Listen to the podcast to learn about:
01:25 - Why early stage startups need to track metrics
03:30 - From gut based decisions to data driven decisions
05:30 - Two signals of a good metric
07:00 - Operating metrics Vs Fundraising metrics
09:45 - Things to consider when deciding North Star metrics
11:30 - Balancing metrics
13:45 - Speed Vs Velocity? Which one to choose?
16:30 - Leveraging forward looking metrics
17:10 - How to avoid getting fooled by metrics
22:00 - What metrics investors look at the time of fundraise
You can read the complete transcript below
01:00 Shikhar Prateek
Hello everyone, welcome to the Prime Venture Partners podcast. This is Shikhar, I look after the community initiatives at Prime. In this episode we will talk about metrics at early stage startups. Our guest on the show today is Gaurav Ranjan, VP investments at Prime. Welcome to the show, Gaurav.
1:15 Gaurav Ranjan
Hi, Shikhar. Thank you.
1:20 Shikhar Prateek
So Gaurav my first question is why does an early stage startup need to track metrics?
1:25 Gaurav Ranjan
So it’s a very good question Shikhar, we’ve seen that a lot of startups track metrics, right, from early days. And of course later stage startups do it. But a lot of time, it is not very clear why you are tracking metrics? So in our mind, we feel metrics broadly serve three purposes. One, the first thing being it gives you a quantitative assessment of the business health.
And ideally, for any stage, you should have a couple of North Star metrics to just give you a quantitative health of your business. And then of course, you can deep dive into metrics to figure out what is working or not working. So that’s the first thing, the second thing is it gives you a sense of control and transparency across the organisation. So once you have defined a set of core, North Star metrics, everybody in the organisation every business function, be it sales, marketing, product, tech team, etc. They can align their own goals, to achieve those North Star metrics, and everybody knows what everybody’s working for. So that way, it brings in a sense of transparency and control. And the third thing is, you’ll be able to take data driven decisions. And metrics broadly, they are- both backward looking as well as forward looking. So backward looking metrics will help you diagnose the health of the business, in order to detect any mistakes, or anything that needs to be fixed. And forward looking metrics will help you align your future plans and roadmap. So these are the three broad objectives for metrics why you should track them. First quantitative assessment of your business’ health, second it will give you a sense of control and transparency across the organisation, third you can take data driven decisions based on both backward looking and forward looking metrics.
3:15 Shikhar Prateek
So in the early days, when you’re starting out, a lot of things come from emotion, a lot of things are gut based. So now you have decided, Okay, you’ll track metrics. So how to make the transition from gut based decision to data based decision making in startups.
3:26 Gaurav Ranjan
Okay. So you have two parts to it, Shikhar. The first part is tracking metrics. And the second part is taking decisions based on those metrics. So I would say that tracking metrics or collecting data you should do from day Zero, no doubts about that, no second thought about that. You should capture as much data from whenever you have data. However decision making should not be over indexed on data at a very early stage. As you rightly pointed out, a lot of it is gut based. And it should be that way because in early days you are trying to figure out product market fit.
It is better to look at, of course, you can look at data and get some signals. But don’t over complicate things by looking at data. It’s good to talk to your customers to figure out what their requirements are, what they are looking for and accordingly build the product.
Once you have achieved some level of product market fit and by that I mean once you have some repeatable sales process, repeatable growth, you can see repeatable growth in the next 3, 6, 12 months. That is when we should move to more data driven decisions. And again, there is no clear transition that now Okay, for the first six months, I’ll take gut based decisions from 7th months onwards, I’ll start taking data driven decisions. It has more to do with how your startup has evolved. And once it has reached a certain level of product market fit that is when you can transition to a more data driven decision making.
04:50 Shikhar Prateek
Got it. In a startup like there can be 10s or 100s of metrics. So now you have made a decision. Okay, I need to track metrics, I’ll be tracking metrics. So what metrics should I focus on and how much does it depend on the stage of the startup?
05:03 Gaurav Ranjan
So what to track is very important. Because these days if you want to track metrics you can track from anything to everything and you have CAC, LTV, MRR, ARR, Leads, Conversions, I mean, you will have 1000s of metrics. And if you start tracking everything, and start taking decisions based on everything it will only only complicate things for you. So what you need to track will of course, depend on the stage of things, but you can of course, have a framework to decide what to track. So, two things, any metric should help you do two things. And if it doesn’t do any of them, which means it is a bad metric to track at that stage. And those two things are first being can it predict the health of your business. And the answer to that question is no, that is a bad metric to try. And second is, will it change the way you operate?
