I once heard such a comparison:
Founder of a startup is like a traveler who travels into the unknown.
A traveler needs a “compass” to not get lost along the way, and it is very similar for a founder of a startup. In the case of startup founders numbers (or metrics) could be considered as the “compass” guiding the company in the right direction.
The Internet with its easiness of measuring every possible interaction has accustomed us to gathering data, analyzing it and drawing conclusions whether we are heading in the right direction. I do not know a single startup founder who does not define his business with te use of numbers.
In pitch decks metrics play the role of the main actor. During presentations, numbers capture the strongest emotions. Metrics close rounds and they bring companies closer to an exit.
Yes — numbers are important. Unfortunately, startup “compass” may be very easily fooled. Founders who rely on erroneous indications of their compasses, often end falling into the abyss.
The main reason for false positive readings of the “compass” is the wrong choice of numbers that a startup optimizes agains in order to determine the correct path. Visits, registrations, downloads, views, etc — these are just “Talismans”. The industry often refers to these numbers as— “vanity metrics.” Their goal is camouflage, concealment, deception. At first glance, arouse respect and admiration — a million visits a week, a thousand registration per day. They make one feel good and successful but defining a business model with these metrics, only scratch the surface. As an industry we sometimes paint a beautiful picture of success with these metrics, which may in fact turn out to be a forgery. A broken “compass” and a quick jump into the abyss.
So how to protect a startup from a certain death. Every business has one key metric, by which it can be defined. As a rule of thumb, this metric is consistent with the type of “work” you want your product to do for your users/customers. This key metric is the tip of the pyramid, a component of all the other numbers that identify each process in the product/value.
Every product is different/unique, and it would be extremely difficult to give a universal formula for the “compass”. Perhaps in the case of Airbnb it is the number of booked stays per day. Perhaps for Salesforce it is the frequency of data entry and use. Hard to be general on this one. Defining a “compass” is a journey in itself. This is one of the things that founders should figure out as quickly as possible — before the fall into the abyss.
What are the implications of choosing the right “compass” for your startup? Suddenly, many things become very clear. Everyone in the company knows what is the objective of the company — as defined by the key growth metric. Any decision taken by the company should be “reflected” in the key growth metric. If the key growth metric is not growing, it’s easy to move down the pyramid and check other numbers that influence it. When looking for funding, in you pitch deck one can focus on one slide online — “hockey stick” growth in the key growth metric.
Early stage founders show a tendency to worry about too many metrics at a time — it is usually a sign that they haven’t found their “compass” yet. Finding it can be a lenghty process. It takes time to understand the
“Client-Problem-Solution” paradigm before a well-define key growth metric is found.
If you already found your “compass”, congratulations some things might get easier from now. If you are still searching, feel free to reach out — after going through this with +20 of our portfolio companies I might have some feedback.