When you’re building a startup, it’s crucial to have control over the direction your company is heading. Metrics provide the necessary data to help founders make better decisions, similar to how an airplane pilot relies on instruments to navigate. Without them, you’re essentially “flying blind.” Unfortunately, many startups fall into the trap of launching a product without key metrics in place. The good news? It’s entirely avoidable.
Why Metrics Matter
Metrics are the lifeblood of startups. They allow you to monitor key areas of performance and pivot when necessary. Picture this: a founder launches their product on platforms like Hacker News or Product Hunt and experiences a surge in users. The excitement is palpable, but a crucial question arises—how many of those users are returning? Without basic metrics like daily active users (DAU) or weekly active users (WAU), there’s no way to tell if users are sticking around or abandoning ship.
It’s critical to have a few key metrics in place before you launch. A startup with solid metrics stands out to investors, enabling founders to clearly articulate their progress and growth. While you don’t need to overwhelm yourself with hundreds of metrics at first, having around four or five key ones can make a big difference.
The Metrics Trap: Too Much or Too Little?
On the flip side, there’s another danger—metric overload. Some founders, particularly those with a background in larger tech companies, may go overboard, implementing dashboards with 500 metrics. When you’re working with only a few hundred users, it’s impossible to split-test everything. For example, does it really matter if the button on your site is blue or green at this stage? Focus on significant decisions, like whether your service should be priced at $80 per user per year or $200.
That being said, don’t let metrics become a crutch. Airbnb co-founder Brian Chesky still stays close to his customers, hosting them in his own home. Metrics can’t replace real-world insights gained from engaging with your user base.
The Essential Startup Metrics
The key to effective metrics lies in simplicity. Start by tracking four or five critical metrics. Tools like PostHog’s SQL Analytics (from Winter 2020) can help startups manage data easily. It’s equally important that your team agrees on the definitions of these metrics to avoid unnecessary debates. For example, decide early on what qualifies as an “active user”—whether that’s someone who engages daily or weekly. Once definitions are agreed upon, stick to them for consistency.
One of the biggest mistakes founders make is tweaking metrics to make the numbers look better. For instance, if weekly active users aren’t growing, switching to monthly active users might make the data appear more favorable. This approach is deceptive, and ultimately, you’re only fooling yourself. Consistency in your metrics allows you to see true progress over time.
Revenue: The Metric that Matters Most
Especially for B2B startups, revenue should be the most important metric. Focusing on revenue rather than vanity metrics like gross transaction value or page views will give a more accurate picture of your company’s success. For example, one Neo Bank reported impressive growth in gross transaction value, but a deeper dive revealed their revenue remained flat. The founders were focusing on the wrong metric.
Transparency with investors is also crucial. One impressive founder sent out monthly investor updates for 10 consecutive months with zero revenue. She didn’t shy away from the truth, and because of that, her team was able to identify and fix the root issues.
Other important metrics to include in your investor updates are burn rate (the amount your startup spends each month) and runway (how many months your startup can survive based on current spending). These provide a clear view of your company’s financial health.
Retention and Net Dollar Retention
Retention is an essential metric for all startups, as it shows how well your product keeps customers over time. By tracking customer cohorts (groups of customers who sign up during the same period) and their activity in the following months, you’ll get a clear picture of how “sticky” your product is. A high retention rate indicates that users love your product and continue paying for it.
For B2B SaaS companies, net dollar retention is even more important. This metric accounts for both lost and upsold customers. For example, if a cohort starts with 10 customers paying $10,000 each but two customers cancel and three upgrade to $20,000, the net dollar retention would be 110%. Startups should aim for net dollar retention above 100%—this shows that the business is growing and customers are paying more over time.
Gross Margin and Its Importance
Finally, gross margin, the difference between revenue and the cost of goods sold, is a vital metric, particularly for operationally intensive businesses. For software startups, this may include the cost of using platforms like OpenAI to power their product. Companies that ignore these costs might be in for a nasty surprise when their free credits run out.
Negative margin businesses (e.g., Uber during its early days) used to thrive in a low-interest environment by raising capital to subsidize their costs. However, with capital becoming more expensive, scaling negative margin businesses has become significantly harder.
If your startup begins with negative unit economics, it’s essential to have a plan to turn that around before scaling. Monzo, for instance, initially lost money on every customer but eventually turned profitable by bringing technology in-house and introducing new revenue streams.
Making It Happen
The most successful startups use a blend of metrics, customer engagement, and intuition to grow. Track your metrics rigorously, but don’t fall into the trap of relying on vanity numbers or over-analyzing small details. By sticking to a few key metrics—revenue, burn rate, retention—you’ll be better equipped to guide your startup to success.
