Key Startup Metrics | Startup School

Intro (0s)

• Tom Blumfield, a group partner at Y Combinator, discusses the importance of metrics for startups.

Importance of Metrics (21s)

• Metrics help make informed decisions and maintain control over your startup.
• Without metrics, startups are like airplanes flying blind.
• Startups should track metrics before launching to understand user engagement and retention.
• Founders impressed investors by comprehending and effectively communicating their metrics.

Pre-launch Metrics & Metric Overload Caution [76.0 & 143.0]

• Investors can tell when founders are in command of their metrics.
• Founders should avoid metric overload before launching and not get swamped with excessive data, as proper analysis requires substantial user volume.
• Founders should also interact with their customers personally, not solely rely on metrics.

Key Metrics Selection (3m17s)

• Start with a few key metrics and choose simple solutions like Posthog for analytics.
• Ensure there’s a consensus on metric definitions within the team to avoid internal conflicts.
• Keeping consistent definitions for metrics over time is crucial, even if performance is not as hoped.

Consistency in Metrics (4m54s)

• Tracking consistent metrics is essential to gauge improvement.
• Different companies may define metrics differently, making comparisons difficult.
• Startups should establish their own consistent internal definitions for accurate progress tracking.

Investor Update Metrics (7m13s)

• B2B companies’ primary metric should be Revenue; vanity metrics like GMV can be misleading.
• Investors appreciate honest communication about metrics like Revenue, burn rate, and Runway.

Retention's Significance (9m17s)

• Retention measures the percentage of customers who continue to use and pay for a product.
• Founders should employ cohort analysis to track retention and understand customer loyalty over time.
• High retention rates enable a “layer cake” effect, building sustainable revenue over time.
• Poor retention results in a “leaky bucket” scenario, hampering business growth.

B2B SaaS: Net Dollar Retention (13m13s)

• Net Dollar Retention (NDR) is a critical metric for B2B SaaS companies, representing customer retention in revenue terms.
• A scenario is presented where a B2B startup with initial ten customers paying $10,000 monthly each expands their income from these customers to $110,000 after upsells, despite some customer churn.
• NDR above 100% indicates growth in cohort revenue over time; below 100% suggests decline.
• Target NDR for early-stage B2B SaaS companies is well over 100% due to likely underpricing, product feature additions, and improved sales skills.
• Achieving high NDR is vital; if it falls below 100%, the company should investigate and address the underlying issues rather than simply aim for new sales.

Cruciality of Gross Margin (16m50s)

• Gross margin, crucial for profitability, is revenue minus the cost of goods sold.
• For software companies, costs that vary with customer numbers, such as usage-based services (e.g., OpenAI credits), are considered cost of goods sold.
• High gross margins (around 95%) were typical for software companies in the past, but with software entering diverse industries, gross margins have become increasingly important.
• AI companies may see reduced gross margins due to costs of using foundation models from providers like OpenAI or Anthropic.
• Lower gross margin businesses must generate more sales to cover fixed costs like office rent and salaries.
• Focus on software solutions with higher gross margins is encouraged where operationally intensive businesses exist.

Challenges of Negative Margin Scaling (21m10s)

• Scaling negative margin businesses (where cost exceeds revenue per transaction) is exceedingly difficult with higher capital costs.
• Negative margins were scaled in the past with abundant capital (e.g., Uber subsidizing drivers and riders to achieve network density).
• Monzo, an online bank, scaled despite initial negative unit economics, later became profitable by reducing external vendor reliance and introducing profit-generating products and services.
• Companies should remedy negative unit economics before pursuing growth.

Metrics Recap (22m18s)

• Revenue is a core metric for B2B companies.
• Importance of net dollar retention exceeding 100% for the growth and health of B2B SaaS startups emphasized.
• Gross margin highlighted as critical and scaling businesses with negative gross margins is discouraged.

Final Thoughts (22m42s)

• Track four or five key metrics from launch to avoid "flying blind."
• Focus on meaningful metrics and not vanity metrics like gross merchandise value or unique users.
• Establish clear definitions and consistent measuring systems to prevent counterproductive debates.
• While metrics are important, directly engaging with customers is invaluable for insights and validating intuition.