Fusebill “changed their sales and marketing focus,” Kent reflected. “They changed the way they drove leads and rebuilt the sales team to handle inquiries more efficiently.”
Overall, our KPI program has made a marked difference in the way we conduct our business and I have full confidence that it will continue to be instrumental in our continued success. As Kent says, “The company is on a great path to double their revenue this year.”
Kevin and Kent look for people who openly embrace and commit to the KPI program. These are the people that are willing to make the necessary changes to realize a high return on investment. This, as Kevin says, “can yield immense success.”
We have learned a tremendous amount while scaling Fusebill. If, at some point in the future, I am to start up another company, the one thing I would do from Day 1 is to implement a KPI program.
We have made many mistakes over the past 7 years, while also making a lot of effective decisions. The successful implementation of the KPI program is one of the best choices we have made so far. They keep us on track and the business can quickly adjust our strategy to help change the future which is cool indeed.
