Introduction
Startups have a different business model compared to more traditional companies. A startup develops an innovative product or service that revolutionizes existing markets. The startup ecosystem often integrates technology - here are some examples from a few specific verticals:
- FinTech: financial technology startups - for example, neolending, which is reinventing the way people finance themselves (in B2C) and their companies (B2B)
- AdTech: advertising technology startups for more relevant and automated ad targeting
- RetailTech: startups that do digital optimization of retail and mass distribution
- DeepTech: startups that explore the most innovative technologies
- AgTech: technology at the service of agriculture
- FoodTech: creating the food industry of tomorrow
- EdTech: online education
- PropTech: reinventing the real estate markets and business models
The innovative commercial nature of the offering of these startups explains the rapid profitability that some can achieve. These innovative companies start by being managed by small, multi-skilled teams in order to keep their payroll low and maintain ambitious margin and profitability targets. Their business strategy and management are primarily based on performance as measured by Key Performance Indicators (KPIs). These KPIs provide crucial information on the financial health of a startup (cash flow, profit, margin...), its commercial performance (sales volume, promotion, Product Market Fit, pricing...), and the acquisition of new customers (marketing, organic...), as well as the churn (or retention) of users.
These KPIs serve as a dashboard and provide a numerical measure of the progress a startup is making toward achieving its goals. For example, startups can measure the number of customer inquiries it receives each month, the number of leads it generates through their website, a payment made, or the marketing impact of an activity. Tracking these KPIs allows the startup to identify areas for improvement and make the necessary changes to achieve its performance goals.
Acquisition and retention KPIs
Customer acquisition cost – CAC
CAC (Customer Acquisition Cost) is a crucial metric for startups, as it is the rate based on the key marketing spend to acquire a new customer (organic spending and paid ads).
These key ratios are part of the strategic expense dashboard before sales. A CAC that is too high in relation to the activity and the estimated revenue or ARPU (Average revenue per user) should be avoided, as it would depreciate the company's profit margin. Also a CAC that is too high via paid acquisition channels can mean a poor Product Market Fit (PMF). The CAC varies according to the sector of activity, and therefore the amount of payment and orders.
Net promoter score - NPS
The Net Promoter Score is the most recommended indicator for a startup to keep an eye on. In the era of digital measurement of a company by users/customers outside the business, the NPS is a reliable business indicator to judge the activity of a startup whose product or service quality is not yet known. It is calculated from 100 to -100 summing up the opinions of "detractors" (scores from 0 to 6), "passives" (from 7 to 8), and "promoters" (from 9 to 10 - when asked if they would recommend the product to their friends or colleagues). The NPS is given by subtracting the number of detractors from the number of promoters divided by the number of responses, all multiplied by 100.
Customer churn rate — CCR
Customer churn rate (CCR) is a good indicator of customer loyalty. It follows the measure of customers who no longer purchase products or services and therefore does not increase sales for a given cohort. The churn rate is an analytic measurement best used for service businesses. Business-as-a-Service is exploding in the economy and is becoming more and more prevalent in the era of cloud computing. The bigger the startup, the lower the churn indicator should be - because the more the startup evolves and advances over time, the more its PMF and its relevance to customers must be verified.
Monthly active users - MAU
Startups are advised to periodically check the number of monthly active users (MAU). This is the number of monthly active users on a startup's service platform or e-commerce site. This number allows us to analyze the performance of various operations:
- Marketing;
- Promotional and commercial;
- Product updates.
When correlated with these operations, the user activity per month indicator can identify the traffic created, or conversely the negative effect of a specific change.
K-factor
K-factor is a marketing strategy that serves to increase the number of customers of a company through the reputation generated by word of mouth. This organic channel is an excellent lever for startups. The K-factor strategy allows startups to promote their product or service at the lowest cost. The K-factor can be defined as the ratio between the number of customers acquired through word of mouth and the number of existing customers. The higher the K-factor, the higher the acquisition rate of new customers. The K-factor strategy is very effective in creating the best possible NPS. K-factor strategies are usually carried out via online marketing and advertising campaigns.
Growth and sales KPIs
Average order size
Average order size is the average amount of an order, payment, purchase, or subscription. In the first two cases, we are more concerned with an indicator specific to online merchants and resellers on the marketplace. In the case of purchase or subscription, we are more specifically concerned with SaaS or mobile application publishers.
Monthly recurring revenue — MRR
Monthly recurring revenue is the revenue generated by the sale of recurring services and products (subscriptions, exclusive content, boxes, premium access, etc.). The MRR is calculated by multiplying the ARPU (Average revenue per user) by the MAU (Monthly active user). The MRR is used to see the evolution of various cumulative KPIs such as gross sales, retention rate, and number of active users, but also to ensure that products and services meet users' expectations thanks to the PMF (Product Market Fit). The MRR is also an important indicator that helps the investors to visualize the financial health of the company in the long term, and follow the evolution of sales. It helps them to predict the profitability of the company.
Annual recurring revenue – ARR
The annual recurring revenue (ARR) is equivalent to the MRR multiplied by 12 (the number of months in a year). It is the same financial indicator, but annualized.
Average revenue per user (ARPU)
ARPU is the average revenue generated by a single customer or user over a specific period of time. How to calculate the average revenue per user? Depending on the period defined, you can divide the MRR or the ARR by the number of active users over the same period.
ARPU is not just a vanity metric. Intelligently segmented, it allows you to isolate an efficient pricing strategy thanks to a correlation with recurring revenues (MRR or ARR). Use ARPU in your performance dashboard - it is also a method to analyze the efficiency of an activity and of a cross-selling and upselling operation.
Gross sales
The value among financial and revenue indicators that serves as a volumetric compass is the calculation of gross sales. Gross sales are the total amount of revenue generated by a startup. This KPI measure is important because it allows you to follow the evolution and the relevance of a commercial strategy as well as the rate of achievement of the objectives set by the company.
Financial and cash management KPIs
Runway
The runway is the life expectancy of a company. It is the length of time during which a company can assume all its fixed costs (in particular the payroll) with the amount of cash on hand at the time without additional financing. How long can the startup last before it has a negative cash balance? The runway is calculated by dividing the total cash volume by the burn rate (monthly cash volume spent). For example, you have €600k of capital, and you have to spend €60k per month - the company's runway will therefore be 10 months.
Burn rate
The burn rate is the amount of cash used monthly for the current management of the business. Based on the starting capital, how much does the business need to live and develop its activity? The higher the burn rate, the shorter the runway is likely to be.
This KPI information is important to analyze for investors who want to evaluate the viability of a company. The burn rate is fundamental for startups, as it is a reliable way to understand if the company can survive financially long-term. It can be calculated by comparing net profit to net cash, or by developing the cost of operating activities and equity financing. It is one of the most important financial indicators for investors, as it gives them an idea of how long their investment will last before they have to inject more funds.
The product KPI
Product Market Fit - PMF
Product Market Fit (PMF) is one of the preliminary analytical foundations for any company seeking to address a market with a product or service. It is the alignment between a value proposition and its application with the current level of demand in a market.
How can you tell if a company has a good PMF? There are multiple indexes: we can consider that the NPS is one, and that the churn rate is another one. The PMF can be calculated in a similar way as the NPS - thanks to periodic surveys. We offer 3 possible answers to the question "How would you be if the offer no longer existed?”
- Totally indifferent
- Slightly disappointed
- Very disappointed
Then divide the number of "Very Disappointed" responses by the total number of responses by 100.
