MBA Mondays - Business 101 for startups by Fred Wilson

Building a company: Key Business Metrics

The past five MBA Mondays posts have been about accounting concepts, financial statements, and related issues. I don't know about all of you, but I'm a bit tired of that stuff. So I'm moving on to something a bit different.

Every business should have a set of metrics that it tracks on a regular basis. These metrics could include some of the accounting stuff we've been talking about like cash, revenues, profits, etc but it should not be limited to those kinds of metrics.

Early on when the company is developing its first product or service, those metrics might be related to product development like development resources, features completed, known bugs, etc. Once the product or service is launched, the metrics might shift to include customers, daily active users, churn, conversions from free trial to paid customer, etc.

As the business grows and develops, the amount of data you can collect and publish to your team grows. If you aren't careful, you can overwhelm your team with data.

It becomes very important to distill the business down to a handful of key business metrics. There are usually four to six metrics that will be sufficient to determine the overall health and growth trajectory of the business and it is best to focus the team on them.

Our portfolio company Meetup has learned to focus on successful Meetup groups. Those are Meetup groups that are active, meeting regularly, have growing memberships, and are paying fees to Meetup. Meetup could focus on other data sets like monthly unique visitors, new Meetup groups, total registered users, revenues, profits, cash. They collect that data and share it with the team. But the number one thing they look at it successful Meetup groups and that has worked well for them. It is their key business metric.

Sometimes the most important data on your business is the hardest to collect. Twitter knows that the total number of times all tweets have been viewed each day, month, or year is a critical measure of the overall reach of the network. But because so many of those tweets are viewed on third party services, web pages, apps, etc, it is very hard to collect that data. The Company is only now starting to measure them.

Most key business metrics will be drivers of revenues and growth but not all of them. Etsy is focusing a lot of effort on its customer service metrics, which are a cost center not a revenue driver. But the Company knows that customer service is critical to the health of the marketplace, so customer service metrics are key business metrics for them.

The management team should spend time talking about and selecting the key business metrics to focus on. They should collect the data on a regular basis, the more real-time the better in my opinion, and they should publish the key business metrics to the entire team.

I do not believe it makes any sense to segment who gets to see what business metrics in a company. Sales metrics should be shared with development. Customer service metrics should be shared with finance. And so on and so forth.

Some companies buy big screens and mount them on the walls around the office and publish the key business metrics on them so everyone can see them. I like that approach. But I also like sending out a regular email to the entire company with the key business metrics and how they are trending. And of course, I think these metrics should be shared with the Board and key investors.

When you publish financial projections (a topic for the coming weeks), you should include your projections or assumptions for key business metrics in the periods for which you are projection financial performance. Many of these metrics will be drivers of your projections but they are also helpful to establish the overall progress of the business over time.

It is a good idea to evaluate what your company's key business metrics should be from time to time. I like to suggest at least once a year, probably around the annual budgeting exercise (another topic for the coming week). It is expected that you will change some of these metrics every year as the business grows and develops. Don't just keep adding new ones, you should also subtract old ones that don't seem as useful anymore. Keep the total number of key business metrics you are tracking to a small enough number that most people on the team could recite them from memory. Less is more when it comes to key business metrics.

Tracking key business metrics is important for a bunch of reasons, but probably the most important reason is cultural. It helps to keep everyone on the same page, aligns people across the different parts of the business, and leads to a culture of success when you see the key business metrics moving in the right direction. It's critical to celebrate when a key business metrics reaches a new and important milestone. These kinds of things seem silly to some but are incredibly important to building a strong company culture that can work together and grow rapidly.

From the Comments

Tereza pointed out:

This is a really important post.

I've been part of businesses with identical business models but management chose to make them visible to all in one, and invisible in the other. The Visible To All metrics overwhelmingly outperformed the Hidden environment. Same core business.

It's important to distinguish between Leading and Lagging metrics. That's driving via looking thru the windshield versus the rear-view mirror.

Most accounting-based metrics are lagging, not leading. Need operational metrics to serve as Leading Indicators.

I suspect Etsy's customer service metrics are leading indicators for that business. The happier customers are, the more repeat purchases and higher average purchase.

...

I would also argue that lagging indicators are typically the standard
ones that everyone's using.

Identifying the leading indicators unique to your business can be a
source of massive competitive advantage.

I would possibly classify them as 'trade secret'.

And Greg Gentschev added:

All great points. My two cents: Try to avoid averaging any metric where there's significant heterogeneity. Lifetime customer value of $100 on average isn't very useful if half of customers are at $190 and half are at $10. So try hard to segment appropriately.

I also think the customer acquisition funnel is one of the most important things to keep tabs on. You have to understand where the growth bottleneck at any given time is. As you fix one bottleneck, another part of the process will become the critical constraint, and so on.