The Four Essential Startup KPIs
Key Performance Indicators (KPIs) provide valuable insight into a company's performance and are used to track progress and evaluate success. But too often, founders don’t know where to begin. Startups are resource constrained—be it by time or money—and while KPI recommendations abound, too few are matched to a founder’s and startup’s maturity. With so many KPI options to choose from, it’s hard to know where to begin.
I work with startups who are in “survival mode.” To them, and to you, I say there are only four metrics that matter in the beginning:
How fast are we growing?
How much does our growth cost?
What’s our burn?
What’s our cash balance?
I’ll break them down below, but if you’re struggling to keep up with the latest hot metrics and startup jargon—as you growth-hack your pivot to a frothy unicorn status or however the buzzwords de jour describe your business stage—just remember, while running a business may be difficult, tracking its progress shouldn’t be.
The highest need above all others when you’re launching or seeing the first evidence of scalability is to understand the money coming in and the money going out, so if all else fails, start by tracking the following:
1. Measuring Growth
One of the most vital metrics is growth. It can gauge product-market fit (ooh, a buzzword), and begin to tell you if the business is sustainable. While you can grow users, customers, employees, funding, etc. I recommend tracking revenue, and specifically, revenue by essential building blocks:
How much are we selling?
To whom are we selling it?
How often are they buying?
If you can only track revenue, that’s okay, but the composition of your revenue may be more actionable—e.g., growing one of those three while keeping the other two constant can still drive growth so you can break the tasks down into discrete exercises that when combined, generate sizable returns.
For some startups, growing too fast can be just as risky as not growing fast enough, therefore, tracking your growth, and its impact on the organization can help you maintain service levels, and overall business health.
2. Cost of Growth
Right behind growth should be the cost of growth. It’s not the whole spend story but it is another critical survival metric because you need to know if you’re spending more to capture customers than they are generating in revenue.
Nuances abound in attributing revenue to specific campaigns, and where you aren’t resource constrained, you should follow this sound advice to make your marketing more efficient. The KPI to get you started comes down to a basic return on ad spend (or ROAS). ROAS is revenue divided by ad spend and needs to be greater than 1 so every dollar spent on advertising is generating that dollar back, and then some.
ROAS isn’t enough to drive marketing efficiencies, but it can guide your organization to action:
If ROAS is too low, you can focus on generating more revenue, or reducing ad spend.
IF ROAS is high enough, the savings can absorb other fixed operating expenses, or you can test new marketing strategies.
The point is, ROAS gives you visibility into your customer acquisition strategy and visibility leads to control.
3. Burn Rate
Your ad spend is only part of your burn, which is why we track the entirety of our burn separately. While the cost of growth can help with top line efficiency (how well we’re driving growth), burn measures how well we’re doing, well, everywhere! Burn measures the rate at which a company is spending its cash and is essential to the company’s sustainability in the long term.
You can calculate burn by adding your costs of sales to your fixed operating expenses (e.g., sales/marketing, people/benefits, rent/overhead). You can also back into it by comparing the difference in this month’s cash balance vs. last month’s cash balance.
Whether you divide by income or divide by starting capital to calculate a true “rate” is less important than the knowledge of where the money is going and how quickly. In the past, startups sought to keep about 12 months of cash on hand, though given the startup landscape in 2023, founders should be looking to stretch their cash to 18-24 months, requiring higher income or more controlled spend, which brings us to our last metric.
4. Cash
The “cash is king” colloquialism was coined in financial investment circles, but the saying has plenty of merit elsewhere. And for startups, it’s crucial. For all companies, the balance of available funds determines whether they can invest in future growth or need to scale back operations, and for startups where cash is almost always limited, you need to be even smarter about spend.
It’s not a difficult metric to track and can be combined with other metrics for greater insight. For example, by dividing cash by your monthly burn, you can instantly tell how much time is left before the lights go out. Monthly tracking of months of cash on hand creates a sense of urgency for a startup. And, if you find that with every passing month, your months of cash on hand stays the same or increases, it’s not only something worth celebrating, but it can give founders the confidence to redeploy some of those funds to growth!
There are hundreds of KPIs a business can track. As a management team and by function, KPIs are essential for measuring success and for identifying areas that need urgent attention, but in a resource-constrained startup where you may not be able to track every imaginable KPI, I’ve found that these four have never let me down.