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How to Choose the Right KPI for Your Startup?

Hesham Mokhiemer, MBA, CMA, CTP, FP&A, FMVA

How to Choose the Right KPI for Your Startup

Starting up a business requires coverage of a lot of areas. The entrepreneur must develop the idea from its inception to its manifestation. This process is wrought with complex processes that must be carried out. The entrepreneur must for instance decide how much startup funding they require; they must also develop the idea and turn it into a marketable product or service. The whole business plan needs to be created so that the business idea can be pitched to interested investors. Among all these complex and complicated processes, one very important process is the determination of key performance indicators for your startup.

What are Key Performance Indicators?

KPIs are a set of financial and non-financial metrics that can help entrepreneurs and in general the stakeholders get an idea of the direction in which the business is heading. For an entrepreneur knowing the right KPI`s for their startup is of utmost importance. The entrepreneur is required to know the pulse of their startup and the KPIs help them in this.

There are numerous KPIs that can be chosen for any business, the problem is not in the identification of KPIs. The real problem lies in the selection of right KPIs for the startup. For instance the list mentioned below contains some of the common KPIs

  • Revenue
  • Gross margin %
  • Net profit %
  • EBITDA %
  • Stock turnover
  • Receivables turnover
  • Payables turnover
  • Debt to Assets ratio
  • Customer retention %
  • Burn rate
  • Conversion rate
  • Lifetime value

These are just some of the common KPIs, there are many more KPIs that are common to every business and then specific KPIs that are only applicable on certain businesses.

The right KPI will allow the entrepreneur to know exactly what is happening with the startup, so that the strategy can be tweaked in a timely manner before things go wrong.

A startup that has figured out its KPIs will rank highly with the venture capitalists because they can easily assess the standing and potential of the startup. VCs keep a close eye on the KPIs of any startup they are investing in and often require that the KPIs are maintained to a high level to minimize the risk that their investment is exposed to.

Selection of KPIs

The KPIs are selected by the startup based on several factors. The short and long term aims, objective of the business, nature of business and the industry it is operating in and many other factors play into the selection of KPIs.

For instance a startup that operates mainly through its website will have the session duration of visitors as a KPI, it will also have the conversion rate as a KPI because for an ecommerce based business, it is very important to know the rate at which the visitors to the site are being converted into customers. In addition to this such a business would also have retention rate as a KPI.

As mentioned above, selection of KPIs is a very crucial step for any startup. The KPIs can therefore not just be selected in a random haphazard manner. There needs to be a systematic method to select the most relevant KPIs.

For the ease of the VCs and other stakeholders, the KPIs can be divided into the following four categories.

  • Financial KPIs: These are the KPIs that shed light on the financial performance of the startup. Some examples include
    • Revenue
    • Gross profit margin
    • Burn rate
    • Average revenue per user
    • EPS
    • EBITDA
    • CCC
  • User related KPIs: These are the KPIs that track the performance of the startup with respect to the users of the product or service. User KPIs are important as they help gauge the impact on the end users. Some examples include
    • Session time
    • Customer lifetime value
    • Monthly active users
    • Daily active users
  • Product related KPIs: These are the KPIs that track the performance of the product or service. These KPIs can tell any stakeholder how well the product/service is doing and where it is weak or needs improvement. Some examples include
    • Sales velocity
    • Viral rate
  • Marketing KPIs: These are the KPIs that track the market performance of the product. Some examples include
    • Market capitalization
    • Market size
    • CAC
    • Conversion rate

As mentioned above, there are so many KPIs that can be set up for any business that at times startup owners may get confused. The categorization shown above is good in general for any startup but there are also certain KPIs that may go under the radar if the above categorization is used.

For instance, if the business owner has chosen the following KPIs

  • Revenue
  • Net profit margin
  • Conversion rate
  • Customer lifetime value
  • Session duration

These are very important KPIs and let us just assume that a startup is showing above average performance on all these KPIs, but the startup is still not able to achieve its targeted growth. This clearly means that something is wrong but what?

To address such a situation, startup owners may want to use a different categorization.

1

Vanity

These indicators may have high value which may induce a false sense of security but there may not be much meaning attached to these KPIs. For instance the number of downloads may be high for a product but this can be a vague indicator because many users may download a product but not use it.

 

Actionable

Actionable indicators allow startup owners to take more direct action based on the value of the KPI. For instance, the Daily Active User or Monthly Active User KPI is a far more actionable KPI as compared to the number of downloads or the number of visitors.

2

Qualitative

Qualitative indicators are good but once again they do not provide actionable information to the startup owners. Employee satisfaction survey or a customer satisfaction survey is a good qualitative KPI but technically, qualitative KPIs are not strictly speaking KPIs.

 

Quantitative

Quantitative KPIs are considered as “real” indicators as they show quantity and present actionable information.

3

Exploratory

These are the indicators that are used for unspecified analysis such as the number of search traffic. Exploratory KPIs may present with information but they cannot pinpoint the reason if anything is not working right.

 

Reporting

These KPIs are management metrics that reflect the day to day status of the startup. For example, the number of search queries is a more directional KPI as compared to the number of search traffic.

4

Lagging

Lagging KPIs indicate past performance. These indicators are useful in understanding the current position of the business.

 

Leading

These are forward looking KPIs that focus on the forecasted information, thereby allowing the startup owners to set future targets based on leading KPIs.

 

How to choose relevant KPIs?

Now that we have understood the importance of KPIs and why the most relevant KPIs should be chosen, let us close off this discussion by going over some tips to help startup owners choose the most relevant KPIs for their startups.

  • Choose KPIs that are directly related to the startup

For instance, the Cart abandonment ratio is a KPI that is very relevant for an online store, but it will not be relevant for micro investment applications. Match the KPIs with the objectives and goals set by the startup. Make sure that the KPIs match the goals.

  • KPIs will differ by industry and sector

Each industry and sector will have its own set of relevant KPIs. Do some search for the industry and sector your startup is based in, to find some common KPIs.

  • Keep the list of KPIs short

There is no point in having a long list of KPIs. It will only take up time and energy. Narrow down the KPIs to the most relevant KPIs that can help you track and analyze the performance of the business. Having multiple KPIs that convey the same information is useless.

  • Align the KPIs with the stage of the business cycle

KPIs differ according to the business cycle of a startup. A startup in its early survival stage will have a different set of KPIs as compared to a startup in the growth stage.

 

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