Do you know the most common reasons for failure of startups? CB Insights report (July 2016) based on 166 startups reveal some interesting insights including running out of runway and poor finance management as primary reasons. These startups could have survived had they implemented effective performance management system to keep their heads up. Running a startup is akin to successfully landing an aircraft. The pilot needs to have right information about length of the runway, visibility, height and should know when he should switch to fly by wire. A plethora of measures only adds to complexity and confusion. What is needed is a simple set of integrative financial and non-financial measures (leading not just lag) to avoid a crash.
What are the key financial aspects every startup must track? Do you know which lead measures can help you decide immediate corrective actions? The most important financial measures include revenue growth and revenue indicators such as bookings which your customer is obliged to pay over the course of your contract, billings which are collected in advance at the time of booking, and gross merchandise value of transactions. Another key element to be tracked is cash in the form of net cash burned as well as cash earned. Your startup could be a brilliant idea but wouldn’t be able to survive long enough to become profitable if you can’t manage cash efficiently. Due to this reason, it is equally important to monitor account payables and reduce pressure on your cash balance. As a startup, tracking the maximum earnings decline ratio for each quarter is the most effective signal to save the business before it drowns. Finally, as important as it is for your startup to build traction and deepen revenue streams, be aware of how much you’re spending to attract more customers. Monitor the customer acquisition cost as well as the customer acquisition payback period so that you don’t end up burning a hole in your pocket.
Do you know the non-financial metrics that would help you in making better sense of the financial measures? The Pirate Metrics devised by McClure is a powerful customer-centric tool that could be used. Rate of Acquisition, Activation, Retention, Referrals, and Revenue are good measures of dynamism of your startup. Measure customers acquired through discounts as well as freebies as these tell you about your customer acquisition. Knowing the percentage of active users will provide better insight into your business performance by eliminating the accidental one time users or first time users. Percentage of orders that required rework, the delivery time per order and percentage of deliveries achieved on time are key measures you must have to capture operational excellence. How does your business measure customer satisfaction and loyalty? The net promoter score is an excellent tool to gauge customer satisfaction. It measures how likely it is that your customers would recommend your product or service to others. Make sure you bean count time to hire, cost to hire and quality of hire to know how good your HR team is supporting your startup dreams.
Finally, remember the measurement must be to drive managerial effectiveness, ownership and accountability at different levels. Remember to keep your cost of running the measurement system low. What you do not need for a startup is a superfine measurement system that comes with a huge cost of collecting, collating and making sense of data. What you need is simple guideposts that tell you whether your direction is right and the speed is right. Keep it simple and stupid (KISS!!).
Aishwarya Nair, Junior Consultant (Finance) and Sai Vinoth T R, Asst Consultant (Sales and Marketing)