YC Partner Adora Cheung covers the importance of defining and tracking KPIs to understand how effectively your startup is reaching its goals.
Adora: All right. So, I am going to be talking about setting your KPIs and goals for early-stage startups. So, I'm going to be pretty pedantic in this lecture. And the reason why is doing this correctly is a necessary condition for starting a successful or building a successful startup. So, the acronym KPI stands for key performance indicators. If you Google around for it, there are actually many definitions of what this actually means. But for the purpose of today, for this context, I'm going to define it as a set of quantitative metrics that indicate how healthy your business is doing.
So, this is important because, obviously, you should know what state your business is in at all times. So, setting the right KPIs and goals will objectively tell you if you're doing well, just okay, or bad. So, nothing keeps you more grounded, humbled, and realistic about where you are then a bunch of numbers because if you interpret those numbers correctly, they don't lie. It'll also actually act as a feedback mechanism for whether your current strategy like user acquisition, launching new features, and so on and so forth, are actually working. So, if you do something and things go up, that's probably good. If you do some things, some things go down, that's probably bad.
And it will not only help you prioritize your time but also course correct. So it follows if you do this incorrectly. If you set your KPIs and goals incorrectly, you can direct your startup into a bunch of circles. Or if you do it for too long on to the wrong path, it'll lead to its unnecessary demise. So, what are the right KPIs to set? I'm going to break this down into two pieces, primary metric, and secondary metrics. And most of today is going to be focused on the primary metric.
So, every week in Startup School, we've asked you in the software to fill out, to define your primary metric and then update its current value. By definition, you can only pick one primary metric. And it's the metric, if you had to, you'd be willing to bet the whole company on. So, why just one metric? It's a way to focus and keep things very simple. If there's a way to get 90% of the job done with just one variable, that's better than having a bunch of variables that gets, let's say, 91% of the job done. In this case, the job to get done is quickly determining how well your startup is doing. So, what are the characteristics of a good primary metric? There are four of them.
One, so your primary metric should quantify how much value you're delivering to your customer. That is, you obviously want to build something that people want. Now, how much do they actually want it? And users often indicate the value through either training you through money or time. So, revenue is always the best metric. I pay you $100 to use your product, your software, I must at least value that $100. Active users using the product once a week or once a day, we call that weekly active user or daily active user, is a weaker, but another good decent indication of whether you're delivering value or not. The second one here is your primary metric must capture whether your product has recurring or enduring value to your user, or it should anyway. So, for example, in a SaaS tool, most SaaS tools use MRR, monthly recurring revenue as their primary metric. I commit to forking over 100 bucks a month, continuously every month, because your product demonstrates to me every month that it has value to me. Another example is if you're building an online digital daily newspaper, then obviously DAU, daily active user is a good one because I expect to be delivering content to you that is valuable to you every single day. So, hopefully, you'll come back every day.
The third one here is your primary metric should be a lagging indicator for its success. So, a common trap that founders do to trick themselves is by picking a primary metric, let's say, something like email signups. Because one, it's easy to move. But while it may eventually influence revenue, or actual usage, it actually doesn't represent real value the best. So, the best indication is when the value has already been delivered, it's already occurred. So, when someone has already forked over their time or money, to use it, then that is what a lagging...that's a definition of what a lagging indicator is. So, if revenue increases, it's because more customers have already paid for the product's value, versus a potential customer came to your site, gave you an email, and maybe they'll sign up one day or maybe they'll use your product one day to buy something.
And lastly, your primary metric should be usable as a feedback mechanism. That is it helps you prioritize strategies and make decisions quickly. In a start-up, one of the key things to be to being successful and getting past product-market fit stage is to iterate very fast, right? So, while you want it to be a lagging indicator, you also don't want it to lag too much. So, for example, a lot of people pick MAU, monthly active user. But this is usually not a great metric because it takes time to understand the impact of movement, especially in a startup this early as in your startup. And so, many things can happen within a month. And also, another reason why I don't like MAU, generally, is because if your user only comes back once a month, they only value something that you're building once a month, I really question actually, if you're solving a real problem.