If the answer to that question is also no, which means it is a bad metric to track at that point in time. So these are two things that you need to look at, to figure out whether that is the right metric you are tracking or not. A couple of more points here. What to track? So, apart from the first two points that I mentioned. A broad framework is that for a startup at any stage, growth is the single most relevant metric. And growth metrics need not be your revenue growth or customer growth all the time. Growth metric is basically to demonstrate that your customers are sustainably adopting your product. So that metric could be different at different stages. So figure out what is the relevant growth metric at a given stage, whether it is revenue whether it’s number of users whether it’s CAC whether it’s improving LTV, whether it is improving the sales cycle, and just try to improve on those metrics.
And again, at early stage it’s pointless to try too many metrics. As I said before, the other thing is, a lot of times, what we have seen is that operating metrics will be different from the fundraising metrics. Of course, they’ll be interrelated. But what investors may be looking at any given point in time may be different from what you want to optimise for internally. And hence tracking a different metric. So it’s also good to have a demarcation between your fundraising metric and operating metric, if both of them are same well and good, but if not, I mean, you don’t make decisions based on your fundraising metrics. Try to keep the two metrics separate.
And the other thing is one mistake that I see a lot of people doing while deciding what metric to track is they have metric as goals. So you look at a metric and then decide your goal. And then you say, Okay, this is the only metric that I need to track. It should be the other way around. It should be you decide on a goal, and then figure out what is the relevant metric to track to make sure that you’re on the right path to achieving your goals, and then decide on the relevant metrics, not the other way around, which is a common mistake a lot of people do. And then you are in the trap of just looking at those few metrics, and deciding your goal based on those metrics, rather than doing it the other way around.
So, to summarise, you need to look at two things, can it predict the health of your business, will it change the way you operate? These are two broad things that you need to look at.
08:12 Shikhar Prateek
Can you elaborate something more on operating metrics and fundraising metrics? Obviously will come at the end of the podcast, but what’s the mistake people make in terms of fundraising metrics and operating metrics?
08:22 Gaurav Ranjan
So fundraising metrics are, for example, any investor would want to see how are you growing. So your month to month growth metrics would be important in that case. Of course, CAC to LTV becomes very important, as your fundraising metrics. So CAC to LTV is something would be also relevant for your operating side of things. But what I meant was that when you’re running a business, you want to optimise a couple of things, and you know, certain things are not working. And you want to improve on those things. And hence, you decide on those metrics, a few metrics to track which will help you move in the right direction on fixing the I mean, fixing all the things that you want to achieve, I mean to move in the right direction.
Whereas fundraising metrics are something that an investor would look at and judge your business. So what your product manager may be looking at to improve the adoption of the product will be very different from what an investor will look at to judge the health of your business. Broadly, investors would look at your month on month growth, revenue, users, your CAC, LTV. Whereas your operating metric, your product manager, for example, may look at the way your customers are adopting the product, the way they’re using different features, and so on and so forth. So that’s what I meant when I said that operating metrics may be different from a fundraising metric.
09:37 Shikhar Prateek
So we just talked about how the metrics you need to track depends upon the stage of the company. Are there other things apart from the stage of the companies, that should be considered when tracking metrics?
09:46 Gaurav Ranjan
Yes, of course. So the business model is another important thing. So you can’t apply the same SaaS metric to a consumer tech business. Even in SaaS if you have SMB SaaS versus enterprise SaaS, the way you track metrics should be different. So it depends on again, it also depends on the sector that you are in the kind of business model as I said before, if you’re a marketplace, you’d want to track both supply and demand metrics.
You would want to track the LTV on the platform. Whereas if you are an enterprise SaaS business, you’d want to track maybe your CAC payback period, your churn, etc. So it depends also on the business model. And as well as on the stage of the company. If you are early stage company, where when you’re like pre product market fit, the metric that you want to track would be the conversion funnel engagement, figuring out right customer segment. Pre product market fit, you may not want to over optimise on your CAC to LTV, because you are still trying to figure out who your customer is. And once you figure out who your customer is, you’d want to sell to them in a repeatable manner. That’s when you’d want to optimise on your CAC and LTV metrics. And similarly, as you are in scaling up phase the metrics that you’d be tracking would be different from what you’d be tracking in a pre product market fit.
So again, when I’m saying tracking metrics, I’m not saying that you should not track all the metrics. by tracking I mean, the North Star metric that you need to have maybe two or three or four that you want to have. So that changes depending upon the stage of the company. Having said that, you should always track everything, I mean, you should have data about everything. But to focus or to look at a senior leadership level or a CXO level, you should not have more than two or three metrics. And that will depend on the age of the company, and the business model, of course.
11:26 Shikhar Prateek
So suppose now you have narrowed down your North Star metrics, that these things I need to focus at this stage of the company, depending on my business model. So now if you’re trying to make an effort into boosting one metrics and it leads to decline of other metrics, so how do you manage that? What’s the trade off and how do you balance that?
