Startups need new metrics for a challenging new era

We’re at the beginning of a whole new era for startups – an era where capital is scarce.

It is no longer about growing at any cost; Business Basics is now back in vogue. The upshot for startup founders is that—as always—those quickest to adapt are the ones most likely to succeed.

The new era requires new metrics to track performance. Here are the benchmarks and data points every founder should track as the tides change.

Why are we in a new era?

The year 2022 was a watershed moment for the venture capital industry.

Not just because venture capital financing was down 35% year-on-year, But because there has been a drastic change in the macroeconomic environment in which you operate. Specifically, the past decade of near-zero interest rates has come to an end unequivocally.

Now capital can generate much higher returns in less risky asset classes such as bonds. The decimation of late-stage valuations has led to capital flight, which means that the flipping of chronically unprofitable startups into later-stage funds has now come to a screeching halt.

“In an era of new high interest rates, the standard is now much higher for startups looking to ramp up.”

Investors have spent the past 12 months advising founders about “cutting the burn” and “extending the runway,” while simultaneously speculating about when things will return to normal — after all, they love writing checks as much as we love receiving them. However, the truth is that there will be no “return to normal”: in the era of the new high interest rate, the standard is now much higher for startups looking to raise.

out with the old

In the old world of capital-driven growth, the founders mostly ran their businesses with an eye on the monthly growth of their North Star metric—the only metric they chose as an overarching guiding light for the business.

Metrics such as gross merchandise value (GMV), number of transactions, number of registered accounts/customers, contracted revenue, and even monthly active users (MAUs) were all in contention. The ratio of customer acquisition costs to customer lifetime value (CAC/LTV) was also a common metric. It was a reference to the fundamentals of business, where – in a world where there is almost no free capital – if you can make a unit of the economy work, it makes sense to grow as fast as it can.

While these metrics are still useful for giving an idea of ​​business momentum, they aren’t particularly good at indicating the true fundamental health and long-term prospects of a company. This is where New Age metrics come in.

with the new

With the days of easy money behind, founders now need to focus on making their business more sustainable, since they will likely find it difficult to raise outside capital. In addition, having strong business fundamentals also makes you more investable.

“With the days of easy money behind us, founders now need to focus on making their businesses more sustainable, since they will likely find it more difficult to raise outside capital.”

Here are some things to think about when determining your key metrics for 2023:

North Star Scale – Does your Northstar scale need to be reconsidered in light of this brave new world? in Olio We’ve changed our number from the number of listings coming into the app (as we’ve always been a supply-constrained market) to Annual Recurring Revenue (ARR), in recognition of the fact that revenue is outperforming growth in this new environment.

Multiple burning – This is a metric that has come on the scene in the last few months and is basically a proxy for how well a company is growing. It measures how much a startup spends to generate each additional dollar of ARR and is calculated by dividing the net annual burn rate by the net new rate of return. It is double combustion <1x مذهلاً ، و1-1.5x رائع ، و1.5-2x جيد ، و2-3x مشكوك فيه ، و> 3x bad.

An important thing to consider when looking at your burn multiplier is which lever will be stronger in getting it into good territory: reducing costs or increasing revenue? This is something every company needs to figure out for itself, but as the table below shows — cutting burn rate in half still leaves a company in bad territory — sometimes revenue growth is still the most effective strategy.

Rule 40 – Multi burn’s cousin, the Rule of 40 is well known in the SaaS world and is a combined measure of a company’s growth rate And profitability. It’s calculated by adding the company’s year-over-year revenue growth rate to Ebitda’s margin (more on it below). It should be noted that the rule of 40 is most beneficial for more mature companies, since in the initial stage of a startup, growth and profitability are often in direct conflict with each other.

Ibitada (earnings before interest, taxes, depreciation, and amortization) Margin This is old school business 101 and a classic measure of profitability. While it is unlikely that the majority of companies in the early stages and even in the growth stage will be Ebitda positive, it is necessary now to at least understand your path to positive Ebitda, and get a view on what kind of Ebitda business you ultimately build.

Payback period – Instead of the CAC/LTV scale now comes the “payback period”. In other words, the time required to recoup the costs of acquiring a client or making an investment. This is very challenging and really helps focus the mind on the time horizon that the company and its investors are willing to invest in. With payback periods now top of mind, we will likely see a rollback from the strong international expansion and speculative brand extensions of the past few years and more focus on investing in core markets with shorter payback periods.

productivity – If there is one thing Layoffs on Twitter They did – other than offering a masterclass in how-tos Not To carry out redundancies from a legal and communications perspective – it is to highlight the concept of employee productivity. Investors are now baffled by conversations about “right-sizing” their “overweight” portfolio companies, with metrics such as revenue per capita and revenue per head of sales now front and center.

Market leadership – Over the In the past two years, a fast-growing commerce startup could be the third, fourth, fifth, or tenth to get funded, in what Jason Lemkin has called “Mailmates Effect”. However, in this new era, we’re back to the way things have always been: most markets are winner-takes-all. This means that you need to credibly demonstrate how you are going to get to one or two digits in your category, and stay there.

Effect You might be surprised to see this on the list, but over the next decade, every startup will need a solid understanding of its impact beyond just revenue and job and customer creation. You will need a dashboard of your primary impact metrics which are likely to include carbon emissions, resource use, pollution, biodiversity, and social equality impact. In the end, there will be no better return on investment than investing in the future of humanity, which means strong impact metrics will command the highest ratings, so it’s worth getting ahead of the game.

Master of your destiny

During the sea change we’re going through, it’s really important for the founders to be on top. If you proactively lean into this new era, you can avoid micromanagement of investors over your shoulder and make your business more investable. Either way, this takes you one step closer to being the master of your own destiny.

Tessa Clark is the co-founder of OLIO. she tweets from @employee

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