Authors: Dr. Bastian Halecker, Giorgio De Papo, Jonas C. Blauth
Metrics, ratios, KPIs. These terms are usually related to the controlling department of bigger firms, however they are relevant for startups and VCs, too. This article summarizes the different approaches of CEOs, founders and venture capitalists analysing, which specific KPIs are employed in different situations.
Startups are usually in an early development stage and still searching for the right business model. For this reason they aim to build a portfolio of KPI’s including marketing, sales, product, user-related metrics and so on. Their starting idea might change often during this early stage. This is why they have to be flexible, react fast to external influences and be able to adjust to market changes. To establish a business model, startups should develop by testing different hypothesis employing different KPIs. With the many uncertainties that they face, it makes no sense to focus on one specific metric, but it’s important to be flexible in order to recognize opportunities in different areas. A wide range of KPI’s increases therefore the chance to find relevant information that is unknown in the beginning and which might be the base for the later development.
In comparison, corporates don’t need to be as flexible, since they have a strict plan and strategy to follow. For this reason they focus on a tighter set of KPI’s. In their case it makes sense to prioritize financial metrics. Thanks to past accounting data, they are able to build realistic expectations of future financial performance. Startups, however, suffer from huge positive and negative fluctuations. Financial KPIs play therefore a subordinate role for them.
The startup’s focus is more on metrics involving a successful product-market- fit, targeting the customer’s utility. As shown in Table 1, typical startup KPIs are therefore e.g. Customer Acquisition Costs (CAC), Retention Rate, Churn. Moreover, as a startup founder crucial KPIs are Burn Rate, which represents the rate to finance overhead before generating positive cashflow, Conversion Rate and customer Lifetime Value (LFV). In order to invest the right amount in the customer relationship, it is fundamental to know how long the customer LFV is. The main two question for startups are therefore how much an average customer costs and how profitable he is during his LFV span.
While founders concentrate mainly on the startup’s growth than its profitability, VCs try to recognize when the business model will start being beneficial. Usually startup founders think in terms of turnover, amount of customers and so on. VCs and investors support the founders by helping them define KPIs for it, but are prone to give a look at financial metrics. The reason for it is that VCs can’t continue investing in the startup forever and are financially under pressure.
In conclusion, the choice of specific KPIs depends from the company’s aim. A startup, that initially just wants to grow, aims to build a customer base. The KPIs are therefore customer-related. VCs and corporates, on the other hand, are mainly interested in the profitability of the business. For this reason the focus is on finance-related metrics.
About the authors:
Jonas C. Blauth is Advisor & Co-Founder at Service Partner ONE GmbH and Project Manager of Start-Up Tour Berlin.
Dr. Bastian Halecker is the CEO of Nestim – A company that match entrepreneurs, managers and ecosystems to create innovations at the core of the digital age.