The Deadly “One Metric That Matters”
Have you heard of the “one metric that matters” (OMTM)? This concept was first introduced to me through the book Lean Analytics, by Alistair Croll and Ben Yoskovitz.
I have a lot of respect for Ben and Alistair. I’m a proud owner of two copies of Lean Analytics. I keep one copy at home and one at the office because I refer to them at least every couple of months.
It’s a good book with solid advice save a few exceptions. The OMTM concept is one of those exceptions. In a series of posts, I’ll explain why the OMTM is dangerous advice, starting with why OMTM could leave you high but dry.
OMTM vs TMTM
When I was checking Google for what others say about the OMTM, I came across this one post from an entrepreneur who went through Y Combinator. This blogger cites an essay by the YC co-founder Paul Graham, “Startup = Growth,” as evidence that the one metric that matters is the real deal.
This blogger and Paul Graham are not alone in their opinion about the importance of growth for startups. There are many in Silicon Valley who advocate that growth is the fundamental characteristic that separates a startup from any other type of business endeavor. In most cases I would agree with this sentiment but would also stress that focusing on growth to the exclusion of all other metrics is one of the fastest ways to kill a company. There is a second metric that can’t be ignored and it’s best described by Graham’s idea of “cockroach mode” which is somewhat contradictory, or complementary, to OMTM.
In a guide to investors Paul Graham defines what it means for a startup to operate in “cockroach mode”:
Apparently the most likely animals to be left alive after a nuclear war are cockroaches because they’re so hard to kill. That’s what you want to be as a startup, initially.
Graham’s definition of cockroach mode is that you can operate on so little money that it won’t die even in the nuclear winter of funding. The ability for a startup to manage its working capital is extremely important and guess what, this is the other metric. You can’t just spend all of your investment on a single month of growth because the growth metric is your OMTM. You also can’t have capital as your OMTM, ignore growth, and expect to make it to Series A or become a profitable business. Balancing both of these metrics together is the real way to achieve what I’m calling the “two metrics that matter” (TMTM).
Soylent as the TMTM
Have you heard of Soylent from Rosa Labs? The story of this startup that succeeded in pulling off a massive pivot was thanks to the clever use of TMTM. The story published by Inc. summarizes how co-founder Rob Rhinehart began to resent the cost of food and how it was eating away what little startup capital they had to work with while they were in YC. Despite being a wireless technology startup, Rhinehart decided to boost both the capital metric by making low-cost food. This startup wasn’t created because they focused on growth. This startup was born out of necessity as they watched the bank account balance shrink week after week. It was a solution intended to resolve the capital issue for the original wireless startup idea, that ended up having a growth metric of its own.
Blindsided by OMTM
Here is an example where TMTM narrowly saved a startup from financial ruin. I met a startup that almost died adhering to the OMTM mantra. This hardware startup was founded by a young team of first-time entrepreneurs. These co-founders had secured a couple million dollars to build the startup when they were still pre-revenue. They had been spending the money for the better part of a year building prototypes, dreaming big, and even getting customers but they weren’t tracking the capital metric. Fortunately, a friend of mine who is a CFO was brought in to help the company. One of his first questions was, ‘Where are you keeping track of your spending? Are you using QuickBooks?’
The answer was no, they were not using any bookkeeping solution. The focus was on getting customers: the growth metric. Two weeks into the job, this CFO quickly set up their accounting system, populated it with the necessary data, and made a discovery. He sat down with the young lions to share this news: ‘At your current rate of spending, you will be bankrupt in two months. Did you realize that last month when you spent this much money?’
The team did not realize they were burning so quickly through their cash, nor did they realize they were two months away from empty bank accounts. The new mission for this very promising startup was to throw out the OMTM and balance their metrics by meeting with investors to extend the runway.
This is why the one metric that matters philosophy is dangerous, particularly to new startup founders. We want entrepreneurs to succeed. Successful startups grow into big companies and add to our economy. Do not let hyper-focused startup founders use the OMTM to burn unnecessary holes in the wallets of investors . We can prevent startups and investors from getting burned by teaching them the collection of important metrics that measure the health of any business, including rapid-growth startups.
I wish Ben and Alistair had called their theory the “most important metric” (MIM). Another good, if lengthy, option would have been the “one metric that matters provided your other metrics look good too” (OMTMPYOMLGT). At the very least, we need TMTM. Unfortunately, I couldn’t even find any wiggle room in the OMTM in the literature. It suffers from as much tunnel-vision as the founders that employ it.
I’m urgently cautioning you, dear reader, of the OMTM danger. You simply cannot be successful by focusing on one metric at the exclusion of other business metrics. There’s a reason why the income statement, cashflow statement, and balance sheet are all important to managing a business. All three are used in conjunction to tell the story. It’s possible to have a great looking income statement (aka Profit and Loss statement) and still go out of business quickly for lack of cash.
In a future post in this OMTM series, I’ll describe how even growth is not one metric. It must be a collection of metrics that provide a realistic assessment of viability. Put down the rose-colored glasses of OMTM.
Originally published at blog.mikezawitkowski.com on August 16, 2016.