What are the Most Important Metrics for a Young Startup to Track?
For any business, understanding revenue, expenses, and profitability are crucial. However, there are more nuanced metrics that companies should track.
Early-stage startups, especially, should measure themselves against certain benchmarks to ensure they are progressing in a positive direction. Many times, founders will focus only on one or two statistics and lose sight of other critical parts of the business. As a result, they discover major problems in their operating or financial model after it’s too late to pivot.
Below, we discuss the 8 most important metrics for early-stage startups to track regularly:
Each of these can be calculated in a slightly different way, depending on the nature of the business. Startup leaders must ensure their teams understand exactly what to measure, what the goals are, and what levers to pull to be successful.
1. Total Addressable Market
Total Addressable Market (TAM) is a measure of how much revenue opportunity exists for a particular product or service. Calculating TAM is important when going into fundraising conversations, as investors want to estimate their potential return on invested capital.
TAM can change over time due to disruptive competitor offerings, new technologies, or government regulation. For this reason, it can be valuable for startups to revisit TAM often.
Anyone with a basic understanding of business knows that monitoring revenue is essential. In the startup world, there are several helpful ways to measure revenue.
Leaders can calculate recurring revenue on a monthly, quarterly, or annual basis. They can track revenue per customer or dig into deferred revenues to ensure cash flow is stable. The most important takeaway here is to fit revenue calculations to fit the underlying business model.
Margin is most commonly calculated by subtracting cost of goods sold (COGS) and operating expenses from top-line revenue. If your startup’s margin is not positive, you either have to increase revenues or decrease costs. Otherwise, the long-term sustainability of your business is in jeopardy.
4. Cash Burn Rate
The Cash Burn Rate (CBR) is a reflection of how quickly a startup uses its cash and cash reserves. In other words, it shows how much money a company loses (AKA “negative cash flow”) over a defined interval.
The burn rate is crucial for early-stage businesses that have yet to turn a cash flow corner. It helps founders understand how much time they have left before they run out of capital.
5. Customer Acquisition Cost
Customer Acquisition Cost (CAC) measures how much money a startup has to spend to win a new paying customer. Businesses typically calculate CAC using the formula below:
(marketing + sales spend) / new customers gained over specified period
Generally, the lower CAC is, the better. For early-stage startups, keeping track of CAC is important because it helps founders quickly assess whether they can attract new buyers easily enough to justify the cost of delivering a product or service.
6. Retention Rate
Retention Rate calculates the proportion of customers that stay with a business over time. Determining retention rate depends on the startup’s business model. However, one broad way to think about the metric is with the following formula:
(total customers - new customers) / customers at the start of the measurement period
Calculating churn may also make sense for startups to measure how frequently the company loses customers. By increasing retention and minimizing churn, startups can boost the lifetime value of their accounts, which is the next metric!
7. Lifetime Value
Lifetime value tells leaders how much value they can expect to earn from a customer or account throughout the entirety of a relationship. “Value” can take on different meanings. Some startups prefer to look at how much revenue a customer generates, while others prefer profitability.
Understanding lifetime value can inform decisions around how much a startup can spend to acquire new customers (re: CAC). Additionally, lifetime value may be an indirect indicator of how much customers value your product. A low lifetime value relative to the product’s price might mean customers don’t think they are getting enough for what they pay.
8. Viral Coefficient
The Viral Coefficient is used to measure a startup’s organic growth. It captures how excited and satisfied users are by quantifying their willingness to share a product or service with others.
Startups that want to calculate the viral coefficient can do so by taking an initial pool of customers, counting how many invitations they send to others, and tracking what percentage of those invitations convert into new customers.
Overall, there are many other ways to measure the financial and operational health of a young startup. However, these eight are essential for founders to understand. Customize them to your unique model and make sure your teams have everything they need to track them successfully!
