One of the key principles in business strategy is about making trade-offs. CEOs and executives are good at it. Good trade-off ability correlates to decisiveness, and leaders make decisions every day. Trade-off in strategy means a firm should choose what not to do instead of what to do; the idea is that every firm has strengths, weaknesses, and limited resources. This means it’s better to do 3 to 4 things it’s excellent at than to do 10 things it’s sufficiently good at.
I think that idea transfers well to entrepreneurship. An area where it can be useful is performance monitoring. If you’re a founding CEO who’s starting out, you’ve probably compiled a list of KPI metrics you want to track. At early stage (pre- raising series A round), tracking too many metrics is counter-productive. Trade-off in this context helps you by thinking in terms of what not to track instead of what to track.
Applying the rule of three achieves such trade-off; force yourself to choose only the top 3 most-important KPI metrics to track at each stage.
How to decide which would be the most important ones?
I’d suggest approaching this by thinking about the core activities and the goal at a particular stage. Good KPIs should quickly tell you how those core activities getting you closer to your goal at any point in time:
(1). Bootstrapping (<$1k funding. Length = 3–6 months)
- Core activities: customer interviews, community development.
- Don’t: product development (for founders with technical backgrounds who often like to “get their hands dirty” and jump straight to coding, I can’t stress this enough).
- KPIs: input-based KPI and qualitative KPI metrics (e.g. #calls made, #communities reached, customer sentiment). Put more emphasis on qualitative KPI metrics — how much do customers like your solution?
- Goal: Raise Angel/Pre-seed (or even Seed) round.
(2). Angel/Pre-seed (~$10k — $50k funding. Length = 3–6 months)
- Core activities: product development (MVP only), customer onboarding (target pilot/beta users), and customer acquisition (target only).
- Don’t: full-time hiring, acquisition cost optimization — it’s too early.
- KPIs: output-based KPI metrics (e.g. #daily active users, Monthly Recurring Revenue/MRR, Gross Merchandise Volume/GMV). The value of your startup here would be driven primarily by revenues, active users, or GMV, depending on your business model. Just right before you raise seed round, VCs would use those metrics to measure how much demand there is for your product. Those are the tractions. VC also look at the qualitative aspects, but the emphasis is more on you and your team profile than things like customer sentiments or net promoter score.
- Goal: Raise Seed round from VCs.
(3). Seed (~$500k — $2m funding. Length = 12–18 months)
- Core activities: Full-time hiring (key employees with complementary skillsets to your founding team), retention, achieve repeatable customer acquisition process — achieve product-market fit.
- Don’t: Overhire.
- KPIs: output-based KPI and retention-based KPI metrics (e.g. GMV, conversion rate, LTV-CAC/Lifetime Value-Customer Acquisition Cost). At this stage, just when you’re about to raise for series A money, VC wants to know if you’ve achieved product-market fit. Strong output-based KPI and retention metrics would be the indicators.
- Goal: Raise Series A round from VCs.
Below is a matrix that shows an example of rule of three application across stages and business models. (there are some with only two metrics):
The simplicity of rule of three approach ultimately allows you to communicate performance-related matters easier to your team and investors at the early stage, where tight feedback loops are preferred. I’d love to hear some thoughts if this would be a relevant approach post-series A to some extent. Any comments are welcome.