When talking about startups with founders, employees and investors all you hear is about how this idea will disrupt the market and change the way people live. At least officially everybody will tell you that they are 100% sure that their company will be a success due to the best technology, team and execution. Statistics tell a different story. 9 out of 10 startups fail and only 1% of the startups become successful (exit or taken public). If your company is successful you reach what everybody is trying to achieve after founding a startup. A low probability for a high payout (not necessary monetary) in the future. Stories of successful startups make it sound easy although it is not. Even if you have a good idea and thought out the operational process, success is not guaranteed.
Many startups competing for the same market and customers
In a lot of cases many different startups with just slightly different business models are competing for the same market and customers. This usually happens in markets with really fundamental and behavior altering
Different startups with just slightly different business models are competing for the same market and it is hard to tell which one is successfulideas like currently happening with passenger transportation all around the world. To execute this idea you need a lot of upfront capital for a gigantic possible future payout. Still there are companies like uber, lyft and others competing for the same customers all around the world.
Also in smaller niche markets e.g. email based Customer Support SaaS companies like Groove, HelpScout, HelpFox, HelpSpot, SuportBee to name only a few, are competing for much smaller future payouts with a similar business model and the same target customers.
So how can a business differentiate itself? Why do some businesses become greatly successful and why do others silently fade away into insignificance?
How can you tell if one startup will be more successful than another?
With several startups competing for the same customer group it is hard to tell which of the startups will be successful. In the beginning most startups are not yet profitable and do not have many hard metrics that can be measured. That is why founders and investors often measure metrics like monthly revenue and customer churn, metrics that do not predict the future success of a company to its full extent. These metrics are important, but research has argued and tried to find softer and more psychological metrics that try to predict at an early stage if a company will be successful in the future.
Dimensions to tell if startup will be successful?
In order to tell if a startup will be successful we think that the metrics used today are not enough and need to be supported by metrics that can be projected into the future or at least give a rough direction how the future can look like if the current structure and development of a company are maintained.
We differentiate two dimensions in startup metrics and separate them into soft and hard metrics. Hard metrics refer to the usual KPI investors and founders measure when assessing startups. Soft metrics are geared towards customer sentiment, satisfaction and his identification with your brand and try to assess how happy a customer is with your company and thus will stay a customer for a longer time.
There are several variations of these KPIs and many further ones you can track. The following state the essential and most important ones:
Since usually a startup does not have any earnings to show one goes to the next best metric: Revenue. Startups try to maximize revenue. In the early stages growth rates of 5% to 7% are average for a company going through for example the Ycombinator program (according to Ycombinator). 10% weekly growth rates are exceptional. Anything below 5% is considered low, but can be addressed to different factors like lack of product-market-fit, missing sales strategy etc. and does not always mean that you have a bad idea.
Customer churn represents the percentage of users canceling your business or subscription. This metric is usually measured only with software as a service business model or other subscription business models e.g. a gym memberships or a grocery delivery service on a monthly basis.
Customer Livetime Value (CLV)
In order to acquire a customer you need to know how much you can spend on the acquisition. For that you will need to know how much a customer is worth to you over his lifetime (CLV). This can be achieved by calculating the average duration of your customer´s contracts and multiplying it by the average customer account size. So if you average customer contract is 14 months and on average you bill your customers $ 110 per month your CLV is $1540 (14*110). This is the maximum you can spend on customer acquisition if you still want to make profits.
These three metrics represent the current status quo and give an idea what metrics startups measure on a regular basis. We believe that these metrics are not enough and do not tell the whole story and leave some questions unanswered: From what customer base is this revenue generated? Are these customers satisfied? Is the team working on the product happy and satisfied and will it be there in the years to come to support further product development?
Soft Metrics are geared more towards customer sentiment and identification
Due to the lack of reliable data startups must turn to different metrics than established companiesWe argue that especially startups where further hard metrics are unavailable because of the lack of reliable data, there are more important metrics that we call soft metrics. These metrics are important for startups that can not yet rely on historical data. The softer metrics measure customer satisfaction, how much the startup is talked about and how satisfied your team is.
The most efficient and cost effective way to get new customers is through referrals, word-of-mouth and social influence. Depending on your virality coefficient your future user acquisition cost and revenue growth will vary greatly.
Basically this metric measures the organic growth of your product. A high virality coefficient is the dream of every founder because it means exponential growth. In the beginning a new company will usually grow by inviting friends and family to try out their product and then usually venture into more strategic and planned out acquisition tactics. If you have a high virality product the initial set of customers will be very active in promoting the product to their friends and colleagues and can set of organic growth just through word of mouth.
You calculate the virality coefficient by multiplying your initial set of customers, the number of referrals they have sent out and the conversion percentage. For example free multiplayer games will have a high virality coefficient. They encourage you to invite your friends to play by giving you easy access to a referral engine directly inside the game and incentivize you through bonuses that you can obtain when you invite your friends or share your game status on social media.
The virality coefficient is a very specific metric and can only be measured in certain businesses like ecommerce, SaaS and other digital businesses. For all other businesses the measurement of the Net Promoter Score will be a better metric to measure.
The NPS makes it simple to track many of the soft factors that we need to measure in the early life of a company. It is based around the question “would you recommend this company to your friends or colleagues” asked to your present customers. The answer is given on a scale between 0 and 10.
The average NPS score is around 20. The score can be between -100 and 100, the higher the better. It is the best soft metric to measure for a new company because it is easy to measure and combines a lot of input that tells whether a company is on the right path. Besides a measurement for customer satisfaction it also will give you indication about your product design and usability, your customer service and if your product solves your customer’s problems in the way they are looking for. Empirical research has also shown that a rising NPS is an indicator for revenue growth.
Internal employee NPS (eNPS)
Steady growth and a sustainable development are only possible when the internal structures are intact and employees are satisfied. Especially in the first days of a new company your team is everything. If a key person leaves it is possible that the development of your product will come to a halt and even the future of your company could be at risk.
That is why we propose a second NPS implementation for the employees of your company. With the same question that you ask your customers you can determine whether your employees would encourage their friends to work at your company. If the eNPS is high, your employees are satisfied, believe in your product and support the internal structures.
While there are certainly more specific metrics that also apply to startups the proposed soft metrics give insight on processes that are very important at the start of a new company and can make or break companies in the first few months after its foundation. What do you think? Are there any more soft metrics that should be measured?