4 Truths Fintech Founders Need to Know
Financial technology, or “fintech,” is one of the more active niches in the startup world today. According to CBInsights, 12% of all unicorns (private companies valued at over $1B) are characterized as fintech businesses. The third-largest unicorn is Stripe, which is currently valued at $56B.
Entrepreneurs are attracted to fintech for many reasons. It’s an extremely fast-growing space with tons of disruption potential. Fintech businesses everywhere are challenging long-standing models around how money is exchanged, borrowed, and managed in the global marketplace.
In 2020, nearly two-thirds of global consumers use fintech products or services, up from one-third in 2017. And 96% of global consumers are aware of fintech offerings.
Adding an interesting dynamic to the equation is the fact that many non-financial service organizations are entering the sector. Companies like Apple and Uber are offering credit cards, thereby altering our conception of what a financial institution is.
However, being a fintech startup does not guarantee you success. There are challenges to growing a successful business in this area, some of which are out of the founding team’s control.
If you are a fintech startup or are considering starting a fintech venture, always keep the following four realities on your radar.
1. Pivoting is Common
It’s not uncommon for fintech businesses to pivot or tweak their offerings to align with demand. There are many possible areas for disruption, but not all are equal. A founding team might set off to solve a problem for one specific target market and realize there is an even bigger unmet need elsewhere.
Don’t be scared to reevaluate your initial business thesis . As you learn more about the space, technological possibilities, and consumer desires, you may find your energy is better spent in a different, but related lane.
2. Regulatory Changes Can Change the Game Overnight
Government regulation can impact fintech startups significantly. As the global economy adjusts to new dynamics in this field, officials have to update laws to protect private citizens. How officials go about implementing changes can make or break certain business models.
As a founder, you must engage with regulators in your markets to understand their priorities and goals. Build collaborative relationships with leaders and share your expertise in a way that moves the sector forward. Don’t try to circumvent existing laws or design an offering to exploit a loophole that will likely be addressed in the future.
By taking a seat at the table with public entities, you can make sure your voice is heard in any conversation that could impact your business dramatically.
3. Relationships Matter
Because the nature of fintech is to disrupt the status quo, there will be forces actively working against you. Don’t expect incumbents to simply roll over and accept defeat. Be aware of who your business model will affect and how.
Think carefully about how others might respond if you directly threaten their existence. A wall of resistance can come up quickly if established companies with lots of cash work together to keep new entrants out. In many situations, it may make sense to partner with existing players, in which case, you might want to tread lightly when you first enter the scene.
Relationships always matter. In fintech, especially, leaders need to be thoughtful about how they approach the opportunity in front of them.
4. Premature Launches Are Tempting
The iterative software development approach makes it easy to deploy updates and improvements once offerings are already on the market. As a result, it is tempting to launch fintech products prematurely. On top of that, founders want to get to market before a similar, disruptive service beats them to the punch.
As a founding team, you should always set goals and timelines. But, it’s okay to push dates back if it means making crucial improvements to your product so that you can enjoy a stellar launch.
If you come out with a half-baked, buggy application, you’ll quickly lose confidence in your investors, the media, and the public. You only get one shot at a first impression, so make it count.
Prepping for Big Investor Meetings?
For founders looking for funding support, Funded.club provides consulting services to help teams prepare for crucial investor meetings and presentations. We’d love to discuss how we can set your venture up for success, whether you operate in the fintech space or another exciting area.
To learn more about our service packs, visit Funding page.
Is Outsourced Recruiting Cheaper Than Managing an HR Team?
In young startups, there comes a crossroads when business leaders have to decide whether to build out a full in-house recruitment function or outsource to a third-party service.
Founders can’t afford to spend their limited time on recruiting when there are more pressing matters at hand, like building a minimum viable product or finding customers. So, the question becomes what path leads to the best possible candidates for the least amount of money.
By going down the in-house route, founders retain 100% control over recruiting and can ensure that every potential candidate meets their high standards. However, this runs counter to the goal of freeing capacity to focus on other areas.
