Let’s talk about startup metrics
Startups, especially those that are in the pre-seed or seed stages, may not be in business long enough to show meaningful financial performance. To understand more about how their business is performing, we can look at metrics relevant to that type of business. Metrics provide further evidence of business validation, whether there is product-market fit and the degree of traction. When doing due diligence on a startup, it is important for investors to analyse the relevant metrics to gauge the performance of the business and to verify key assumptions.
We look at some common startup business types below. A startup’s business can simultaneously fall within more than one of these classifications.
Further explanation on the metrics covered here can be found in Lean Analytics: Use Data to Build a Better Startup Faster by Alistair Croll and Benjamin Yoskovitz.
E-commerce
An e-commerce business is simply one where consumers purchase goods from the business via the internet. Below are the key metrics to look at:
Conversion rates
Here, we are tracking the proportion of initial visitors to the site that end up making purchases. Analyse the customer funnel and focus on the metrics at various stages - from the number of initial visitors to the proportion of them that become potential leads. Then track the proportion of such leads that end up as paying customers.
To add more colour, look at conversion rates across different types of customers for example in terms of demographics, time of sign up, source of traffic, etc.
Frequency of purchases
It is useful to track the number of purchases by customers on a per year, or per 90-day basis. Some products are by their nature, purchased only once or twice over a long time. Other products see a more frequent repurchase rate. If the metrics indicate a low number of repeat purchases, the business should focus on acquiring new customers. For high repeat purchases, the business should focus on keeping existing customers engaged and buying more.
Average basket size
In conjunction with conversion rates and frequency of purchases, the average basket or shopping cart size throws more light on the startup’s revenue. If segregated data is available, look at basket sizes from different customer types and demographics.
Abandonment rate
Here, we are looking at the rate of potential customers dropping off in the sale process, whether in the search stage, ordering stage, payment stage, etc. . Understand this to identify bottlenecks in the customer funnel which needs to be resolved. Rectifying these may improve conversion rates.
Cost of customer acquisition(COCA)
This is the total cost incurred including marketing and advertising, to secure a customer. Compare this to customer lifetime value below in order to assess whether the business is viable and how difficult it is to scale. We can also segregate these costs according to different advertising efforts to assess their effectiveness.
Lifetime value (LTV)
This is the total revenue from a customer during the time he is active on the website. The business can work towards increasing LTV via increases in average basket size and frequency of purchases. If LTV exceeds COCA, preferably by a healthy margin, this points towards a sustainable and scalable business.
Virality
Virality metrics capture the number of new customers invited by existing customers. Virality helps reduce COCA.
Shipping costs and time
Given the state of the e-commerce scene today, high shipping costs and long shipping times reduce competitiveness and conversion rates. Quick and reasonably priced delivery increases repeat purchases. Compare shipping costs and delivery time of the business with that of the competition.
Software as a Service(SaaS)
A SaaS business offers software on an on-demand basis, with users accessing the software or service via the internet. In many cases, the services are consumed on a recurring basis for a period of time while payment is made on a monthly or yearly subscription basis. Services may also come in the form of tiers, from free to premium levels.
The key metrics to understand include:
Stickiness
SaaS businesses want to have their users return to use the product repeatedly. Recurring revenue is a key characteristic of such businesses. We need to analyse user engagement - how frequent users use the product, time spent on usage and the number of daily, weekly and monthly active users. Compare these metrics in different time periods.
Some products, because of their nature, are not meant to be used frequently. We should factor this in when looking at user engagement.
Track which user groups are engaging in the product more frequently and the reasons they are doing so. Also understand what product features are used more often and by which users.
Conversion rates and funnel
Just like in an e-commerce business, look at how many visitors successfully become users - analyse how many visitors turn to leads, proportion of leads to registered users and free users becoming paying users.
Study paying users as a separate group to see the proportion of customers that switch to a higher-paying tier. Understand what makes customers buy more and how frequent that happens.
Recurring revenue and LTV
Subscription revenue is usually presented in terms of Annual Recurring Revenue(ARR) and Monthly Recurring Revenue(MRR) for the business. Track the growth of MRR and ARR through time.
On the other hand, LTV aggregates how much money a customer brings in before they drop off. In that way, stickiness and churn impacts on LTV. LTV is also compared to COCA to gauge how sustainable or scalable the business is.
COCA
Cost of acquiring users as explained previously.
