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There are lots of metrics which you need to track, understand and build on to run a good business. Typically there is too many, which is why I suggest trying to find three key numbers to know if it’s really working.
This started when Mike Cannon-Brookes was on the Pollenizer advisory board and pushing us for regular metrics, but keep it simple. “Just give me three numbers which means you’re going forward.” I’ve pushed the companies I’ve worked with on the same point and ended up adding the three metics to my version of the lean canvas.
The reason three is a good number is because it can’t possible include everything you need to track. You need to pick those that really matter. Even just asking this question is a great way to know if you are tracking a vanity metric or a real number.
The other reason why 3 is good, is it makes you find a simple way to communicate progress which is important for team, investors, spouses and yourself. Three is small enough to put in an email subject line to ensure that you can keep everyone up to day, and it’s also simple enough to keep everyone aligned.
This is the harder part. The rule should be that if this number improves, your business is substantially working. It should be an indicator of real value. Something substantial that can’t be faked, crammed for or easily replicable. It’s a number that should get you genuinely excited.
When you first start a business it’s easy, and maybe important, to look for any sign of interest to show some validation of the risk you’re taking. Friends telling you it’s a great idea, retweets, page visits, sign ups, facebook likes, PR mentions. All these numbers give you a short term high, but they are not a foundation of a business. They can’t be built on.
Don’t worry if one of the numbers is going to be zero for a while. That’s fine. Things like renewed customers take time, so you can track other numbers which are building towards that and you may change the numbers you track over time. Just be aggressively honest with yourself to say is this a transitionary number or does this number actually, really, really mean that it works.
Here are some of the things I look for in a good metric.
Value To Your Customer
One of the best metrics to track is the actual value you create for your customer. I often say that you need to create 10x value for new customers of a new product which means if the total cost of the product (including price, risk, time, etc) is $100 then you need to add $1,000 of value to get them to use it. So understanding the value your customers get and measuring it is obviously a great metric to track. Not always easy, but critical to at least ask and a lot of time it’s actually possible.
Actioned confirmation of value
I like numbers which mean that there has been clear acknowledgement by a real customer that they got value out of the product. Unfortunately this doesn’t just mean a sale. (Though I love sales). A sale may mean that you’re good at sales. It doesn’t mean that you created value that the customer appreciated. The second sale does. Or a renewal does.
For a free product, it needs to be serious usage to show that people are really using your product. Typically this means usage multiple times over a sustained period. Zynga uses 90 day actives. Who has been active every month for three months.
Another test is would that number be meaningful to someone outside the organisation. i.e. an investor. This can also be looked at as sellable value – if you had a bunch of that metric would someone buy this. People buy contracts with customers or seriously engaged users that are in some way locked in.
Examples of Good “3 Metrics”
- Renewed paying customers.
- People used the product three days in a row.
- Gross profit from renewed customers.
- Conversion of trial to paid – means they saw the value and want to commit to it.
- Money saved for your customers.
- Time saved for your customers.
- Money made for your customers.
Put your three metrics in the comments and I’ll let you know what I think.
Here is some other good reading/watching on this:
Planning is useful. Plans are most often useless. Especially in startups.
A startup is trying to be a small business and the difference is uncertainty. There is so much uncertain that to try and write a business plan, even with ten MBA’s and PHD’s, you’d still be left with a laundry list of assumptions.
That being said, the process of planning is important and my suggestion is to scale your planning with your business.
- Before you start – keep it very simple and do a one page business plan, business canvas or my version of the canvas. Mick’s Focus Canvas
- Discovery phase – Use your canvas until you have spoken to at least 5 customers and done at least 5 experiments. After that, start a brand new canvas. Don’t edit the old one.
- Validation phase – Do a pitch deck to present, not to read through. Start with the Universal Pitch Deck and make sure all questions are answered satisfactorily. Make sure it flows as a story and there are no gaps. It is OK to say that an area needs work.
