Startups need new metrics for a tough new era

Startups need new metrics for a tough new era

We are at the dawn of a whole new era for startups, one where capital is scarce.

It is no longer about growing at all costs; “Business basics” are now all the rage. And the bottom line for startup founders is, as always, those who adapt quickest are the most likely to succeed.

A new era calls for new metrics to track performance. These are the benchmarks and data every founder should follow as the tides turn.

Why are we in a new era?

2022 was a defining moment for the venture capital industry.

Not only because venture capital financing was 35% less year after year, but because there has been a radical change in the macroeconomic environment in which it operates. Specifically, the last decade of near-zero interest rates has unequivocally come to an end.

Now equity can generate much higher returns in less risky asset classes like bonds. And the destruction of late-stage valuations has led to capital flight, meaning the shift from chronically unprofitable startups to later-stage funds has now stalled.

“In the new era of higher interest rates, the bar is now much, much higher for startups looking to step up.”

Investors have spent the last 12 months giving founders advice about “cutting consumption” and “widening the runway” while at the same time speculating on when things will “go back to normal”; after all, they like to write checks as much as we like to receive them. The reality, however, is that there will be no “back to normal”: In the new era of higher interest rates, the bar is now much, much higher for startups looking to step up.

out with the old

In the old world of capital-driven growth, the founders predominantly ran their businesses by focusing on monthly growth for their North Star metric, the only metric they had chosen as their overall business guide.

Metrics such as Gross Merchandise Value (GMV), number of transactions, number of registered accounts/customers, contracted revenue, and even monthly active users (MAU) were all contenders. The ratio of customer acquisition costs to customer lifetime value (CAC/LTV) was also a popular metric. It was a nod to business fundamentals, since, in a world of near-free capital, if you could make the economic unit work, it made sense to grow as fast as possible.

While these metrics are still useful for giving a sense of business momentum, they aren’t particularly good at indicating the true underlying health and long-term prospects of the business. This is where new age metrics come in.

in with the new

Now that the days of easy money are over, founders now need to focus on making their businesses that much more sustainable, as they are likely to find it more difficult to raise outside capital. Also, having strong trading fundamentals also makes you much more investable.

“Now that the days of easy money are over, founders now need to focus on making their businesses much more sustainable, as they are likely to find it more difficult to raise outside capital”

Here are some things to think about when defining your top metrics for 2023:

north star metric — Need to revise your North Star metric in light of this brave new world? A Hodgepodge we have changed ours from the number of listings coming into the app (as we have always been a limited supply marketplace) to Annual Recurring Revenue (ARR), in recognition of the fact that revenue trumps growth in this new environment .

record multiple — This is a metric that has burst onto the scene in recent months and is essentially an indicator of how efficiently a company is growing. It measures the amount a startup spends to generate each incremental dollar of ARR and is calculated by dividing the net annual consumption rate by the net new ARR. A multiple of burned <1x se considera asombroso, 1-1.5x es excelente, 1.5-2x es bueno, 2-3x es sospechoso y >3x is bad.

One important thing to consider when looking at your burn multiple is which lever will be more powerful in getting you into the good zone: decrease costs or increase revenue? This is something each company must figure out for themselves, but as the table below shows, where halving the rate of consumption still leaves the company in the bad zone, sometimes revenue growth can still be the key. most effective strategy.

A graph showing the relationship between ARR and the rate of consumption for start-ups

rule of 40 — A cousin of the burn multiple, the rule of 40 is well known in the SaaS world and is a metric that combines the growth rate of a company Y cost effectiveness. It is calculated by adding a company’s year-over-year revenue growth rate to its Ebitda margin (more on that below). It’s worth noting that the Rule of 40 is most useful for more mature companies, since in the earliest stage of a startup, growth and profitability are often in direct conflict with each other.

ebitda (earnings before interest, taxes, depreciation and amortization) margin This is old school business 101 and a classic measure of profitability. While most early-stage and even growth-stage companies are unlikely to be Ebitda positive, it is now imperative to at least understand your path to Ebitda positive and have insight into what type of Ebitda business you are ultimately building. instance.

Recovery period — Instead of the CAC/LTV metric now comes the “payback period”. In other words, the time required to recover the costs of acquiring a customer or making an investment. This is much harder to avoid and really helps focus your mind on the time horizon in which the company and its investors are prepared to invest. Now that payback periods are top of mind, we are likely to see a reversal of the aggressive international expansion and speculative brand extensions of recent years and a greater focus on investing in core markets with their shorter payback periods. .

Productivity – If there is something layoffs on twitter have done, beyond providing a master class on how not carrying out layoffs from a legal and communications perspective: is to shed light on the concept of employee productivity. Investors are now excited about talks about the “right sizing” of their “overweight” portfolio companies, with metrics like revenue per capita and revenue per head of sales now front and center.

Market leadership – About him In recent years, you could be the 3rd, 4th, 5th, or even 10th fast trading start and get funding, in what Jason Lemkin called the “Postmate effect”. However, in this new era, we are back to the way things have always been: in most markets, winner takes all. This means that he must credibly demonstrate how he will get to number one or two in his category and stay there.

Impact — You may be surprised to see this listed, but over the next decade every new business will need a firm understanding of its impact beyond revenue, job creation, and customers. You will need a dashboard of your main impact metrics, which will likely include your carbon emissions, resource use, pollution, biodiversity, and impact on social equity. Ultimately, there will be no better return on investment than investing in the future of humanity, which means that strong impact metrics will get the highest ratings, so it pays to get ahead of the game.

Owner of your own destiny

During the radical change that we are experiencing, it is very important that the founders are at the forefront. By proactively leaning into this new era, you can prevent investors from micromanaging over your shoulder and make your business more profitable. In both respects, this takes you one step closer to being the master of your own destiny.

Tessa Clarke is co-founder of OLIO. She tweets from @TessaLF Clarke.

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