StartupNorth

Category: Metrics

  • Vanity Celebrations

    [Editor’s Note: This is a guest post by Brydon Gilliss  founded the shared office space ThreeFortyNine in Guelph where he plays with Startupify.Me, Ontario Startup Train and 20 Skaters. A serial entrepreneur and fervent community builder, he’s also busy organizing a train-full of founders for this summer’s International Startup Festival.]

    The moments we choose to celebrate say a lot about what we consider important. They’re a proxy for the metrics we value, because we’re signalling to others by their very celebration. And yet, I’ve always been of the belief that startups tend to celebrate the wrong things.

    If that’s true, what signals are we sending? We celebrate product launches, government grant acceptance, fundraising, winning pitch contests, and so on. Too often, these are the vanity metrics of our startup ecosystem.

    Of course, some of these events are worthy of celebration. A grant lets us live to fight another day; a winning pitch might drive sales or help us to hire a key employee. But they would be way down on my list, personally, if my goal was to build a real business. Let’s stop concentrating on celebrating events like taking on debt or winning what is often little more than a beauty contest—and focus instead on what we should celebrate but rarely do.

    At ThreeFortyNine, we celebrate the achievements that matter to the business model. Consider, for example, the first time you sell something to a complete stranger. That’s worth celebrating because it’s the first sign your business might have legs of its own. In our Founder’s Club events, we celebrate selling our first train tickets to strangers; Foldigo celebrated its first-ever sale to a stranger. Our plan is to build up this list and move it into our monthly socials.

    We’re building our Startupify.Me program around the concept that talented developers stepping into startup life need options. Incubators, accelerators and government grant programs funnel them into a single, traditional path thereby discouraging experimentation. We want our cohort to have the option to create a lifestyle business or a even a small, local business—if they choose. Of course, any of them can still try and swing for the fences, but they have all options in front of them.

    “We didn’t get to where we are today thanks to policy makers – but thanks to the appetite for risks and errors of a certain class of people we need to encourage, protect, and respect” – Nassim Taleb

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    Only in recent years have books like Lean Analytics begun to draw out the real risks of obsessing over feel-good data that does little for the business—so-called “vanity metrics”. There’s a very real danger if a young entrepreneur believes that success comes in the form of taking on debt, winning a pitch contest and launching a product. Those may be required for some businesses but they shouldn’t be misconstrued as success.

    Part of the challenge here is the proliferation of what I call success turnstiles in our ecosystem. These are entities whose prime motivation is to funnel as many businesses as possible through their turnstile. It’s a pure numbers game for them as they chase their success metrics. These entities tend to be government funded and these success metrics are defined by bureaucrats and can be tracked up the organizational hierarchy to a speech-writer’s desk.

    We need to lead real conversations about what success is because it comes in many shapes and forms. Advocates of this more mindful form of celebration include Jason Cohen imploring founders to get 150 customers instead of 1000 fans and Rob Walling helping startups to start, and stay, small.

    Here’s an initial list of milestones and accomplishments worth celebrating to get you started.

    • Performed 30 interviews with real potential users.
    • First customer acquired.
    • First customer acquired and you have no idea where they came from.
    • Covering your monthly personal costs.
    • Identifying the first product feature a potential customer will pay cash for.

    Which vanity metrics need to stop being celebrated? What do we need to celebrate more?

  • Aim for your next valuation

    CC-BY-ND-20 Some rights reserved by Alex Schwab
    AttributionNo Derivative Works Some rights reserved by Alex Schwab

    “Ain’t no need to watch where I’m goin’; just need to know where I’ve been.” Mater in Pixar’s Cars

    This is wrong. But it is the behaviour that a lot of founders execute on after raising money.

    I’ve been thinking a lot about Venture Math, Valuation and Accretive Milestones and whiners. I was struck at how many entrepreneurs seem to be working towards the post-money valuation of their last round of financing. I think this is wrong. You should aim high. Higher than the post-money of your last round. You should be acting like the pre-money for your next round. That is the only way you will drive the necessary milestones for the next raise.

    Skip Level

    Let’s make a few assumptions.

    You are raising $1MM on a $4MM pre-money valuation. This gives you a post-money valuation of $5MM. If you subscribe to 2x valuation as the floor for the next round. This means that you need to start behaving like your company is worth at a minimum $10mm. That’s right, a minimum of 2x your post valuation. You should be targeting >2.5x, so in our example you need to start acting like a company that is valued at $12.5MM.

    Your behaviour and decisions need to reflect milestones necessary to raise your next round of capital. Not the round you just closed.

    “The art of raising a round it to raise enough money to get to a significant milestone, and not too much money taking too much dilution too soon. So how do you define the milestones.” – David Crow

    This is incredibly difficult. Because the balance is crucial to the long term success of the company, getting it wrong and you’ve raised too much money you will be diluted, but you might have enough money to change direction and try again. If you aren’t behaving like the end point has changed, the company will be executing on goals that are too small to raise the next round.

