Why early-stage startups need to care about KPI metrics
By Kevin Leuthardt & Kalyanam Karthikeyan
Translating great ideas into even greater products and / or services and successful organisations is every entrepreneur’s and innovator’s ambition and dream. However, the journey from the ideation stage towards the product-market-fit and beyond does not follow a linear path but rather constitutes a constant iterative cycle that could be a big hazzle!
In approximation of A16Z’s approach, we segregate the startup maturity into four main categories:
Each of the four above-mentioned maturities comes with its individual challenges and focus points. Being in the early days of a start-up venture most often means that resources, particularly in terms of people, time and finances, are not infinite. Only once the startup has found a repeatable and scalable business model, it is wise to increase spending in a robust manner to anticipate market growth. It is also important to consider that most of the startups out there are still working on reaching product-market fit, i.e. facing these significant resource challenges.
Hence, it is of material relevance that the customer and market validation, i.e. the materialisation of the product-market-fit, is achieved in due course. This is especially relevant as once a product has been successfully launched and proven in a particular market, it still takes some time until positive net cash flows kick in (repeatable and scalable business model). That is why it is essential to get to the product-market-fit and a repeatable and scalable business model as soon as possible to restrict the duration of the so-called “death valley”, i.e. the time between ideation and reaching positive net cash flows.
Unfortunately, since there is strong emphasis, as outlined above, on achieving this product validation with its target customers early on, there is an imminent risk that startups consider themselves to have already achieved this key milestone too early. This also holds true as there is no absolute definition of qualitative and quantitative criteria for product-market fit / repeatable and scalable business model. Experts call this phenomenon the “pre-mature-scaling”. A study conducted by Startup Genome (2011), although focused on internet startups, has spotted evidence that an impressive 74% of the surveyed startups failed due to pre-mature scaling.
Keeping in mind the general resource limitations of early-stage startups, pre-mature scaling often results in start-up’s sudden death and even affects entrepreneurs irrespective of the greatness of their ideas. Therefore, an insights driven approach to product validation and business modelling is a very powerful way by capturing your product and market traction through KPIs. It goes without saying that insights-driven entrepreneurship needs to be combined with an agile mindset.
Although the focus of this blog is much on KPIs for early-stage startups, KPIs are also very significant for later-stage startups. If you simply think about what Series A+ investors ask of startups in terms of venture maturity, it ultimately comes down to best visualising and illustrating successful product-market-fit and business modelling through various insights, i.e. KPI metrics reports.
This blog shall strive to provide you with a preliminary overview to widely used KPIs as well as how they could be smartly applied in a KPI management context to guide your early-stage startup towards product-market fit and subsequently to a repeatable and scalable business model. Having said that, the blog outlines the necessity for an end-to-end perspective to KPI management supported by a cross-functional and iterative collaboration across the organisation / company. Within the context of this blog, an early-stage startup is understood to have already left the ideation stage, has a working team and shows first limited traction (it should not matter whether a legal entity is put in place or not). From a funding point of view, it is understood that it has already collected respective (pre-)seed funding from angel investors, (pre-)seed VCs and / or friends & family.
What are KPIs and how do you they apply to your business?
Let’s start first with the definition of key performance indicators (KPI).
“A KPI is a measurable value which mirrors how effectively an organisation is materialising its predefined objectives. KPIs must be actionable to be insightful and of an operational value.”
Further, one needs to reflect on the time aspect of a particular KPI:
Lagging KPIs: Inform you about the business performance in the past (e.g. churn rate)
Leading KPIs: Indicate to you the future business performance (e.g. net promotor score)
The table below is an attempt to holistically capture commonly applied KPIs for early-stage startups. However, please bear in mind that KPIs come in distinct variations and need to be thoughtfully reflected in the context of the individual business circumstances. In particular, the type of customers your startup serves (e.g. B2C v B2B) and also on the type of product your business commercialises (e.g. software v hardware) should be considered and be reflected when you design your specific KPIs. There is no one-size-fits all approach!
Differentiation B2C v B2B — Sales cycles, team size and contract value differ!
Although the dividing line between B2C and B2B businesses is no longer that clearly defined, there are some fundamental differences which come with the operation of one or the other business model. In particular, it concerns the duration / length of the sales cycles. It is often the case that it takes significantly more time to complete the buyers journey for B2B business models compared to B2C scenarios. Of course, this also comes with increased requirements in terms of the sales and overall team size. Ultimately, this is all balanced by a clearly higher prospect value of a potential client.
Differentiation software v hardware — virtual vs physical products
Basically, the differentiation between hardware and software businesses starts with the characteristics of the end-product. Whereas hardware constitutes a physical product, software is more of a virtual nature. Nevertheless, the dividing lines are fading away since new business models for hardware like hardware as a service or hardware as a platform (e.g. Amazon Kindle) have fundamentally changed the nature of the hardware business. However, the key differences in the building process of products for hardware / software business still remain:
Hardware: It all starts with a working prototype which is of a crude nature. Afterwards, the development and production of a first proper prototype / series 0 calls for significant first funding need and time. Prior launching such proper series 0 to the target customers, no valuable product validation is possible.
Software: Software applications are built best in line with the lean startup methodology in iterations. New adoptions can be swiftly brought to the attention of the target audience for validation. Instead of months or years in case of hardware, validation of iterations solely takes weeks.