All right. So, you may have guessed from me talking about these four characteristics of a primary metric that there are really two primary metrics to pick from. So, one is either revenue or active users. Ideally, you're picking revenue because nothing tells you more about delivering real value than people forking over, handing over real hard-earned dollars to you. And even better, is picking revenue that people keep giving you over and over and over again, like monthly recurring revenue, MRR. It's the best test for whether people really want what you're making. So, that being said, some people do pick revenue, but a common trap they fall into is that they don't actually get paid. And usually, I hear something to the variant of, "Oh, I have these 1000 users not paying me anything. I just want to get their feedback and see how they're using the product and make it a little bit better and then eventually, I'll get them to pay or the next 1000 users, I'll get them to pay." That's a trap because free users will give you different types of feedback than users who are actually paying you. Paid users are just more serious about the product, and hopefully, will be more serious about giving you feedback.
So, I urge you to just get paid. All right. So, what are reasons why... So, Kevin in an earlier lecture said 99% of you should actually use revenue as your primary metric. So, what are reasons why you should consider active users? So, one main one is because building a large audience as it is actually a prerequisite to monetization. So, an example of this is if your business model is advertising-based, like a Facebook or Google, then yeah, you need millions and millions of users coming back to your site every day, before you can actually get brands and people to buy ads.
And so, in this case, active users is actually a reasonable proxy for revenue because eventually, when your startup starts making money, it's usually just...revenue is just a multiple of your active users.
Another reason is also, but much, much more rare, is if you have very strong network effects. That is, if you're like a marketplace that requires tons of users to just get the flywheel going and grow, then maybe that's a reason for you to focus on active users today versus revenue and then just do revenue later down the road.
Now that being said, if you're using active users as a metric, it's important that you define user appropriately. I hear often, I ask, "Okay, what's your primary metric?" "Active users." "How many users do you have?" "I have 100 users." What does users mean in that situation? Sometimes, to people, it means 100 users that just signed up and gave you an email. Sometimes it means 100 users that signed up and started using your product and come back every day for about 10 minutes a day, which is by far, much better than just people just like diddle daddling on your site, right? So, you really need to get that definition correctly and don't trick yourself by just saying users and get having a really easy definition of users.
Another example of users where it's not exactly users is if you're in a marketplace and there are two types of customers or two types of users. So, a good example is Airbnb. Who are your two users? You have not just the guest, but you also have the host. So what are you to do? How do you pick just one? Well, you pick a value that actually represents them both getting value. So, in Airbnb's case, it would be nights booked. Right? Another example is Uber. So, who are your two users there? You have riders, and you have drivers. And so an example of a primary metric you could pick there is weekly trips. Okay?
All right. So, there are always exceptions to the rules. And there is one exception in which your primary metric is neither revenue or active users. And that is if you run a biotech, a hard tech business, and you're still trying to figure out whether the science or tech is actually going to work. Can you actually build a product? And another definition of this is for biotech or hard tech business, is it often takes a lot of time and money to get your first product to market. So, what's the founder to do especially you have little funding?
So, there's two answers to this. One is, if there are no regulatory issues to doing sales pre-product, you should actually do the same as everyone else. It should be, most likely, revenue. Your primary metric should be revenue in the form of paid contracts, LOIs, POCs, proof of contracts, proof that if you build it, they will actually come. Now, if you are in a space with regulatory issues, meaning you can't sell it at all, without having to go through like FDA or some kind of body like that, then your product primary metric is actually less quantitative, per se, and more of a binary thing. So, it's about figuring out the technical milestones that you need to demonstrate to mitigate the risk of whether the drug or tech is working. So, if you have to think about the experience to prove this out, you can ask a question, like, what are the minimal things I need to do to truly answer the question of whether this works or not? So, if you fall into this category, I urge you to actually just go watch these two lectures. They're actually fireside chats I did last Startup School with Elizabeth and Eric. Elizabeth is an expert in biotech and Eric is an expert in hard tech. And they actually go through deep, deep dive into how do you think about your goals? And how do you think about your milestones? And what metrics to actually track?
All right. So, people have referred to the primary metric as a North Star Metric. And I actually don't like the term North Star, because it kind of...people have interpreted it as something, you just focus on this one metric and then ignore everything else. But like I said earlier, there's no metric that actually tells a story, that tells 100% of the story, maybe 90%, but not 100%. And so, sometimes, founders fool themselves by literally only tracking their primary metric and nothing else. So, a common example is just looking at user growth and just ignoring retention completely. But retention is obviously just as important to user growth, as is new user acquisition.
