New founders series - Startup metrics you need to know, now
Let us take the worry away so you get some sleep at night. Read on for the key startup metrics you need to know – and how to get the support you need right from the start.
1. First of all – what are startup metrics?
Like any industry jargon, as a new founder you might think you need to know all the lingo straight away. But to be honest, we think it’s more important you focus on your business, instead of wasting hours googling what CAC and LTV are*.
Essentially, startup metrics are what you need to measure to keep things running, and keep investors happy.
*don’t worry – we’ll explain!
You’ll always need the traditional profit and loss and balance sheet financials to run your business, but the startup metrics here will highlight any problems and opportunities early enough to do something about them.
Key Startup Metrics:
Startup financials: cash burn, cash runway, recurring revenue
Customer success: churn, customer acquisition cost (CAC)
Growth & expansion: customer lifetime value (LTV)
Now let’s delve a little deeper in plain language, and go into more detail on all of the following in this free handy guide.
2. Cash burn
AKA ‘burn rate’ or even just ‘burn’, is how fast you’re spending your cash.
It’s especially important in early stage startups, as you don’t want to fail because you ran out of cash and didn’t leave enough time to raise funds or reduce expenses. Cash burn is usually expressed as a monthly amount, and the simplest way to think about and calculate your monthly cash burn is to look at the most recent month’s spend, and consider whether it’s a ‘normal’ month spend going forward.
Question to ask yourself: If we keep spending at the current rate of $x / month, how long can we last?
3. Cash runway
Cash runway is how much time you have left (usually in months) before you run out of money. A hugely important metric in startup land, where founders are often operating at a net loss while in development or set up mode.
Question to ask yourself: How many months can we last based on the current cash burn rate, assuming expenses etc remain similar?
4. Recurring revenue
You may not currently have recurring revenue, but if you do you need to track it.
Investors love businesses with recurring revenue because they see it as buying into a ‘guaranteed’ future revenue stream. You can track monthly recurring revenue (MRR) – typical for SaaS startups – or annual recurring revenue (ARR) if your business model is based on larger dollar amounts instead of high sales volumes.
Both of these track revenue that recurs (e.g. subscriptions/monthly fees), so exclude any one off type customer set up fees.
Question to ask yourself: Which of our products and services are recurring rather than one-off revenues?
5. Churn
If a customer signs up for a subscription and then leaves you later on – that’s churn.
Don’t be offended, just be realistic! (how many times have you jumped ship to another streaming service for example?). It can be measured in terms of dollar churn, or customer churn, e.g, a loss of two customers last month and $200 in monthly subscriptions. It’s worth noting that if you know your churn rate, you’ll know your retention rate too, bonus! If your churn rate is 2% of customers monthly, you’re retaining 98% of your customers monthly.
If a customer signs up for a subscription and then leaves you later on – that’s churn.
Don’t be offended, just be realistic! (how many times have you jumped ship to another streaming service for example?). It can be measured in terms of dollar churn, or customer churn, e.g, a loss of two customers last month and $200 in monthly subscriptions. It’s worth noting that if you know your churn rate, you’ll know your retention rate too, bonus! If your churn rate is 2% of customers monthly, you’re retaining 98% of your customers monthly.
Question to ask yourself: Have there been any ‘spikes’ in our churn over the last 6 months, and if so what may have caused them?
5. Customer acquisition cost (CAC)
Yep, this is the cost of getting a new customer. Especially crucial for subscription-based startups, it’s the staff and marketing costs of acquiring new customers. CAC is an upfront cost and you only receive the payback for it over time, so it’s important to include in metric monitoring.
Questions to ask yourself: Am I ready to hit the growth accelerator and do I know the CAC so I can raise enough capital? Which activity/channel is most effective for generating new business?
5. Customer lifetime value (LTV)
Even though it seems a long way away, the LTV is a prediction of net profit from the customer throughout your entire relationship with them. This will help determine the long-term value of the customer, and is mainly important so you know how much you can afford to spend on CAC. Keep in mind LTV is a tool to understanding, rather than a strategy. It’s also useful to determine how you are treating customers, as you can check the reasons for leaving.
Questions to ask yourself: Am I covering upfront acquisition costs with profits, so I know I have a long term sustainable business? Are people leaving my business because they don’t like my product/service, or because of my customer service?
If it’s all still a little unclear and that founder’s brain of yours is spinning in your head then repeat after us – you do not need to be the expert on startup metrics. In our next article we will give you the simple maths to calculate these metrics, accelerate that growth and help you sleep easy at night.
At Standard Ledger we pride ourselves on being a ‘safe space’ for you to ask as many questions as you like with no judgement. We also run (free) workshops on startup metrics online or at coworking spaces in Sydney, Melbourne and sometimes in other states too. Follow us on Eventbrite so you don’t miss out.
Before you go, just a reminder that this isn’t personal advice. If you want that or help with metrics or financial planning for your startup, book a call and we can chat about what you need.
Let’s translate these numbers into narratives of success together!
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