- Efficiency stage. You can either do a pitch deck to read through, as this will lead to a better flow, or you can do a 5 page business plan. No longer. Most of this should be dedicated to how you are going to make it efficient and your current hypothesis on scaling. Plus capital requirements. If you are raising more than $1m at this stage, you might need to refer to this as an Information Memorandum or IM in Australia. It’s a non-audited investor document.
- Scale stage. If you are looking for real scale capital (which means that 90% of the money raised will be going to growing sales or customer acquisition) then you might need a 10-15 page business plan or IM. You’d be raising $2-10m at this time.
Important note. A business plan will never get you funded. It will only stop you not getting funded. Does that make sense? So if you have a good plan it might answer all the questions an already interested investor has and show to them that you’ve thought it through.
Here are some amazing decks on how to raise money and what you need to show;
2014. That is the year, and that is my goal for Sydstart.
I gave one of the first talks at the first Sydstart way back in 2008 when there was 50 people in a free room at the Australian Technology Park. I’ll always remember the words on the website.
“It’s time we put a rocket under the startup industry here.”
This year is at the Sydney Entertainment Centre and we want it filled with energy and entrepreurs and geeks and hackers and hustlers and robots and ninjas and pirates.
What you’ll get out of going:
- A day immersed in tech startups.
- You will see more than 50 new tech companies you never knew existed.
- You will meet more than 50 people who have energy, ambition and are kindred spirits.
- You will learn at least 10 new things.
- You will get introduced to at least 5 new products that you will try and love.
- You will be amazed at how big and exciting the Australian technology industry actually is.
- You will hear at least 5 things which will make you laugh.
- You will see at least 10 tee-shirts with cryptic messages that initially you don’t understand but then laugh at a few seconds later.
- You will get back to work the next day moving faster and being more focused.
- You will remember the day for the entire next year and know how exciting it was.
One of the hardest things to do as an entrepreneur is to hold both laser focus and huge ambition in their heads, hearts and hands at the same time. It’s not just a challenge, it’s actually an important part of making it a success.
I found a great video by legendary radio broadcaster Ira Glass about his lessons around living with the gap between your current ability and your ambition.
A comment he makes which is absolutely true for entrepreneurs is that you must complete a volume of work to get the full lesson and close the gap between your focus and your ambition. You can’t just whiteboard it, business plan it, forecast it. You have to do it. You have to put a proposition in front of a customer, get them to say yes, try to deliver the value of your ambition and then evaluate whether you did. Then you can learn a tiny slither of the wisdom you need to bridge the gap. Then you can go and test again. This flearning at it’s best.
Yes there will be a gap. There has to be. Stop quoting Steve Jobs about insanely great every time. Yes he got there some times, but he never go there first time. Even with a mountain of money, his business called Next was an amazing product that no one bought. Flearn!
My advice is that the most wasted aspect of this is your own time. Don’t put off the lesson. Bring it forward. Do it now. Test it now. Launch it now. Call a customer and make them an offer now.
Here are some good posts on driving global sales of tech companies:
Getting to No
When you’re early on, you’ll get lots of people keen to have a chat and hear more. This can be good for feedback, but for actual sales, at some point you need to ask the question. This is why I like breaking up my initial target market into two groups. Group A for research, where you ask lots of questions, get lots of feedback and admit all of your weaknesses and your alpha stage. Group B is for selling (or at least testing selling) where you put offers to them, try and get the sale. Don’t get feedback, be tough, set a high price.
This will help you really understand life time customer value and customer acquisition costs. Great detail and numbers in here. There is no avoiding this. It’s just plain hard work in spreadsheets and doing it over and over and over.
KPI Dashboard for SaaS businesses
More great detail here and an actual spreadsheet to start you off. It is really worth spending time to understand why these numbers matter now and in the future. This is the real substance of a working startup.
Getting it right is a lot about correct measuring. Each time you try something new (and you need to make sure it’s one main thing so that you really know what is working and what isn’t) then put those customers you acquire into one group and measure them all the way through. This won’t make the fog go away but it will make it easier to navigate. Product Market Fit is more about simplicity then it is about more features.
