In the context of investing in innovative startups and SMEs, we often talk about ‘metrics’ as a benchmark for assessing whether an investment will be profitable. What are these metrics and why do they matter? What are the metrics that really matter to startups seeking capital, and to investors looking to invest in promising projects?
KPIs (Key Performance Indicators) form an important part of the valuation of any business. In the startup sector, these metrics take on particular importance – given that new companies do not have a historical financial records, KPIs are the only indicators which help the entrepreneur or the investor to understand the current state of the company.
To simplify the concept of KPIs, we can divide into two areas: the first concerns ‘validity metrics’, whilst the second is related to performance measurements.
Measurements of validity show the progress of a product which is newly launched or in the launch phase. The business owner can use these metrics to evaluate the success of the product on the market in order to understand what its strengths and weaknesses are. Some examples of validity measurements are:
- the number of users that have signed up to try out a product
- the number of positive responses to a questionnaire to establish market need
- the number of returning customers who come back to buy a product
These performance indicators are aimed at more mature startups during a growth phase, that therefore need to find key indicators to track the progress of the business. Some metrics to measure performance could be:
- Customer Lifetime Value
- the number of active users per month
- the cost of acquiring new customers
- the average usage of a software or application
There is not a defined group of key metrics that will perfectly reflect the performance of any type of business. Every company needs to identify and track key metrics which are appropriate to their needs, taking into consideration the business’s current stage of development, the priorities of the company at the time and any plans for future development. The difference between the success and the failure of a business is often determined by choosing KPIs speedily and effectively. In this context, the best businesspeople are those who are ready to change metric when circumstances require it.