The reign of metrics may be legitimate in the data-driven universe of startups. Metrics are indeed a salvatory beacon in the foggy waters that edge startups navigate, exploring uncharted territories to shape tomorrow's world and build disruptive business models. But the largely widespread focus on a limited number of growth metrics also triggers at least three major pitfalls that business founders should avoid. Growth metrics shall not prevail over strategy, shall not be self-sufficient, and shall not be confused with performance.
Do not let growth metrics prevail over strategy
Most entrepreneurs rely on various categories of metrics to lead their innovative business to success, including for example metrics on strategy, finance, tech, operations, and human resources. Generally speaking, a clear-cut focus on metrics may paradoxically create a blind spot that obstructs views on strategy. The perfect alignment of metrics with startups’ long-term strategic objectives is never secured, and requires strong management attention. Although strategy is being hijacked by figures across almost every organization (1), this tendency is emphasized in VC-backed startups. Quarterly or monthly reporting on quantitative KPIs to venture capital firms generally increases focus on growth metrics which may result in a loss of strategic hindsight. Hopefully there are some exceptions. Entrepreneurs must be aware that their role also consists of reconciling their long-term strategy with short-term achievements in terms of growth, which is a major focus area for the vast majority of their investors.
Do not consider growth metrics self-sufficient
The promise of scalability drives tech startups to relentlessly struggle to demonstrate monthly revenue growth. At first sight, the reign of monthly recurring revenue (MRR) growth as a predominant metric seems a fair standard practice, which is particularly noticeable in the SaaS universe. The trick is that revenue growth alone does secure neither long-term sustainability nor profitability. Profitability metrics are a second order priority for shareholders and founders in a context of easier access to funding and record low interest rates. Ebitda, which usually serves as a relevant proxy for financial sustainability and for cash-flows from operations (despite significant differences), is probably less relevant in the startup sphere than in well-established organizations. Indeed, the quintessential venture capital model consists of piling up series of funding rounds, and increasing enterprise valuation along with revenue growth. Shareholders’ return on investment materializes mostly at exit, for example mainly through public listings, such as IPOs and SPACs, and M&A transactions. The current VC framework lean more on capital gains at exit than on a yearly distribution of dividends. The VC funding model shall not be an excuse for founders to endlessly postpone the quest for profit margin generation, which is consubstantial to long-term survival, even for deep-pocketed startups. For the record, shareholders of large corporates, which for some have proven resilient for over a century, focus first and foremost on earnings per share or other profit-based indicators. The belief that one predominant metric shall obscure any other may lead to narrowing down decision-makers’ understanding of both strategy and performance, which conversely require a holistic approach.
Do not confuse growth metrics with performance
​First, confusing what’s being measured with the metric being used is a behavioral tendency known as the surrogation trap (1). Even when closely tight to very specific strategic objectives, metrics are inherently imperfect. Furthermore, the risk of confusion becomes pervasive as soon as employees are incentivized on metrics’ targets. Then, assessing startups’ performance through the most adequate metrics is quite a challenge. On the one hand, the design process of key metrics has to result from a dynamic approach to adapt to both fast-changing competitive environment and internal organization. On the other hand, investors may question a lack of consistency if the key metrics implemented by their portfolio companies change over time. It could prove rather irrelevant to encapsulate into static & industry-standardized growth metrics the bespoke performance of edge startup companies, which are reputed for smart execution of nimble strategies. By the way, benchmarking is soothing for shareholderds but sometimes frustrating for entrepreneurs willing to express their differentiated position in the market. In a nutshell, it seems a couple of practices could help optimize the meaningful usage of growth metrics, such as (i) implementing a dynamic metrics' design process throughout the startup's growth journey, (ii) setting bespoke metrics, which intimately reflect both the unique proposition of the firm and its evolving environment, (iii) considering growth metrics as a brick, not self-sufficient although very important, in the wall of a 360° strategy and performance analysis, and (iv) creating powerful communication dynamics at board of directors level, to enable founders and shareholders to step back from time to time. Switching from short-term growth metrics monitoring to helicopter views and strategic hindsight when necessary could create some additional value that is certainly not easy to measure at first, but that may become highly perceptible in the long-run. (1): Michael Harris & Bill Tayler - Harvard Business Review, September-October 2019