Turn to insights-driven entrepreneurship through a KPI-enabled performance reporting
Being in your early days of your startup, there is a clear case for having a close look at your KPIs in order to steer your company in the right direction. This perhaps leaves you with the question, “How should I live up to the principles of insights-driven entrepreneurship?”.
In our view, it starts with a clear understanding of the key KPIs for your business and to visualise them in a KPI dashboard. If your business requires real-time data insights, connecting the right data sources (and relevant analyses) to your KPI dashboard is key!
But by defining your KPI strategy, it is also fundamental to ask yourself about the context and ultimately who will be the recipient of the information displayed on such a KPI dashboard. Within the next paragraphs, we will outline a plausible KPI approach both for business management as well as investor reporting purposes.
We are convinced that by far the most promising benefit of insights-driven entrepreneurship is its effect on your organisational culture. KPIs / insights-driven entrepreneurs uniquely stand(s) for an organisation inspired by the principles of transparency and facts. Ultimately, it’s about an organisation where facts always prevail over politics, personal opinions and sentiments. Essentially, it goes way beyond steering a young organisation into the right direction, it is about enabling and motivating the entire organisation through an open and insights driven organisational culture.
You might ask the question “How to get to such an ideal state?”. Our simple response is twofold which includes the KPI strategy tailored to your business as well as the use of smart KPI visualisation tools. We will have a more detailed look at the visualisation tools for both business management and investor reporting purposes in the following paragraphs.
Business management
Having an instant access to actionable key performance figures of your business is certainly a competitive advantage in today’s dynamic and global business world if not even an imperative. Hence, mapping wisely the important KPIs identified by your KPI strategy in a smart visualisation tool can be a immense facilitator of both business performance as well as operational excellence.
Visualisation of key information and data is almost always an effective way to share relevant information with a small or wider audience and one that enables living up to an inclusive organisational culture. Incorporating such visualisation tools and / or the relevant outcomes in your regular staff / management meetings and presentations can thoroughly empower your organisation.
Now the question remains as to how to technically implement the visualisation of the core KPIs? There are different ways how to tackle this challenge:
Excel spreadsheet: The beauty of excel spreadsheets is that everybody knows it and uses it frequently. It also comes with all flexibility how you would like to build the reporting graphs and categories. However, it quickly becomes quite cumbersome once multiple users need to access it with high frequency. Several authors have crafted and open-sourced some very interesting excel-based toolkits:
o David Skok (Forentrepreneurs)
o Christopher Janz (Point Nine Capital)
Smart, software-based visualisation tools like Klipfolio, Databox and Chartio belong to the type of applications that do very well in automating KPI reporting. They work best in bigger and cross-functional team setups and come in all variations in terms of standardisation and tailoring possibilities. Often, these SaaS companies offer a free trial period, for testing (which is highly recommended before you sign up for your eventual solution). Melinda Elmborg from Actionmetrics has published a great blog on the different tools which are currently available in the market (although it comes with a certain focus on e-commerce and SaaS businesses).
Investor reporting
Especially in the early days of your startup, you are keen on winning the financial investment from an active investor with a certain edge. To leverage such person’s know-how and network to its very best, it is important to keep such people well-informed about the progress of your business. That is why we firmly believe in a clearly designed and focused regular investor reporting format to your investors.
But to be honest, just looking at investor reporting from a post-funding perspective would lack a certain perspective, i.e., the view of an investor conducting his or her due diligence on you before he or she takes the decision to or not to invest. Having a strong handle of your data / traction sends a very good signal of your professional conduct and your handle on your business, which is always highly appreciated by investors.
“[…] we recommend EVERY cloud business track and report on these as a starting point, plus additional metrics that are relevant to your teams and functions!” Bessemer Ventures
Of course, this is not just our perspective evidenced by the fact that there are already many interesting solutions available in the market. One of them is the product by Visible. It is as a powerful and well designed software tool, which can be connected to a myriad of data and information sources. Furthermore, it allows you to send investor updates using the connected data charts to your investors as an automated mail delivery as required!
Blue Tree, our Geneva-based strategic partner and an investor relations company, is currently working on shifting its investor-startup network on a digital platform which is supported by interactive KPI reporting features. It is further fueled by a blockchain technology-based filing system. We definitely recommend staying tuned on what they are working on or getting in touch with Maxime.
Final remarks
Let us summarise the essential findings of this short paper:
Reaching product-market-fit and a repeatable & scalable business model are important milestones for early-stage startups, especially taking into account the startup’s resource limitations.
There is an imminent risk of pre-mature scaling, i.e. before you have actually reached the product-market fit and succeeded in business modelling!
A KPI based approach can be an effective response to the risk of pre-mature scaling on the quest for product-market fit and your repeatable & scalable business model.
It is important to consider that KPIs come in different forms and variations and the KPI strategy needs to reflect on your industry, product, customer and maturity profile.
By implementing a KPI strategy and using smart visualisation tools, you not only agree on the prevalence of insights over opinions / gut feelings, it also shows a clear commitment to an open and transparent organisation.
So, if you are an early stage startup interested in implementing a KPI strategy and visualisation tools, we would gladly appreciate if you get in touch with us for a first discussion for free: kevin@ksquared.ch