On the other hand, it can be scary to hand over the reins to an external party. They haven’t been with you in the trenches over the years. They are unfamiliar with your culture and may not fully understand the type of person your startup needs. And given the reality that 90% of startups fail (independent of COVID-19!), there is no room for hiring mistakes. Every new teammate should be stellar without exception.
At Funded.club, we believe the right partner alleviates all of these concerns and more.
Outsourced recruiting can be cheaper and more effective overall than managing an HR team. The challenge lies in finding an agency that specializes in startup hiring, which differs from corporate recruiting in many ways. Those who have expertise around startups recruiting can manage costs well without sacrificing quality.
Below are three economic reasons why outsourced recruiting can make more sense than building an in-house HR team.
1. Optimizing Recruiting Cost Buckets is Hard There are many cost buckets within recruiting.
On top of labor expenses, startups have to pay for job board advertisements, background checks, and technology platforms, like applicant tracking systems. In general, it is difficult for young, fast-growing businesses that have their hands full to optimize performance across these areas. In-house teams typically struggle with duplicative tasks, delays, and premium prices associated with acquiring their own suite of technologies.
Outsourced recruiters will typically offer these features at a price that is less overall than the startup would spend to get a comparable function up and running. Dedicated outsourced firms can achieve lower cost-per-hire and time-to-hire metrics by streamlining recruiting processes in a way that young businesses don’t know how to do.
Additionally, as tech skill shortages persist, recruiting is growing more competitive. Those who choose to build an in-house recruiting function may not realize the ROI on their investment as they are competing with recruiters with extensive experience.
2. In-house Recruiting Can Distract From the Core Business
Anyone who works in a high-growth venture is familiar with the idea of wearing multiple “hats.” When companies are small, employees often have to take on responsibilities that fit in various lanes. Job descriptions tend to be more fluid, and workers have a broader range of influence.
The same dynamic applies when it comes to in-house recruiting. Oftentimes, in-house startup recruiters will be tasked with cultivating a healthy candidate pipeline, in addition to executing essential HR activities. Startups that want to attract the best possible talent can’t expect to do so if their in-house team is distracted by two sets of priorities.
In this scenario, either recruiting quality or HR services suffer, which drain company resources in different ways. Bad recruiting leads to poor hiring decisions, bringing down the long-term potential of the organization. Neglected HR workflows can leave current employees feeling undersupported, leading to increased turnover. With outsourced recruiting, leaders don’t have to choose.
3. In-house Teams Can’t Scale with Business Needs
Startup recruiting needs can expand or shrink rapidly depending on the success of the business. Those experiencing high growth may need to ramp up quickly in certain areas to keep up with demand. On the flip side, a company may need to scale down to cut costs to survive tough times, like what we are experiencing right now.
Startups that have an in-house recruiting team can’t respond to volatility as effectively as outsourced firms can. Fast growth can quickly overwhelm a small team of internal recruiters, which means the business can’t respond to demand and take advantage of valuable revenue opportunities. Stagnant growth, or even contraction, can lead to startups paying for recruiting labor that they aren’t using.
An outsourced firm can easily align resources with need. Startups can take advantage of “pay-as-you-go” pricing, only incurring charges for recruiting activity that is needed at any given time. As a result, businesses don’t miss out on growth opportunities or waste precious resources on underutilized human resources.
Funded.club: the Best of All Worlds
As an outsourced recruiting partner, Funded.club helps startups all over the world build exceptional teams over the long-term. But, what differentiates Funded.club from other agencies is our fixed-fee recruiting model.
Our clients benefit from the efficiencies of outsourced recruiting without having to worry about racking up charges that are independent of results.
Want to learn more about how we work?
Ray Gibson is founder and CEO of Funded.club. He brings 20 years of experience in recruiting across Europe, North America and Asia and 5 years running his own startups.