So, one suggestion I have is to select a set of three to five other metrics, secondary metrics, to pair it with your primary metric. This gives you a good 360-degree overview of the health of your company. So, there are a ton to choose from, so many to choose from. What you choose is actually very dependent on your business. Next week, we're going to have two lectures on these sorts of metrics. I'll be giving one on consumer startups and another YC partner I know will be giving one on b2b companies. And so, we'll deep dive into these metrics next week.
The key here, though, is just picking a few, right? At most five, three to five, closer probably to three. You don't want to boil the ocean and pick everything. It's totally fine to track all this kind of stuff. But it's really not a good idea to optimize too many at once to really just suffer from analysis paralysis. All right. So, a common question I have when I say, what is your primary metric used for set one? Well, what if I haven't launched yet? Well, obviously metrics don't matter. If you don't know what the problem you're solving is, you don't even know who your customer is yet, you should really just focus on that first. You'd be really putting the cart before the horse by worrying too much about this kind of stuff. That said, once you get to the point where you're building the product, it's really a good idea to get this down. Even if you haven't launched yet. By at least defining your primary metric, you'll be able to think about who your user really is. You get everyone on the same page on who you're targeting, and even you can use the metrics and goals to hypothesize on how you might get your first few users.
And trust me, nothing is more motivating than staring down the barrel of zero users and zero dollars of revenue for weeks on end, you're going to get very antsy about launching very quickly and that's actually the effect you want.
All right. So, I'm going to go into how do you set goals for your primary metric for your KPIs. So, Paul Graham actually wrote a great essay a few years ago called "Startup equals Growth" and explains why startups should focus on growth. And I really urge you to go read it. And this section of this lecture draws a lot of insights from it. The goal of your startup is to grow your primary metric. By doing this, it does two things. It proves that you're making something lots of people want. And second, it proves you're making something that has a possibility of reaching and serving all those people. Each week, your goal should actually be to set a weekly growth rate. Now, we use weekly increments because startups early on need frequent feedback from their users to tweak what they're doing. But also, we use weekly growth, right, because it helps to divide up the progress you need into doable chunks.
So, say your goal in a couple of months is to get 10,000 daily active users, which requires growing new users, let's say 10% week over week. To grow 10% this week, may amount to actually just getting 100 new users which is a different problem to solve than trying to get 10,000 new users, right? You should be focusing on what's directly ahead of you in that week, do things that don't scale today if that's actually the best way to get those 100 users. And don't worry about the eventual goal of 10,000 too soon.
So, naturally, the next question is, how fast should I be growing? What should this rate actually be? Well, there's no good formula. There's no right formula for this. But one angle that we could tackle it from is looking at good startups and seeing how fast they were growing in the beginning stages of their life. So, I actually went back and I looked at the good startups who pitched in recent YC demo days. So, these...if you think about these startups, they were three months prior, they were all in the phase that you are probably in today. And it turns out the growth rates ranged anywhere from 20% to 200% month over month but clustered more closely to 20% to 50% month over month. Once you have a backup, back it out, it amounts to about 5% to 10% week over week. And so, this chart, just to explain it real quickly, the left-hand column is the weekly growth rate. And then, these are the equivalents that you need to grow by month, and then what the multiple is by year.
So, this is actually in line, if you read that essay PG wrote a few years ago, which he said, "A good growth rate during YC is 5% to 7% a week, if you can hit 10% a week, you're doing exceptionally well." And so this is the green area, which we've seen consistently, actually, in the recent batches of YC.
So, growth is a little hard to grok. But if you look at this chart, you'll see how small variations in weekly growth rates can make a huge difference on the monthly and yearly time horizon. You'll also get the sense that to get big fast, it actually seems doable if you have something people want. On the flip side, if you only manage 1% weekly growth, it's a sign you haven't figured out things yet. It doesn't mean that you have a horrible business, you can run a great small, profitable business growing 1% week over week, but it's not a good sign that you have a start-up with a billion-dollar potential. So, you should think about that trade-off there and what you really want out of your business if you're growing at that rate.
