Here’s Redpoint VC Tomasz Tunguz’s top 10 metrics, including a new one for me – TSM – or trailing six month (average), which he says are the ones he’s found most useful in board meetings:
With the analytics tools today, it’s easy to measure hundreds if not thousands of different metrics for your business. Cutting through all the chaff to determine the most important or insightful metrics can be quite a challenge.
Below are the ten metrics I’ve found to be most useful in board meetings. They answer the questions of how should a startup founder might measuring the business at the highest level. You should have many more metrics than these, but I’ve highlighted the ones that I recommend presenting to your board and reviewing each week.
Clear data leads to productive conversations. To best understand a data point and its implications, we have to put it in context.
I’ve found dividing top level data in three slides, one for company priority (Distribution, Engagement, Revenue) helps to set the right context. Within the slide, a table that shows the metric and compares it to last month, then explicitly calculates the monthly change, the trailing six month average and finally compares the metric to the goal best communicates the state of that metric. See below for an example.
Metric This month Last Month % change TSM Average Goal Active Users 100,000 50,000 100% 125% 75% Total User Base 500,000 400,000 25% 7% 10%
The TSM Average column is the Trailing Six Month Compound Growth Rate. It is calculated in this way:
In most businesses, a monthly growth percent is too volatile to be meaningful. However the TSM Average smooths out the monthly change. Comparing the monthly to the TSM, we can get a sense of whether the monthly growth is accelerating or decelerating and how it compares to the goal you set each quarter. In this example, the total user growth was slower this month than in the past six month, but activity is way up. The next question, the one board members and founders should ask, is why?
Now that we have the base format of the metrics, let’s talk about which metrics matter. Each metric is followed by the question it’s designed to answer. Pick the ones that are relevant to your business.
- New users added last month by channel/TSM growth rate: How are well are we growing the user base? Which user sources are the best?
- Total user base/TSM growth rate: How important is our monthly growth compared to our total user base?
- Cost of customer acquisition, lifetime value, pay back period: Can we grow faster through paid acquisition? Are we acquiring customers profitably? How much can we afford to spend on new customers? How is this changing over time?
- Active users (can defined in several different ways depending on your product) by channel/TSM growth rate: Are we getting better at giving our customers what they want/need? Which channels of users are most effective in finding us the right kind of user?
- % of users using top 3 key features in a given month: Are our product initiatives the right ones?
- Revenue / TSM Revenue growth: Are we growing our revenue?
- Conversion to paid rate in that month/by cohort: How many users converted to paid? Are we improving our ability to convert customers to paid?
- Avg spend per paying customer of a managed account vs solo account: What is the impact of the account management team?
- Churn rate/ TSM Churn rate: How well do we retain our customers?
- Burn rate: When are we profitable? When do we run out of cash? When do we need to raise?
These are the metrics that have been most valuable/insightful for me working with our companies.
So if that didn’t do the trick and get you focusing on the numbers maybe this fun video from Guy Kawasaki at UC Berkley will help – skip to 08:30 to bypass the introduction – and to get straight to the first mistake entrepreneurs make:
Guy focuses on one simple message, if you wanted to sum it up, it’s that’s VC’s are just interested in the numbers. But that begs the question, what numbers are they interested in when seeking investment?
Here’s Tomasz’s answer when I asked him that generic question: “Each business is different. Each VC is different. But ultimately if you can show profitable unit economics I think that’s a good start.”
So my suggestion? To give yourself a better chance of succeeding ask the VC before your meeting what they use as key generic KPIs to judge investment, and why? Then adapt to your specific business case.