11:41 Gaurav Ranjan
Okay. So as I said, the North Star metric will depend on the stage of the company. So, I mean, if you look at metrics, most of them are interrelated. So if you look at your LTV, it is related to your churn, if you look at your ARR, it is a function of your customer acquisition, retention, expansion revenue and everything else. So, it will happen that if you try to optimise on one metric, some other metric may move in the wrong direction. Hence, it becomes very important for you to figure out what is your North Star metric. Let me give you some examples, for instance. So suppose you are in early growth phase. Suppose you are a marketplace, let’s take the example of a marketplace. And your marketplace is a supply constrained marketplace. For instance, if you have enough demand, but supply is not there.
Now, in this case, for instance, you may not want to focus too much on the cost of acquisition of supply, because it is a supply constrained marketplace of course supply will be expensive here till the time you reach a critical mass. And then of course, network effects will kick in. And so here if you want to, for example, improve the monetisation of the platform, you may not want to look at the supply payout, because you’re trying to build supply, you’re trying to get more supply on the platform.
So when you’re calculating your unit economics, you may want to look at your CAC, but the gross margin may not be very important, because the supply is expensive. We know that for a fact, right. So you can ignore that for some time till you have built a critical mass of supply.
So of course, when you’re trying to optimise on some metric, some other metric will move in the negative direction, you need to be comfortable with that, given the stage of the company. And hence I said North Star metric is more important. You need to have a clearly defined North Star metric. And to achieve that, if you have to forego some metric sometimes, or let go of some metric, or let go of some metric going in a negative direction for some time, you should be okay with that.
13:43 Shikhar Prateek
Does it make more sense in the context of a startup should focus more on velocity than speed?
13:49 Gaurav Ranjan
Good that you brought that. So when you’re focusing more on say growth or on velocity. At that point in time of course, you would want to control your CAC. But over optimising on your CAC, at that point in time may hamper your scale up or may hamper your growth. So there, you just want to figure out where do I acquire my customers from where to get most of my customers from?
And once you have reached a certain critical mass in terms of growth, that is the time when you want to, you’d want to optimise or fine tune your CAC, you may want to improve your retention and so on. So it will depend on the state that you are in? What you want to achieve at that stage? At early stage of course, growth is more important in terms of number of users and revenue that you get. Later on, Of course, NPS metrics will become more important. So in that case, you’d want to have lower CAC and hence you may be okay with a slower growth phase because you want to optimise an CAC and your unit economics. It depends on the stage, of course.
14:42 Shikhar Prateek
So another challenge for early stage startups is the number of data points. Since they’re just starting out, suppose somebody is in the business of subscriptions, they have quarterly subscriptions or annual subscriptions. But they cannot wait for a whole year to pass and then make decisions. So how should they go about when they have few data points or large sales cycles.
15:03 Gaurav Ranjan
So there are two things here. One is when you have few data points. So if you have few data points, of course, which means you are very early in your journey. So in that case, it does not make too much sense to over index on data driven decision making. You can look at the data and get some signals from the data. And then of course, use your own learning, talk to customers to get insights from them, see what others in the industry have done. And try to maybe pick up the best practices from there and make decisions accordingly.
So at early days, when you don’t have enough data, don’t get into that trap of analysis, paralysis. Otherwise, you’ll be just stuck with a limited amount of data and that every data can be painted in a different way to tell a different story. So with the limited data, it becomes even more easier, if you want to paint a story.
Whereas the other part was if you have maybe a longer sales cycle, How do you wait? So for example, if you are an enterprise SaaS company, and you have annual contracts. So the only way to figure out churn is maybe at the end of the annual contract, and you can’t wait for one year to figure out if your customer will churn out or not. So in that case, you can do two things. One is, of course, if you have a few customers you can talk to them on a regular basis, you can have a stellar customer success team, which kind of stay in touch with the customer on a regular basis to see how happy or unhappy they are with the product. And then of course, you can have certain forward looking metrics, for example, engagement numbers, or NPS scores that will give you a sense if the customer is happy with the product? And will he or she churn out? Or will they churn out at the end of the contract cycle.
I mean, again, you can talk to the customers, or you can look at some forward looking metrics that will give you a sense whether the customer will churn out or will stay on the platform.
16:52 Shikhar Prateek
So one more thing I would like to ask all the entrepreneurs, they have decided, Okay, now I need to track metrics. And based on my stage of the company or my sector, I’ve decided the metric. But what are some of the mistakes that people make when tracking metrics? Obviously, since they’re doing there must be some common mistakes? Or they get fooled by those metrics? And what should be the gotchas that they should avoid?
17:12 Gaurav Ranjan
Yes. Okay. That is a very relevant question. How do you draw actionable insights from metrics is more important, I mean it’s equally important to tracking metrics. You may track everything, but how do you draw insights from that is very important. A lot of people kind of make mistakes here and get fooled by metrics, as you rightly pointed out. So as I said, before, you can use data to paint any kind of story that you want. So some of the common mistake that people make is you just look at the high level metrics without understanding how is that metric arrived upon or what is underlying data points for that metric?