Bronwen Clune has written some great blog posts on Pollenizer recently but I really disagreed with one she wrote on The Guardian blaming investors for the lack of diversity in tech startups. A good conversation ensued when Avis Mulhall shared it on Facebook. There are lots of important areas in there, so I thought I’d offer my thoughts.
Here are Bronwen’s points and my thoughts:
Belief one: you can only succeed if you have an all-consuming passion for what you’re doing
It’s not ‘only’ but it is certainly helps, and if you have to choose between someone passionate and someone not, then of course you take passion – and investors hold the money. If you’re not passionate you’re not going to know the space as well and you’re less likely to stick through the hard times.
Belief two: working long hours separates the real entrepreneurs from the hobbyists
Again, it’s not mutually exclusive, you can have ‘four hour work week’ like businesses but any new business, even a cafe or accounting firm takes work to do the job, admin the business and grow the business. If you can do it in less hours, great, more power to you. But most of the time it takes a lot of work for the first few years. Mike Cannon-Brookes made an interesting point at the talk a few weeks ago saying that you can start off running really hard, but eventually you have to turn it into a marathon in order to stay effective over the ten year journey.
This is also the same for a lot of jobs or things people want to do. If you wan to be an elite sports person like a swimmer, then you have to get up early and go swim. It’s not easy and takes commitment. If you want to be a CEO of a big company or politician it takes lots of travel and long hours. If you’re not prepared to work the long hours, do something else.
For me personally, after 8 years of long hours, low salary, lots of travel and high risk trying to build startups I’ve taken a corporate job which is more balanced. I’ve got a young family and I know I can’t put in the time it takes to run a startup or even run my own business. It’s tough but I’m certainly not prepared to sacrifice my relationship with my wife or children for it.
Belief three: a modest salary proves you’re committed
It’s not that it proves you’re committed, it just means you spend less scarce cash on you and more on your growth, etc. Especially if you’re a developer. Companies just can’t afford to pay big salaries until they either generate enough revenue or enough traction to raise money. But if you can convince an investor to put in more money and take more risk to pay you a higher salary, then great, but don’t blame the investor if they don’t.
It’s sort of the same reason why there are less female co-founders. Tech companies need tech people and if the co-founder can code, and work for free or cheap, then you can raise less money and have more of a chance to succeed. My understand of the stats is that considerably less women code, which leads on to less women co-founders. I think this is changing and I really hope it does. I think the world of tech would be considerably more successful if there were more female coders and co-founders. That being said, this just means it’s a bit harder, not impossible. Rebekah Campbell from Posse, Nikki Durkin from 99Dresses, Jodie Fox from Shoes of Prey, Whitney Komor from Best Day, and Melanie Perkins from Canva are some local proof.
Belief four: startups aim to ‘change the world’
Yes, I think they do. Not all of it, but the part they are passionate about. Clones like Rocket don’t but genuine, innovative startups are changing something. It also helps with staying committed to it. If it’s was just for the money you’d go and work for a merchant bank or big corporate.
I also think it’s wrong of Avis to say that building technology companies is not changing the world in as good a way as social enterprises do. There are lots of ways that you can and we need to change the world for the better. Bill Gates didn’t build a social enterprise but he added trillions of dollars of productivity across the globe which had a big positive impact on billions of people. I was in Tanzania working with a micro-financing group helping HIV Aids widows and Excel made a huge difference in running the NGO, knowing what was working, following people up, etc. Yes, there are some people saying they are changing the world but really just want money, but if the passion doesn’t combine with it, then they will typically fail.
Finally, even if these things are true, none of them actually stop you if you really want to. Lots of companies grow without investors, so if you want to build a business that you’re not super passionate about, with a good salary, working reasonable hours and not try to change the world – great, go for it. I’m sure that some of investors fit the bill but I think to blame them a single group as culprits for lack of diversity and label them sinister, anti-family, sexist and racially prejudiced is unfair.
Again, this is an important discussion and I hope my strong response to a strong post sparks some useful debate and perhaps even some useful actions.