Churn
Churn rates are key to SaaS businesses as it impacts recurring revenue and LTV. The churn rate is the percentage of users that dropped out during the month out of the number of users in the beginning of month. We may define a dropped off user as someone that cancelled their account or have been inactive for a certain number of days or weeks.
Track churn separately for unpaid and paid users, or by cohort ie batches of users that sign up around the same time.
Virality
Look at how likely customers are to invite others, how long it takes them to do so and how many new users they successfully invite.
Mobile App
This broad category covers businesses that offer a mobile app in the form of free apps with advertising revenue, paid apps or apps with in-app purchases.
Here are some of the key metrics to look at:
Downloads
Look at the number of downloads for different time periods, the ranking of the app in the app store, whether it is one of the featured apps in the store and user ratings. It is also useful to have an idea of the demographics of the people who downloaded the app.
Launch rate
The proportion of people who downloaded the app and went on to launch it.
Percentage of active users
Look at the proportion of users who have launched the app and how often they use it. This gives you metrics on the daily, weekly and monthly active users. Study these metrics at different points in time and by cohorts ie batches of users that signed up around the same time. Analyse how the active users are growing or decreasing and the rate of them doing so. This provides a gauge of how engaged the users are:
Percentage of users who pay
Study the behavior of paying users separately from non-paying users. A small portion of users may, in many cases, contribute to a large part of the startup’s revenue. With paying users, look at them by cohort or by total spending and understand the different usage and paying patterns, churn rates, revenue they bring in etc.
Monthly average revenue per user (ARPU)
This is the total of both in-app purchases and revenue from any advertisements. ARPU reflects the impact of user growth, user engagement as well as monetization. The app has to be addictive enough to encourage higher engagement and yet able to extract revenue without turning the user away. This is a balance that needs to be struck and it will impact on ARPU.
Also look at paying users separately. ARPPU, the average revenue per Paying user, is useful in understanding the behaviour of paying users. As mentioned previously, it is common for a small portion of users to contribute a big portion of the revenue.
COCA
As explained previously, these are the costs including advertising and marketing to secure a free or paying user.
LTV
This is the customer lifetime value as explained previously. The LTV is often analysed in conjunction with the COCA.
Virality
Virality metrics indicate on average how many new users are successfully brought in via invites or referrals by existing users.
Churn
How many users have uninstalled the application or haven’t used it in a certain time period. Track churn on different time periods eg 1 day, 1 week and 1 month after users come on board and understand the reasons why users drop out.
Two sided marketplace
In a two sided marketplace, the business provides a platform that brings together a buyer and a seller to complete a transaction. It is a variation from the pure e-commerce business as explained previously. In a two-sided marketplace, the seller typically is able to create and update product listings efficiently with minimal manual assistance from the platform.
Buyer and seller growth
The success of two sided marketplaces depends on the benefits of the network effect – the more sellers on the platform will lead to more buyers and in turn will attract even more sellers and so on.
We look at the rate at which the business is adding new buyers and sellers through time. As a start, one needs to have enough sellers, product listings or ‘inventory’ in order to attract buyers. It may be easier to focus on establishing a base volume of sellers first and then try to pull in more buyers.
Track how fast the business is adding sellers to the marketplace and whether the rate of addition is growing or slowing. If growth is stalling, then the platform may want to find new ways to attract new sellers or focus on increasing the number of listings per seller.
Inventory growth
Focus on the rate at which sellers are adding inventory - the number of product listings per seller- and whether that’s growing.
Search effectiveness
In a two sided marketplace, it is useful to know what buyers are searching for, and whether it matches the inventory the business is building. Track the number of daily searches, new listings, and the result count from searches. Also take note of searches that yield no results. Compare these metrics from month to month.
Conversion funnels
The business should understand the metrics starting from the initial search to the eventual purchase or non-purchase. It would be good to track the number of searches, proportion of searches yielding more than one product listing, number of click-throughs to product listing, total purchases and proportion of successful transactions.
Ratings and comments
As the business involves running a marketplace, it is good to look at the quality of the product listings as well as that of the buyers and sellers. Take note of the ratings for buyers and sellers, the proportion of good and poorly rated ones, proportion of listings flagged by users, user comments, etc.
The above are a summary of the key metrics to look out for in common business types in the startup landscape. A startup may fall within a combination of these business types. Whether one is interested in looking at product market fit, traction or the performance of a startup, it is always important to understand the key metrics. Metrics are naturally one of the main aspects investors should look at when investing in startups.