So let me give you an example. Let’s say you are a consumer tech company, and let’s say you are an enterprise SaaS company. And one metric that you track is your MRR growth, which is MRR is monthly recurring revenue, how is that growing month on month? Now, if I say that a company is growing at 10%, or 20%, month on month, in terms of their monthly recurring revenue. On the face of it, this looks like a very good number like 20% month on month is a pretty good number to achieve. And anybody would be happy with those numbers. But it is important to look at the underlying data for that MRR.
If I look at your revenue, it will be a function of your new customers that you acquired, plus some of expansion revenue that you would have gotten from the previous cohort, plus, some of the customers may have resurrected, customers who churned out a couple of months or a couple of quarters back would have come back. So these are the three ways in which you could increase the revenue. And the same thing would have also lost some revenue, because either the customers churned out or they would have downgraded to a lower tier of your product. So this is the lost revenue. Now, if I only look at the month on month growth, it will not tell me what is the contribution of new revenue? What is the contribution of expansion revenue, what’s the contribution of churned revenue or the contribution of contraction revenue.
So in the 20% month on month growth example that I took. What if the new revenue added every month was very high was maybe like 60% of the new revenue, I mean, 60% of MRR was coming from new revenue. And you are losing a lot of customers, a lot of revenue because churn and contraction, so it is not a very good sign of the health of your business, which means your marketing is working well to get customers. But either your product or your customer success is not good, because of which customers are churning out. So if I would have only looked at the month on month growth, I would have been very happy as a CEO or a CXO, but I need to dig deeper to figure out where is this growth coming from. And unless and until I get a hold of that it’ll be very difficult to take a call whether the revenue that I’m getting or the growth I’m been getting is good or bad.
And the same can apply to a consumer tech startup anywhere. I mean, any metric that you look at, for example, churn metric, since you brought about that point about one year contract. Now if I sign only one year contract, and if I track my quarterly churn, of course, it will be very low. So that’s not the right way to track churn. Ideally, you should track churn by the number of users who moved out, divided by the number of users who were up for renewal. That is the right way of tracking churn.
A lot of people track quarter on quarter churn or month and month churn without trying to understand what are their contracts cycles when are their contracts are expiring. And then people might say, Oh, my churn is very low, but come the contract cycle, or come from the year end, you may see like 50%, of customers have churned. So similarly since we are on the point of churn, it may very well happen that you may have lost 50% of your customers, but the 50% of the customers that stayed back, the net revenue retention from them outstrips your customer churn, which is to say, at the end of tracking for a period of one year, at the end of one year, you lost 50% of the customers, but the remaining 50% of the customers, they kind of contributed they kind of added more to your MRR and your MRR was 2x of what it was at the beginning of the year.
In a way this is good, which means to say that the customers who are retained on the platform are actually seeing value in the platform, and that is the right TG for you to go after. The customer who churned out, maybe not the right TG. So even your churn numbers were bad but your revenue retention numbers were high and they gave you a positive signal that focus only those sort of customers. So it becomes very important to track the underlying data and within a metric and try to understand how a metric is derived from the underlying data to get a sense, and to not get fooled by metrics.
21:53 Shikhar Prateek
Got it, very useful Gaurav. Thanks. So now that we are in the final segment of the podcast. So suppose for the entrepreneurs listening to the podcast, and they want to approach VCs or investors for fundraising. So what metrics should they pay attention to when they’re going for fundraising and approaching investors?
22:09 Gaurav Ranjan
So, there are broadly I would say, two broad set of metrics that investors look at, at any given point in time. One is the growth metric, which is to say, How fast are you growing? Are you just about to take off? investor typically would want to come in when they see that, okay, now, putting in additional capital will help the company scale exponentially. So the velocity becomes very important. So your month and month growth, your quarter on quarter growth rate, or your CMGR for the trailing 3.6,12 months is something which becomes very important. So basically whatever decides your growth or velocity those metrics become important.
The second metrics which become important are your unit economics metrics. Because again, as I said before, when you’re raising funds, the whole idea that I will deploy the fund to scale from here. If your unit economics are not in place, which means you have a leaky bucket, which means even if you deploy enough and more capital to scale up, at the end of the day, you lose all that money because of churn or because the customers moved out. So unit economics numbers also become very important. So these are broadly two things, I mean, two broad set of metrics that investors look at the velocity or the growth metrics and second is the unit economic metrics at any given point in time.
23:33 Shikhar Prateek
Got it. Gaurav, Thanks for your time today. Thanks for sharing insights with us.
23:35 Gaurav Ranjan
23:37 Shikhar Prateek
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