    Don’t aim for the Net Present Value milestones. You’ve already raised money to achieve those. Start setting milestones for your future value. And start delivering against those.

  • Fundraising, Valuation and Accretive Milestones

    CC-BY-ND Some rights reserved by HappyTramp87
    AttributionNo Derivative Works Some rights reserved by HappyTramp87

    I keep having a similar conversation with early stage entrepreneurs about fundraising and valuation. “Do you think a $1.5MM valuation is good?” “How much should I be raising?’ Well, it depends.

    I’m finding more and more, the conversation about valuation is one that resembles not being able to see the forest because of the trees. Early stage entrepreneurs tend to fixate on valuation and assume product is the biggest risk at the seed stage thus defining product launch metrics as key metrics. Often, valuation and risk mitigation are tied together. And the milestones or traction metrics required to mitigate risk can help establish valuation. 

    Valuation

    Fortunately, valuation is a topic that others have covered. Nivi and Naval, on VentureHacks, have provided incredible insight into early stage fundraising over the past 5 or 6 years. The advice is often summarized, “as much as possible is especially wise for founders who aren’t experienced at developing and executing operating plans”. The translation means that founders see rounds of seed stage companies raising $4.2MM at what must be a huge valuation.

     “‘As much as possible while keeping your dilution under 20%, preferably under 15%, and, even better, under 10%.’ ” – Nivi

    You can make some basic assumptions about the valuation. Most seed stage companies should be looking keep dilution in the 15-20% range. The specifics will be determined in fundraising but you can start to do some back of the napkin estimates:

    You start to see a range for how much a company will raise at what valuation. The numbers aren’t set in stone but they provide a framework for estimating the amount valuation. As Nivi points out the difference between a seed round and “a Series A which might have 30%-55% dilution. (20%-40% of the dilution goes to investors and 10%-15% goes to the option pool)”. The more you raise early, the more dilution you can expect. The goal becomes managing the different risks associated with startup. You also see why raising debt early, which allows companies and entrepreneurs to delay valuation until certain accretive milestones, is attractive.

    “The worst thing a seed-stage company can do is raise too little money and only reach part way to a milestone.” – Chris Dixon

    So given the back of the napkin dilution terms, what are the milestones that you will need to hit in order to raise the next round.

    Raising the next round

    So you’ve raised a round, how much should you raise at the next round?

    I like the rule of thumb that Chris Dixon uses. “I would say a successful Series A is one where good VCs invest at a pre-money that is at least twice the post-money of the seed round.” The expectation is that companies are roughly going to double their valuation at each raise. This isn’t to say that a 2x increase in value is your target, it’s the minimum, the floor. The art of raising a round it to raise enough money to get to a significant milestone, and not too much money taking too much dilution too soon. So how do you define the milestones. The milestones

    “partly determined by market conditions and partly by the nature of your startup. Knowing market conditions means knowing which VCs are currently aggressively investing, at what valuations, in what sectors, and how various milestones are being perceived.” – Chris Dixon

    So part of the market conditions, i.e., raising money in Canada is different than raising money than in Silicon Valley, New York , Tel Aviv. You are measured against your peers, and this might be defined by geography of the company or the VC. Being connected with other companies, advisors and investors can help provide insight in to the fundraising environment. The second part is determined by the nature of your startup, but generally expressed as measures of traction. We’ve talked a lot about getting traction and what traction looks like to a VC.

    “The biggest mistake founders make is thinking that building a product by itself will be perceived as an accretive milestone. Building a product is only accretive in cases where there is significant technical risk – e.g. you are building a new search engine or semiconductor.” Chris Dixon

    Entrepreneurs tend to focus on the product early. This is usually because the product is something that entrepreneurs can directly affect. But the product risk, is may not be the  biggest risk that entrepreneurs need to mitigate early. The trick is figuring out which risk you need to eliminate to satisfy potential investors. And you can try to figure this out yourself, but I like to see entrepreneurs engage investors and other founders to get their opinion. The discussion usually is a combination of what other startups are seeing in the market place as milestones from investors (yay, market place data). Then you can work backwards the necessary resources and burn rate to reach those milestones.

    Thoughts?

    Additional Reading

  • SaaS Metrics: The Ultimate Guide to Building a Business

    This post is a recap from a how-to created by Mark MacLeod . I feature some of the most impressive startup strategies we encounter at StartupPlays and share them free, here at Startupnorth.ca. Enjoy.

    This guide is available in an interactive how to format Free at StartupPlays.com – Get it here

    The number one focus of Mark’s investment and advisory work is SaaS companies. There are lots of reasons to focus on this segment. For one, it’s large ($21B and growing at 20% per year). In addition, it lends itself well to (metrics) and is great for investors because of the visibility and predictability that the best SaaS businesses generate.