It’s hard to find a tech co-founder to build a business with. Ask Liz at YouChews. It’s even harder to build a tech business without a tech co-founder.
The reason it’s an issue is a bit of a circular reference.
Don’t Have a Tech Co-Founder:
Startups are risky.
So it’s hard to attract funding early.
So you don’t have much money to pay people.
So if you can’t pay people and you’re not a coder then it’s hard to create a product, that gets traction that gets funding to pay people.
Maybe a 1% chance of success.
Have a Tech Co-Founder:
Startups are risky.
So it’s hard to attract funding early.
So you don’t have much money to pay people.
Since you’re a coder, you make a MVP in your spare time.
Your MVP gets some traction and either makes some money so you bootstrap or it helps you raise some money.
Maybe a 5% chance of success.
Other Reasons Why It’s Hard
Uncertainty – building a new product that does a new thing in a new way isn’t just hard, it’s risky. You have to learn which takes time (if you are a programmer) or money (if you aren’t a programmer). Startup tech companies is a contact sport. You can’t learn it or win it through theory, canvases or whiteboards. You have to do it to peel away the risk, one harsh lesson at a time.
Magic – the very subtle but earth shatteringly massive difference between a product and a product which gets traction very rarely happens just from good planning from smart people. To get it right, faced with the uncertainty, takes a messy balance of intuition, sixth sense, love of customers, stubbornness and creativity. It is hard to get that mix at the best of time and it’s very hard to do it when you’re paid by the hour to build someone else’s dream.
Tech – despite advances tech businesses still contain significant amounts of tech. There is a common belief amongst first time non-technical co-founders that it should be quite easy to ‘brief-in’ or ‘outsource’ what they envision and have the unicorn appear. Partly for the reasons above but partly because it is freaking, crazy hard that it isn’t this easy.
Raised bar – because every man and his dog, and woman and her cat is starting a startup the hurdle to impress has gone way up. Focus, focus, focus to start with but to wow even one customer these days it has to create value, work on my multiple devices and look pretty good. (Though a good 404 page should never be done until you raise a series A or are profitable.) The analogy I like to use is restaurants. Imagine asking a chef to write you a menu, the recipes and showing you how to cook it and then saying “Thanks, I’m OK from here.” Tech businesses are never finished. I want to repeat that for anyone saying, “But I read Tim Ferriss’ Four Hour Work Week and he says I can set and forget.” – TECH BUSINESSES ARE NEVER FINISHED. OK, some are harder to maintain then others, but they still take work, and typically every power of 10 number of customers you grow by your costs will double.
That sounds harsh, and it is, but there are a few ways around it.
Manual MVP - Be the product yourself and with existing tools. Also known as Fake it until you can make it. A lot of businesses can be run by email, Skype, BigCommerce, Campaign Monitor, WordPress, spreadsheets, go-to-meeting, Freelancer and 99Designs. (Nice plug for Aussie startups). If you can’t build the full product you can still get sales, traction, and even a raw version of product market fit without it. Aardvark did this, Posse did this on their first model, YouChews are doing this now. PlayToLead is doing this now.
Ratchet – it’s not easy, but you can also get there step by step. Build a simple outsourced product which gets you some base sales, traction and validation. You won’t get the love and magic you get with a tech co-founder, but you at least get a base product, hopefully cheaply, and after you get some traction you have a better chance to bring on a good person or to raise money.
Raise money – your other option is to sell sell sell, pitch pitch pitch and don’t stop until you raise money. I’d say 60% of the time, with unrelenting persistence, no fear of cold calling and being a pain in the arse, lots of hard work on a great pitch and follow up documents, and probably some good advice, you have a good chance to raise at least $50k and maybe up to $250k to get started – even without sales, a product or a tech co-founder. Whilst with all of that your chances are still only 60% I’d say that most people I meet do less than half of what is needed and their chance is 10%. If you haven’t had at least one hundred meetings, then you haven’t started trying. I’m not joking about this. 100 meetings. They don’t all have to be pitches to Sequoia or Square Peg, but they all should be a 20 min pitch and questions with a senior, connected person in the industry. Don’t give up.
