These days, startups are often launched with little more than a great idea and some sweat equity.
Financials in a startup’s business plan typically include projections of how many customers it expects to attract, how much it will spend and how much revenue and profit that will lead to.
Though the plan tends to differ greatly from where the startup actually is in its early days, it’s often still sufficient to secure early stage Angel support.
Within a few weeks or months of launching, most products – even the ones that fail – achieve at least some traction. Most products have some customers, some growth and some positive results.
Even if they are not at the volumes anticipated at the outset, early-stage results can provide entrepreneurs with a ‘founder’s high,’ which can distract from unfavourable variances from projections.
Add to that, entrepreneurs tend to be optimistic by nature, which makes the myth of sheer perseverance as the key to success all the more dangerous.
When growth doesn’t happen as quickly as expected, entrepreneurs attempting to quell concerns from Angel investors and board directors will often establish a dashboard that includes a set of key performance indicators (KPIs).
A common problem, however, is that these KPIs are often made up of vanity metrics, which can easily hide many sins.
“Vanity metrics: Good for feeling awesome. Bad for action.” – Tim Ferris
Vanity metrics are all those data points that make us feel good if they go up, but aren’t helpful in guiding decisions.They give entrepreneurs false positives on business performance, which is why the use of vanity metrics is often called success theatre.
Just because a startup can produce a chart that veers up and to the right does not mean it is a success.
How do you know that the changes you’ve made are related to the results you’re seeing? And how do you know that you are truly forming the right conclusions from those changes?
To answer these questions, startups must employ innovation accounting.
Innovative accounting enables startups to prove objectively that they are growing a sustainable business, allowing entrepreneurs to measure the impact of their efforts.
For a software-as-a-service (SaaS) company, a chart featuring vanity metrics may include: registered users; users who logged in once; users who activated an account; and active users.
With these types of metrics, you’ll see a traditional hockey stick graph, which veers up and to the right.
The alternative to vanity metrics, as described by Eric Ries in The Lean Startup, are actionable metrics. These should be used to judge business progress and learning milestones.
Thankfully, there is an informal system in place for converting vanity metrics to corresponding actionable metrics.
Here’s how some of the more common ones compare:
|Vanity Metric||Actionable Metric|
|Trial Users||Converting Users|
|Page Views||Conversion Rate|
|Leads in Sales Funnel||Cohort Analysis of Sales Funnel|
|Total Customers Acquired||Customer Acquisition Cost (CAC)|
|Monthly Revenue per Customer||Customer Lifetime Value/CAC|
Actionable metrics link directly to business success and speak to customer behaviour.
Simply declaring you acquired more customers is an act of success theatre. Unless you know how much you paid for each one and how much they’re worth, you don’t have useful business metrics. As far as you know, you could be growing a huge customer base and going broke at the same time.
Put in the extra effort early to ensure you are tracking metrics that tell you things you actually need to know about your business and your marketing.
The end result will be faster learning, more efficient resource utilization and a more successful business outcome.
Susan Richards is the co-founder of numbercrunch, an innovative company committed to providing innovative accounting support services to start-ups and SMEs.