    The SaaS Terminology Cheat Sheet:

    AARRR: A pirate war cry or more importantly, an acronym coined by Dave McClure to summarize the flow of SaaS users from first activation to monetization and referral.

    Activation: The first time someone uses your service.

    Acquisition: A new user sign up. This does not necessarily mean a paid customer. It means a new user on a free trial or permanently free version. If you don’t have a free trial or free product and the only way for someone to use your product is to pay then acquisition for you is a new paid customer. In this series “user” will refer to people that don’t pay and “customers” will be people that do pay.

    ARPU: Average Revenue Per User: Total revenue / # of paying customers.

    CAC: Customer Acquisition Cost. Total costs of customer acquisition / # of new customers acquired. This should be calculated both for gross new customers and net new. Net new is net of customers that you lost in the period.

    Churn: The % of users / customers that abandon the service over time. This can be measured weekly, monthly, quarterly, etc. You will want to measure churn for users and churn for customers (assuming you have a free trial or freemium product).

    • Customer churn: % of paying customers that cancel their subscription.
    • User churn: % of free users that stop using the service.

    CLTV: Customer Lifetime Value. The expected total revenue from a customer over their lifetime less the cost of generating that revenue less the cost to acquire that customer.

    Cohort: Also called cohort analysis or class analysis. A cohort is a group of users that are grouped together based on a common attribute. That could be the month they signed up, the source through which you acquired them, the method in which they use your service (web vs. mobile vs. desktop app), etc. Say, you’re looking at cohorts based on month of sign up. You can then look at usage and monetization patterns for those users over time. For example all users signing up in January are a cohort. You can then look at the % of them that use, subscribe for, churn out, cancel their account etc. in February, March, April, etc.

    Conversion: Every time a user moves forward a step in your funnel from visitor (just visiting your web site) to user (signed up) to customer (paying you money) to referrer (helping bring you new users).

    • UV conversion: % of new unique visitors that become users.
    • Active conversion: % of users that use the service for the 1st time.
    • Paid conversion: % of free users that upgrade to a paid account.

    Engagement metrics: These are softer metrics that are specific to your application that don’t measure core conversion but measure specific feature uses and overall engagement with your service. Examples include # of likes, session length, # of comments, # of connections, etc.

    Freemium: A goto market strategy where you have a permanently free base version of your service. This, hopefully, replaces the need for a big marketing budget and reduces friction for user sign up enabling you to acquire lots of users. From that large user base you convert a small portion to a paid premium version. There are other freemium scenarios such as free content monetized by ads but in SaaS this is the primary meaning for freemium.

    K Factor: Also known as “viral co-efficient“. For every active user how many new users do they bring on. If your K factor is > 1 then your user base grows virally or exponentially. This applies well for social games and freemium services that have a built in viral aspect that introduces the game or service to new potential users.

    Retention: Subsequent usage of your service. Any usage after the initial (activation use). As you will learn, retention is the most important aspect of a successful SaaS business.

    Retention rate: The % of users that continue using the service over time. This can be measured weekly, monthly, quarterly, etc.

    Tenure: The # of months or years that you keep a paid customer. Calculated as 1 / churn rate.

    Upgrade %: The % of customers that upgrade from you basic plan to a higher plan.

    The Business Model

    Business model viability, in the majority of startups, will come down to balancing two variables:

    1. Cost to Acquire Customers (CAC), and,
    2. Lifetime Value of a Customer (LTV)

    Successful web businesses have long understood these metrics as they have such an easy way to measure them. However there is a lot of value in looking at these same metrics for all other businesses, especially in the SaaS model.

    Image source: http://www.forentrepreneurs.com/startup-killer/

    Calculating Customer Acquisition Cost – To compute the cost to acquire a customer (CAC) you would take your entire cost of sales and marketing over a given period, including salaries and other headcount related expenses, and divide it by the number of customers that you acquired in that period. Use the “Cost To Acquire” sheet of the workbook to help calculate this.

    Calculating Lifetime Value – To compute the Lifetime Value of a Customer, LTV, you would look at the Gross Margin that you would expect to make from that customer over the lifetime of your relationship. Gross Margin should take into consideration any support, installation, and servicing costs. Use the “Lifetime Value” sheet of the workbook to help calculate this. SaaS businesses are usually initially very high cash intensive businesses because you pay upfront to acquire a customer and the customer only becomes profitable over time. So, you have a gap in cash flow. You can grow organically by saving up enough margins from your existing customers to acquire more, but this is slow. If you want to dominate your market, you need outside capital to maximize the pace of growth (more on this later). At the seed and series A stages, I recommend startups spend no more than 6 months of revenue to acquire a customer. This is because i.) cash tends to be tight; and ii.) the startup does not have enough cohort data to know for sure how many months customers stay on average. Later, when you have more data and more cash you can be more aggressive and spend more. It’s important to do this calculation both for your overall customer base and by price plan. You will likely find your higher price customers stick around a lot longer.