Those alternatives are hard, but it’s all hard, even with a tech co-founder or as a tech co-founder. That’s why their are rewards at the end, and that’s why only those who feel the journey is a reward make it.
You have no money, you have 1,000 competitors, customers have never heard of you and you have 39 mistakes to make before you get it right. You need to move fast.
Launching fast is critical. Not because of first mover advantage, but because you start the process of learning straight away. First mover is actually a disadvantage in innovation.* You are doing something new and you have to learn the lessons. That costs time. It only becomes an advantage if you learn faster than anyone else. Otherwise you expend all of your resources and the next business starts from first base due to your efforts.
The other reason to launch fast is that no amount of work in advance can make it perfect. You don’t know what you don’t know, and indeed nobody knows. There are at least half the things you need to know that can only be learned by doing. The smartest, most experienced people developing the most feature rich, customer focused designed product is still a bundle of assumptions. Indeed the more thinking, the more you put into it the more assumptions that are combined together. This can lead to the worst of situations – failing but having no idea why.
That’s just launching. It doesn’t stop afterwards. You keep going.
Think > Do > flearn > Think > Do > flearn
The more challenging the business, the more laps of this you will need to do before you get it working, but even the most simplest business will require at least 20 laps of this before it is really working well. If you go fast enough, you may get through the 20 laps before you run out of resources. If you go too slow, you won’t.
Whilst you can directly control your speed of flearning, you cannot control the results. You cannot anticipate what will work in advance or how many times it will take you to work it out. All you can control is the speed by which you work, the ability for you to measure and learn from what you do, and your instincts to adjust and retest.
This is why planning of any kind is very hard in a startup.
When will you get to product market fit?
When will you be cash flow positive?
When will you have enough traction to raise money?
What is your feature roadmap?
All of these questions are near impossible to answer because of the uncertainty of the path of flearning.
The speed must be balanced with patience.Good luck.
* Interestingly, the people who wrote the original piece of work on first mover advantage later wrote a follow up where they showed they flearned and said it’s actually first mover disadvantage.
Despite more communication and collaboration tools than ever, having a tech business team in the same location is still a big factor in increasing your chance of success.
I got some flack when muru-D launched a ‘national’ program but wanted everyone to come to Sydney. From my experience working with more than 100 startups around the world and seeing many more is:
Yes, it’s possible to run a team globally, but it is significantly harder than having them in the same room.
This is why:
Forming takes time.
If the company or the team is new, it helps to have lots of small moments which aren’t about the business to form the relationship. Your chance to have a chat over coffee, food, drinks goes way up and that is where trust and depth is established.
Words aren’t enough.
Online communication tools miss body language, emotion and other elements which are critical in young relationships but also in difficult moments. Emails, instant messaging, project management tools and user stories are limited.
Getting a business working, especially a new, innovative idea isn’t about day long workshops, spreadsheets, or moments of brilliance. It’s 1,000 little conversations that slowly move you towards your vision. They sound like this:
“Hey, what do you think about…”
“What if we tried…”
“Did you see…”
“What’s happening with…”
“Got a second, I’m trying to… and I need some ideas.”
These are conversations that you generally don’t have in an IM and you don’t bother calling someone. But you do if they are 3 metres away.
Lots of tiny sharing is the duct tape that builds startups.
The World is Flat
Yes, it’s flat, and yes, you can have a successful new company with a new team doing a new thing with everyone in different locations and different timezones. It’s just much harder, more risky and less likely to succeed. If you disagree, let’s grab a coffee to chat about. If we’re in the same location of course.
Next Wednesday night we’re having a discussion about exit or stay. I’m hosting it and the fire-side, audience included chat is with Mike Cannon-Brookes and Stu Fox.
Mike tweeted some pre-reading which is really worth it.
The point of the article is that if you really love your customers and really want to build a big company that changes the world then you don’t ever want to leave it. It’s like having a pre-nup for a marriage, you’re setting up to leave.
