When it comes to growing your startup, the importance of choosing the right Key Performance Indicators (KPIs) cannot be overstated. KPIs are the metrics that provide insight into the health of your business and help guide your strategic decisions. Without them, you risk running fast in the wrong direction, wasting valuable time and resources. In this article, we’ll explore how to select the right KPIs and set meaningful targets that drive your startup’s success.
Primary vs. Secondary KPIs
Primary KPIs represent the core metric that determines whether your business is on the right track. For most startups, the primary KPI should be growth, and in most cases, this means revenue growth. Revenue is a clear signal that customers value what you’re offering, and it helps ensure your business is moving toward long-term success. There are some exceptions to this, such as marketplace businesses that might prioritize sign-ups or Gross Merchandise Value (GMV), or enterprise businesses with long sales cycles that may focus on letters of intent.
Secondary KPIs are additional metrics that ensure you’re not sacrificing business health in pursuit of your primary KPI. They provide early warning signs and offer deeper insights into how your business is performing. Examples include retention, churn, unit economics, and customer acquisition costs. These secondary KPIs can help ensure you’re building a sustainable business, even as you focus on growth.
For example:
- Retention and churn: If your revenue is growing but customers aren’t sticking around, this is a red flag. Monitoring these metrics ensures that growth is sustainable.
- Unit economics: Make sure you’re making money on each user and not giving away products or services at unsustainable rates.
- Customer acquisition cost (CAC): While it may not need to be optimized in the early stages, having a sense of how much it costs to acquire a customer and how long it takes to break even is critical.
Keeping your list of KPIs small and relevant is important. Three to five secondary KPIs should be enough to track alongside your primary metric.
Beware of Vanity Metrics
It’s easy to get distracted by vanity metrics—numbers that make you feel good but don’t contribute to meaningful growth. Vanity metrics are often used to impress others (investors, social media audiences, etc.) but aren’t necessarily tied to revenue or customer satisfaction. These include things like social media likes, website visits without conversions, or even the number of features in your product. Before focusing on any metric, ask yourself: Is this metric directly helping me achieve revenue growth or solve my biggest blocker?
Case Study: DoorDash vs. Rickshaw
A real-world example highlights the importance of sticking to the right KPIs. On demo day, both DoorDash and Rickshaw, two delivery platforms, had similar levels of success, with a laser focus on order volume as their primary KPI. This focus led to clear and strong early traction for both.
However, after demo day, Rickshaw faced fundraising challenges and, out of fear, shifted its focus to both growth and unit economics, hedging its bets. This split focus was a mistake. DoorDash, on the other hand, continued to focus solely on growth, which helped it scale faster and avoid the “no man’s land” of slow growth. The lesson here: Don’t try to optimize too many things at once. Focus on your primary KPI and don’t lose sight of it.
How to Set Growth Targets
Once you’ve identified your KPIs, the next step is setting targets. But how much growth is enough?
In his classic discussion on growth, Paul Graham notes that for companies going through accelerators like Y Combinator, 5-7% week-over-week growth is good, and 10% week-over-week growth is exceptional. These small percentages may seem modest, but they compound over time and can make a significant difference.
Early-stage startups benefit from setting ambitious growth targets that force focus and urgency. As demonstrated by the Airbnb story, the founding team wrote their weekly KPI goals on their bathroom mirror, ensuring they were reminded of these goals several times a day. It’s this level of obsession that helps startups achieve rapid growth.
Factors That Can Impact Your Growth Rate
Several factors can influence how fast your business grows. Here are a few:
1. Latent demand: In the early days, users may tolerate an imperfect product because it solves an urgent problem. However, maintaining that growth rate may become harder as expectations rise.
2. Sales cycle length: For enterprise businesses, long sales cycles can delay revenue, so setting targets around process metrics like leads in different funnel stages may be more useful in the short term.
3. User acquisition strategy: Early on, organic growth is ideal. Find your first passionate users, engage with them directly, and let them spread the word. Paid user acquisition can help you scale later, but doing it too early can drain resources before your product is fully ready.
4. Retention and engagement: Growth isn’t just about acquiring new users; it’s also about keeping the users you have. Ensure that churn isn’t eating into your growth, and that users stay engaged with your product long enough to pay back your customer acquisition cost.
Example: Super Daily’s KPI Adjustment
Super Daily, a daily grocery subscription service in India, faced a challenge early on when they realized their user acquisition numbers were artificially inflated by paid promotions. While the sign-up numbers looked good, they didn’t reflect a healthy, growing business. To correct this, they shifted their focus from sign-ups to a more meaningful metric: tracking customers who placed five or more orders. This change helped them align their marketing efforts with their revenue goals and focus on acquiring customers likely to generate long-term revenue.
Setting Targets: Top-Down and Bottom-Up Approaches
When setting targets, there are two common approaches:
Top-Down Approach: Start by setting a long-term goal or milestone (e.g., $5,000 in monthly recurring revenue (MRR) by the end of Startup School), then calculate the weekly growth rate needed to reach that target. This approach helps maintain focus on the big picture.
Bottom-Up Approach: Think about what you can realistically achieve in the next week, and project that out over time. To do this, imagine what you could accomplish with unlimited resources. Then, ask yourself what you can achieve with the resources you actually have.
Both approaches have merit, and it’s a good idea to periodically reassess to ensure your targets are both achievable and ambitious.
Avoiding Tempting Non-Revenue KPIs
While growth should generally be your primary focus, there are some KPIs that, although tempting, aren’t always the right choice for early-stage startups.
CAC to LTV ratio: These terms are often thrown around but are generally more relevant after product-market fit. Early-stage startups should focus on the payback period—how quickly you can make back what you’ve spent to acquire a customer.
Free sign-ups or Daily Active Users (DAUs): These can be misleading, especially if you plan to charge for your product. Paying customers will have different expectations than free users, so feedback from free users may not help you build a revenue-generating product.
A great example of this comes from Scribd, an early YC company. They spent four years building a free product before finally deciding to charge their users. Despite losing 90% of their customer base after implementing paid subscriptions, their revenue skyrocketed. It wasn’t until they started charging that they truly learned what their paying users wanted.
Exceptions to Revenue KPIs
There are some business types where revenue isn’t the most appropriate KPI—at least not in the early days. For example:
Hardware or biotech companies: In these industries, KPIs like technical milestones or contracts may be more relevant indicators of progress.
Enterprise businesses: Companies with long sales cycles may focus on letters of intent or other process metrics.
In these cases, it’s important to ensure that your KPIs are still indicative of real progress, and that you aren’t just checking boxes that don’t lead to growth.
Stay Focused, Stay Accountable
Choosing the right KPIs is essential to ensuring your startup is on the path to success. Focus on growth, avoid vanity metrics, and be diligent in setting and reassessing your targets. By doing so, you’ll be able to drive meaningful progress and avoid getting stuck in slow, unproductive growth.
Once you’ve set your primary and secondary KPIs, share them with your team or community to stay accountable. By keeping your goals clear and your focus sharp, you’ll be much more likely to reach product-market fit and build a scalable, successful business.