    Tipping the Balance – Tactics for Optimizing your Model

    If you are building a data driven company then i.) your entire team should have daily access to key stats (just put up Geckoboard on a big monitor and connect everything to it); and ii.) each team member should own a metric.

    Brainstorm – with your team – 5 ideas/strategies around the two key elements (Monetization and CAC) with help from the examples given. Calculate Your Monthly Recurring Revenue (MRR) And Average Revenue Per User (ARPU) – Monthly Recurring Revenue (MRR) is calculated by multiplying the total number of paying customers by the Average Revenue Per User (ARPU). This is usually a key indicator of profitability. Use the “Monthly Reoccurring Revenue” sheet of the workbook to help calculate this.

    Look at your CAC ratio monthly: this is the new Monthly Recurring Revenue (MRR) you added in the month * gross margin / the customer acquisition costs incurred that month. You can read more about this important ratio here.

    This and more is available in a step-by-step interactive format at StartupPlays.com

  • Meaningful metrics for incubators and accelerators

    Editor’s Note: This is cross posted from WhoYouCallingAJesse.com by Jesse Rodgers, who is a cofounder of TribeHR. He has been a key member of the Waterloo startup community hosting StartupCampWaterloo and other events to bring together and engage local entrepreneurs. Follow him on Twitter @jrodgers or WhoYouCallingAJesse.com.

    CC-BY-20 Some rights reserved by Nathan E Photography
    Attribution Some rights reserved by Nathan E Photography

    Incubators and accelerators are businesses just like the businesses they intend to help develop as they travel through the startup lifecycle. As with any business, there are indicators that they can measure to give them a better idea of how they are performing besides the big public relations buzz around a company being funded.

    You need to measure these numbers so that when a success happens you can hopefully gain some insights on how to help the other companies better. The problem is that even though the model of an incubator or accelerator is generally known, how to take 10 companies and have 10 successful growth companies come out the other side of the program is not.

    The issue of what metrics to use is an important but complicated problem to solve.

    Set the baseline at the application process (pre-program)

    There are far more applicants than slots offered in an incubator or accelerator program. However, it is at this point that a program is gathering it’s best intelligence. You need a baseline measurement at the start of the program that you can measure every team against. What you should be tracking:

    • Who applied to the program that you didn’taccept (this is your control sample)
      • Track their progress on Angellist, Crunchbase, and/or go back to their web site in 3, 6, 12 months.
      • Keep a ratio of who is still in business and what their status is.
    • Maintain, in a CRM system, information on the applicant founders and their team members.

    Measure the incubator/accelerator clients (in-program)

    At this point there are X number of startups with Y number of founders and maybe Z employees. What you want to measure are things that demonstrate they have improved (or not) and which are things you would expect to see improve as a result of the services provided by any incubator or accelerator:

    • Current customers and revenue per customer (for most that will be 0 at the start) that will work across revenue models: CAC, ARPU, churn rate.
    • Sales funnel – do they have leads? How many? Are they qualified leads? What are they worth?
    • Average user growth in the last month.
    • What mentors or advisors did they meet through the program? What role did they take with the company?

    Run these numbers at the start and at the end of the program. If you are a pure research focused incubator, ignore this section. You have a much longer time to see success – but few are truly research focused.

    Monitor the graduates: Alumni (post-program)

    This is a very important thing an incubator/accelerator can do — build and maintain its alumni connections. These folks not only help at every stage of running future programs but their success lifts the profile of the program, just like how alumni of prestigious business schools make the business schools prestigious.

    There should be reporting milestones at a set interval (probably financial quarter based) where you gain the following insights on the company:

    • Customer growth percentage: CAC, ARPU, and churn rate all expressed as percentage growth.
    • Sales funnel growth expressed as a percentage.
    • Average user growth in the last month.
    • What mentors or advisors are currently active with the company?

    Ideally you should have a position that is equivalent to a close advisor or board observer with the company once it graduates from the program.

    Defining success

    If an incubator or accelerator program is successful, the graphs should be heading up and to the right at a much faster pace than they would have been had startups not entered the program.

    The only baseline data I know of is from the Startup Genome. In their report they explain the stages and the average length of time it takes a company to go through them. For an incubator or accelerator to demonstrate that they work, I would expect a successful company to move through the stages faster than the average. I would also expect them to fail faster than the average.

    Tracking metrics puts a lot more overhead on an accelerator. It is likely more than they budgeted for to start. However, if you want to know if the program is successful it is worth the investment of an admin salary to track and crunch data. This is just a baseline, track more and figure out what the indicators of success are for you.