As a venture capital firm, I have the privilege of reviewing numerous board decks from startups. While many of these decks are beautifully crafted with metrics that seem impressive at first glance, I often find myself feeling nervous about what I see. My preference is to see a screenshot of an internal dashboard, not something created specifically for the board. I believe that the real value of a board deck lies not in impressing the board, but in helping management track their own performance.
Why Metrics Matter
Metrics are crucial in business because they help drive decisions and inform strategy. Good metrics should be comparable across industries, comparative, readily understandable, and actionable. This means that you can compare a metric over time periods, groups of users or competitors. A good metric answers the question: "What will I do differently based on this information?"
Identifying Key Metrics
The most common financial metrics we ask companies to compare versus budget are:
- Gross revenue
- Cost of goods sold
- Gross profit
- Payroll expenses
- Net income (loss)
- Cash burn
- Available cash and remaining runway
For early-stage companies, the key metrics might center around activation, engagement, and retention. The product should serve users’ needs in such a way that they will continue to use it (and ideally, find life without it hard to imagine).
Non-Financial Metrics
We typically ask portfolio companies to report on the following non-financial metrics:
- Universal metrics:
- Headcount
- Number of users/customers
- Customer acquisition cost (CAC)
- Customer lifetime value (CLV)
- Churn percentage
- Monthly recurring revenue (MRR)
- Sales pipeline and conversion to sales percentage
- Metrics for certain categories of startups:
- Company-specific KPIs
- App store ratings
- Social media engagement
Using Metrics Effectively
Metrics are not just about tracking numbers; they should inform strategy and decision-making. A management team that uses rigorously logical metrics is more likely to succeed. I have found that the first month after a VC invests in a company, they are getting to know the management team better. Implementing and using rigorous metrics is one of the best predictors of a company’s success.
Conclusion
Metrics are essential in business because they help drive decisions and inform strategy. By identifying key financial and non-financial metrics, companies can track their performance and make data-driven decisions. A management team that uses rigorously logical metrics is more likely to succeed. As venture capital firms, we should prioritize working with companies that have a strong focus on metrics and use them effectively.
About the Author
David Teten is a founder of Versatile VC and writes periodically at tenet.com and @dteten.