That said, the main thing, in terms of setting your goals, is to think for yourself, is to define your own goal based on not what others are doing, but what you think is ambitious and achievable based on the products you're building. So, you know your users and business better than everyone else. What does success look like for you? And what does being on track look like to you? So, here are some general guidelines when defining a goal.
All right. First, if you're solving a real problem in a large market, then that means there's a ton of latent demand out there. People would use just about anything to use your product even if it's half-broken, half baked, or just solves a bit of their problem, which means that startups usually have fast initial growth. That said, where you are today matters. So, if you have a ton of users and a ton of revenue, you will probably know that, at that volume as a volume increases, what you need every week to grow, gets harder over time. So, again, most startups that grew very quickly, and then over some time, they kind of the growth rate kind of slows down a little bit.
The second one is time to sell. So, when you're trying to set your goal, you need to consider how long it takes to acquire a user and make a sale. So for a consumer startup, generally you have an app or a website, I show up to it, I look at it, I see if I want it. And then if I do, bam, I buy it, or I sign up for it. And so, it's instantaneous. For an enterprise startup where you're actually probably going through some red tape, you have a bunch of stakeholders you have to deal with. You can show up to the company and they're not going to be willing to buy it right away because you're maybe not even talking to the right person. So, it might take some months to actually get your first sale. So, you'll have to take that into account.
Over time, this time to sell should actually decrease over time. Good enterprise startups, that time to sell goes from once to hopefully days, if not hours, and so it shouldn't impact your growth rate in the future, but in the near term, it actually might.
Third, is you really want to focus on organic versus paid users or paid growth in the beginning. Organic means they discovered through word of mouth. Basically, you're not paying for the user. They kind of just, maybe are searching for it and using it themselves. I think in the early days, using paid users is actually cheating growth, and you should avoid it as much as possible. And finally, because you're a startup, startups equal growth, you should focus on exponential goals and not linear goals.
All right. So, in terms of picking the goals, I think there's two ways to do it. One, you can just pick a growth rate. Pick a growth rate that you think you can hit and if you hit it, great, you probably should change it if you're hitting it consistently to something higher. If you're not hitting it, then you should be a little bit alarmed and you should figure out why. Another way to do it is time-box and absolute goal. So what I mean by for that is, say, for the purpose of Startup School, at the end of startup school, how many active users or how much revenue do you want to have? What would it look like, what would something meaningful look like at the end of 10 weeks? Then go back out, your weekly growth rate, and then go week to week, figuring out the obstacles and how you should hit that weekly goal.
In the beginning, if you're somewhere close to zero users today, often you'll get something higher if you do this method, then 5% to 7% week over week.
Tracking progress. So, metrics and goals obviously don't mean anything if you don't leverage them. Use these as a motivational tool. So, one way to do this is, get a piece of paper, draw a forward-looking graph of what the growth you want to hit in the next 10 weeks, print it out, and put it everywhere. Put on top of your desk, put it on the bathroom mirror, put it on the fridge, and update once a week. This is in fact what the Airbnb founders did in the beginning, and if they hit the numbers, great, if they did not, that's all they would talk about. And so, I would follow something like this.
Now, you want to leverage your primary metric and goal to help you prioritize your time week over week. So, week to week, you should be stack ranking all the ideas you have of how to grow it and make a good guess on what's going to have the biggest impact for the next week to meeting your goal and then choose accordingly. Occasionally, you won't hit your goal for the week, we can dream that our growth will be flawless and look like this, but in reality, in the beginning, it always looks something like this. It's okay if you don't hit your goal one or even two weeks in a row as long as you understand why. You should be always asking yourself what is the biggest obstacle in my way of hitting my weekly target? How do I overcome this? And be obsessive of this. If you don't know the answer, then the answer is, go talk to more users and don't spin in circles trying to figure it out yourself.
A good startup idea will keep growing at some point. So, not hitting your weekly targets week on end, will maybe just help inform you you're not working on the right thing or even the right idea. Finally, to end, as you already know, our Startup School software asks you to set your primary metric and goals. It is important to be honest about where you are and one of the best ways to do that is to fill this out every week. We've given you the software to do this very easily. It is not for us, I promise you, it is for you to use and get in the habit of doing it. We hope you fill this out throughout the course and moving forward even after the course you keep doing it. It's a good habit to have. I guarantee you if you're not already doing this, just adding this one simple thing to your workflow is going to help you and change things dramatically.
