Granularity and Consistency of Startup Metrics
Tim Berry has a great post on Why I Hate Those Huge Market Numbers tells us that he doesn’t like to see business plans with multi-billion market numbers used as the basis for projections. It’s the old – 5% of massive market gives us a big number. I agree completely:
If it makes you feel better to give me that number in passing, okay, go ahead, but don’t put any emphasis on it. Instead, give me the details on how you’re going to make your sales, and to whom, on the first day, the first quarter, and the first year. Give me granularity.
If you’re a Web-based startup, for example, show me how many unique visitors you think you can get in the beginning, and what you’re using for an estimated conversion rate (buyers to browsers). Show me how much each unique visitor is going to cost you in search engine optimization and pay-per-click search engine expense.
Great stuff! And it’s surprising how few startup founders think in those terms.
And it becomes really important to have that granularity really fast.
I’ve talked before about initial conversations with founders and the questions I’m likely going to ask Startup Software Development – Do Your Homework Before You Develop Anything. Part of those questions are around Startup Metrics.
This aligns with understanding the the core business model:
- Get Users (= Acquisition, Referral)
- Drive Usage (= Activation, Retention)
- Make Money (= Monetize) (and Lifetime Value is a good one)
Of course, that’s a big part of what the investor wants as well.
And you definitely should have ideas around important proof points for the business. What hurdles do we need to hit for that next round of investment?
Good founders will have ideas about all of these at a fine grain. And it will be a consistent picture provided both to the team (CTO, COO) and to investors. We all are signing up for the same thing.
But the bottom line is that Tim won’t invest and I have a hard time executing when you describe the objective as 5% of a massive market. Ack! Give me granularity as well!
3 comments:
Andrew Chen, of Silicon Valley, has an excellent post and free spreadsheet on start-up metrics.
http://andrewchenblog.com/2009/01/19/how-to-create-a-profitable-freemium-startup-spreadsheet-model-included/
To often entrepreneurs don't know how to estimate the "response rates" needed to build a bottom-up financial model of revenue.
This includes the response rates for both marketing communications activities (ads, PR, social media, etc.) and sales activities.
In addition, they don't know how to estimate the "time lag" of marketing activities to know when to expect revenue to result from those activities.
Carlos - Thanks for the pointer. Great example.
Cliff - Good point. How do you think they should go about estimating things like response rates, conversion, time lag, etc.? I've seen quite a few models where there were some pretty optimistic estimates around these things, but it's hard to know going in what they will be.
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