There are many different ways to analyze a startup — understanding its product-market fit, assessing core competencies, identifying competitive gaps, etc. But quantifying a startup’s goals and understanding how it tracks against its core objectives and goals comes down to a handful of metrics that can be identified according the business. We call these metrics key performance indicators, or “KPIs” for short.
Tracking KPIs is crucial for founders, not just because it helps them better understand how their business is performing and what it would take to scale, but also because it can play a major role in attracting investment from VCs — many of whom are highly data-oriented. Here, we’ll explore the importance of KPIs for startups, provide some KPIs that startups should consider measuring, and explain how founders can go about tracking KPIs.
What are KPIs?
Again, KPIs are metrics that relate to how a startup is progressing towards its high-level objectives and key results (“OKRs”). Examples of common KPIs include customer acquisition cost (CAC), daily active users (DAUs), and monthly burn rate — but more on these later.
KPIs should not be conflated with just any business performance metric. Typically, startups will track hundreds of datapoints to gain insight into the performance of various business functions (sales, marketing, etc.). A combination of these datapoints will often role up into a single KPI, which is measured over a particular period of time. For example, a KPI for the marketing function may be to lower customer acquisition cost by 10% in a business quarter. The marketing team may then track a variety of metrics (e.g., marketing spend, net new customers, return on ad spend, etc.), to determine CAC and measure how the team is tracking against that goal.
Keep in mind, KPIs can either be quantitative — again, based on a percentage or dollar amount change, for example — or boolean. In the case of the latter, a KPI wouldn’t track against a scale but rather would be binary, meaning they only have two possible results: achieved or not achieved. An example of this might be shipping a new landing page as part of an objective to increase adoption of a particular feature or product. Rather than setting a performance metric for the yet-to-be-launched page, you might opt to create a boolean KPI where success is simply determined by getting the page live.
In general, numeric KPIs tend to be more prevalent than boolean KPIs, mostly because they offer richer business insights, allowing you to track progress, create benchmarks, and analyze your performance on a more granular level.
Why do KPIs matter?
KPIs allow a founder to understand and explain their business, as well as chart its current trajectory. Additionally, having a grasp on the key metrics related to the business allows founders to make more effective decisions. For example, if a startup releases a new design for its app and notices an increase in daily active users (DAUs) month-over-month, it might indicate the business should invest more in improving UX.
KPIs are also important to would-be investors, who often require an in-depth look at these metrics to determine if the business will be able to execute on its stated mission. VCs want founders to demonstrate they have a deep understanding of the core drivers of the business so they can work to improve them.
A business that doesn’t track KPIs risks operating on instinct or personal preference, which could cause the startup to make uninformed decisions rather than strategic ones backed by data.
How to pick the right KPIs to track
The “right” KPIs to track depend on the nature of the business. However, it helps to bucket KPIs into a few different categories so founders can understand their value and determine the right metrics to track accordingly.
Bernard Marr, a best-selling author and thought leader in the realms of tech and business, thinks about KPIs in six different categories: opportunity, income, customer acquisition, funding health, customer engagement, and loyalty. From there, you can break down each category further to start thinking about the more granular metrics that could inform a higher-level KPI measurement. Here are examples of particular metrics that might fall into each KPI category:
- Opportunity: TAM and market size
- Income: monthly recurring revenue (MRR), annual recurring revenue (ARR), and profit margin
- Customer acquistion: customer acquisition cost (CAC) and churn
- Funding health: burn rate and runway
- Customer engagement: active users
- Loyalty: retention rate and net promoter score (NPS)
While all categories are important to track, there might be some that are more meaningful depending on the type and stage of the business. It’s important for founders to think critically about what will make their business succeed, and base their KPIs around that. For example, an early-stage company will likely have different KPIs than an enterprise organization. When the company is still searching for product-market fit, they may weigh DAUs more heavily than a longer-term metric like customer lifetime value (LTV). Once the business finds product-market fit, they can then focus on optimizing unit economics or focusing on metrics like LTV, CAC, and CAC to LTV ratio.
Additionally, note which KPIs are lagging indicators of success as opposed to leading indicators. Lagging indicators measure something that already happened (e.g., MRR), whereas leading indicators inform you where the business may be headed (e.g., conversion rates).
Finally, don’t overwhelm yourself with datapoints. Focus on fewer high-quality KPIs to measure each OKR — maybe three or four. More than that and it becomes difficult to stay focused on what the priority is.
How to track KPIs
Understanding which KPIs to track and actually tracking them are two entirely different workflows. The latter requires a software stack that provides a birds-eye-view of all the data related to a business’s performance. This may mean setting up integrations (because different KPIs are tracked via different platforms), custom dashboards, and automated reports from tools like Salesforce, Google Analytics, and Metabase.
It’s also helpful to visualize key metrics, as people retain visuals better than numbers. A good system will automatically pull all relevant KPIs upon request and at necessary intervals (monthly, quarterly, annually), make it easy to share the KPIs with stakeholders, and iterate on those KPIs as business goals evolve. Consider creating a data analytics dashboard using your platform of choice — Amplitude, Metabase, Tableau are all good options. You can also keep it simple with a report built in Google’s Looker Studio. The key is to create an easy-to-use dashboard that you can leverage regularly to pull performance numbers and report on progress with minimal manual work each time.
Ongoing tracking can then take place in a simple Google spreadsheet, where team members can collaborate and update KPIs for the projects that they’re owning.
KPIs should be reviewed at a regular cadence to ensure they’re still measuring the factors that matter most to your business’s success. With some degree of rigor around determining and tracking KPIs, the path towards growth should become clearer. Then it’s simply a matter of execution.