All right. So, I am going to take questions.
Audience Speaker 1: So for a nonprofit, what would your suggestion be for primary method and secondary methods?
Adora: So, the question is for a nonprofit, how should you set your primary metric? The nonprofits that we actually work with at YC, we want them to get in the state where they don't have to rely on going out for donations, like, every quarter every year. And so, it's actually to develop a revenue model. And so, while you're not looking to seek tons and tons on profit, you should still be having revenue coming in the door. And so, I would probably use that as a yardstick.
Audience Speaker 2: Is LTV ever a good secondary metric to measure, or sorry, is it too early to think about it?
Adora: Good question. So, the question is LTV a good secondary metric or even a metric to track? So, I'm assuming all of you guys are early-stage startups, and the answer is that you should just ignore it for now. So, LTV is lifetime value. It's something where, basically, it's how much revenue your customer is actually going to generate over the course of the life with your product. And that's so hard to estimate or actually impossible to estimate when you have just a few months of data or any data at all.
So, I'm actually going to talk a lot about this next week. But just to give you a preview, like, the jargon LTV is often paired with CAC. And so people are like, "Oh, your LTV should be more than CAC." CAC, meaning customer acquisition cost. I think the more important thing if you're focused on paid growth is to look at payback period in the early days. And hopefully, that payback period is zero, zero days. Like, you are profitable on the first buy. Yeah, right there.
Audience Speaker 3: If you're an enterprise startup, would you focus your tracking on like graded pipeline value, or would you just still track everything?
Adora: Yeah, so the question is, if you're an enterprise startup, meaning probably the sales cycle is a little bit longer, should you actually be tracking something else like... What did you call it?
Audience Speaker 3: Graded pipeline value.
Adora: Oh. Pipeline value or LOIs or something like that. So, I think these are great secondary metrics to actually track. Ultimately you want the revenue, the actual revenue that's booked and that you're getting in the door. And so enterprise startups do often have metrics like that, that they're tracking in the near term because that actual revenue is zero for a really, really long time. But yeah, so hopefully that answers your question. Yes.
Audience Speaker 4: So, not having the paid users in the beginning. So if the consumer-facing, for example, hardware products similar to Kickstarter. Kickstarter, obviously marketing products. So, what percentage CAC is a good way to get product sales from the price of the product in the beginning? Because in the beginning, obviously, you have to pay something prior to get the word out for some cases.
Adora: So, the question is, if you're building a hardware product, often you need to do marketing campaigns, which requires a bunch of money. And so, I believe the question is, what is an ideal CAC to actually spend? I mean, obviously zero. And so, I think when I think about CAC, I'm thinking about not maybe like a fixed marketing budget. Like, maybe you do need to spend like, X number of dollars to do a video for your Kickstarter campaign. What I mean by CAC is the amount you have to pay and scale on a per user basis. So to acquire a user, I need to pay $50 moving forward. And so, obviously, you don't want to be paying $50 if you're not making $50 from the customer. So, at the very least, you should be breakeven. Do not pay more than what the customer is actually giving you on a profitable basis, on a margin basis.
Again, I question whether people actually want to buy this product, if your whole entire strategy is just paying for users. Because at some point, even if you pay for users, they hopefully enjoy the product so much that they're talking about it. And that word of mouth and referrals or things like that are actually starting to go. And so, your CAC, hopefully, if you have to start with one, is going down over time. All right, one more, yep.
Audience Speaker 5: If you need funding to build your MVP, is your MVP too ambitious?
Adora: If you need funding to build your MVP, is your MVP too ambitious? It depends on... So, Michael just gave a whole lecture on MVP. And then, also I'm guessing you're thinking about his definition of a heavy MVP. I think there are many ways to answer that question. But if you're in one of those businesses that require a lot of capital to get the first product to market, then you'll have to find other ways then to obviously get funding, whether it's pre-sales, if you can do pre-sales, that's the best way to do it, paid contracts, just guaranteed revenue upfront to help you build your product. The other way if you have to go to investors is again, investor is going to want the situation as de-risked to him or her as possible. And so, I would be setting up experiments that help output data that shows that, you know, what I'm building is actually feasible, and actually people want it. Cool? All right. That's it. We'll next have Ilya from Segment. Thanks.