So Stu Fox is taking the role of the ‘vulture’ capitalist, saying “Sell, sell, sell!!!”. OK, no, he’s not doing that at all. The reason I asked Stu to join us in this chat is because he made some great points about how exits can be good for the entrepreneur and also good for the ecosystem. From my chat with Stu, here are my thoughts on why an exit can be the right thing to do;
- Change. Your circumstances may change, the customers may change, the market may change. Any of these may mean that the original vision and the passion to build towards it is no longer strong enough to sustain you. In this situation it may be best to sell the business and find a new vision/passion to pursue. You certainly can’t continue to run a business with anything less.
- Help needed. There are times when you’re vision needs significant help from a partner in order to be achieved. You might need distribution, IP, or other things that are impossible or just too high risk to pursue on your own. Lots of buy outs don’t work out well, but some are just what is needed. Certainly having a strategic reason to buy a company leads to a better price, and hopefully a better outcome. When Spreets was bought by Yahoo7 it was facing massive pressure from other media companies who had access to tonnes of customers. Whilst timing was also good, Yahoo7 gave Spreets something it couldn’t afford on it’s own.
- Version 2. If it’s your first success, and you’ve made so many blunders, flearns and pivots along the way that you’re tired and want to have another crack, then selling the business, taking some money and starting a new company with your new wisdom and cash can be a good idea. It’s interesting to note that Atlassian is Mike’s second business, Freelancer is Matt Barrie’s second business, Spreets was Dean McEvoy’s second business and BigCommerce was Mitch and Eddie’s second business. (Pollenizer was my third business… it takes some people longer to flearn…)
Exits for Momentum?
What is good for the founder is always the most important, but it’s also good to consider the benefits for the community. Australia has a growing tech industry but it’s from a small base and it’s up against an even faster growing global market. Huge successes are obviously fantastic and they take ten years – well worth the wait. All other things considered, some companies meeting the above criteria and exiting ‘early’ instead of staying for the long haul can create a feeling of momentum in the market. Often times those big successes happen over such a long period of time that they can appear to be anomalies and hard to appreciate how to get it done. Understanding the progress helps, but unfortunately the most common milestone for tech companies is capital raising where it should be customers. For a ‘forming’ market, some exits for the right reasons can help.
Entrepreneurs Into Angels
The impact of an ‘exited’ founder is also clear. Over the past three years seeing David Kowalski, Paul Wenck, Matt Rockman, Paul Basset, Dean McEvoy, Justus Hammer, Kim Chen, Bart Jellema, Guy King, Bevan Clarke, David Jones and many others investing time, brains and money back into young companies and young entrepreneurs has been phenomenal.
Yep, it’s a soft answer, but obviously it depends on the situation. What Mike is going to say is that far too many people are aiming to exit rather than aiming to build a business that lasts 100 years. What Stu is going to say is that yep, you’re right but it’s not awful when it happens for the right reasons.
Having the experience of Stuart Fox and the confidence of Mike Cannon-Brookes is one thing but how does the average founder even take a breath and think about staying on for the long, long, long haul to build the vision they always wanted. It’s pretty tempting when someone waves a cheque at you and you’ve been living on two minute noodles for years and you’re spouse is asking when she gets her holiday house. There are a few good things we can do to at least support a tough, big decision;
- Talk about it. Events like what we’re hosting is a good start, but I also encourage angels, investors, entreps, event organisers and others to put it on the agenda and talk about what an exit really means and highlight the alternatives. The first big moment that exit is really considered is right at the start of a business. Am I building this to make a buck or because I do really care? Maybe we can influence that moment.
- Exit buddy. The second big moment that an exit is considered is when a term sheet is put in front of you. I propose that any Australian founder who is in this situation we (the royal we) will make sure that you have someone in your corner who can ask the questions that Mike and others asked a Startmate founder a few months ago. “Do you really want to sell?” “Why did you start this business?” “What happens if you don’t sell?”. If you are in this situation, email me at mick liubinskas com and I’ll make sure you have some one advise you.
The event is sold out, but we’ll try and post a recording or notes from it.
Thanks for reading.