Startups need new metrics for a tough new era

We are at the beginning of a whole new era for startups, an era in which capital is scarce.

It is no longer about growth at all costs; Business basics are back in fashion. And the bottom line for startup founders is – as always – those who adapt fastest will be those most likely to succeed.

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

Why are we in a new era?

2022 was a watershed moment for the venture capital industry.

Not only because venture capital funding was down 35% over one year, but because there has been a radical change in the macroeconomic environment in which it operates. Specifically, the last decade of near-zero interest rates has come to an unequivocal end.

Now, capital can generate much higher returns in less risky asset classes like bonds. And the decimation of late-stage valuations has caused a flight of capital, meaning the swing from chronically unprofitable startups to later-stage funds has now come to a shuddering halt.

“In the brand new era of higher interest rates, the bar is now much, much higher for startups looking to scale”

Investors have spent the last 12 months advising founders on ‘cutting the scorch’ and ‘extending the trail’, while simultaneously speculating on when things will be ‘back to normal’ – after all, they love writing checks as much as we love receiving them. The reality, however, is that there will be no “back to normal”: in the new era of higher interest rates, the bar is now much, much higher for startups looking to raise.

Out with the old

In the old world of capital-fueled growth, founders primarily ran their businesses by focusing on the monthly growth of their North Star metric – the one metric they chose as a general guide to the business.

Metrics such as gross merchandise value (GMV), number of transactions, number of registered accounts/customers, contract revenue, and even monthly active users (MAUs) were all in the running. The ratio of customer acquisition costs to customer lifetime value (CAC/LTV) was also a popular metric. It was a nod to business fundamentals, because – in a world of almost free capital – if you could make the unitary economy work, it made sense to grow as quickly as possible.

While these metrics are always useful for giving a sense of business momentum, they aren’t particularly good at indicating the true underlying health and longer-term prospects of the business. This is where new era metrics come in.

With the new

With the easy money period over, founders must now focus on the sustainability of their business, as they will likely find it more difficult to raise external capital. Plus, having strong trading fundamentals also makes you much more investable.

“With the end of easy money, founders must now focus on the sustainability of their business, as they are likely to find it more difficult to raise external capital”

Here are some things to consider when setting your leading metrics for 2023:

North Star Metric — Should your North Star metric be reviewed in light of this brave new world? To Olio we’ve changed ours from the number of ads coming to the app (because we’ve always been a limited-supply market) to annual recurring revenue (ARR), in recognition of the fact that revenue trumps growth in this new environment.

Burn multiple — This is a metric that has burst onto the scene in recent months and is essentially an indicator of how efficiently a business 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 ARR. A burn multiple of <1x est considéré comme incroyable, 1-1,5x est excellent, 1,5-2x est bon, 2-3x est suspect et >3x is bad.

An important thing to consider when reviewing your multiple burn is which lever will be most powerful to bring it into the right zone: reduce costs or increase revenue? This is something every business needs to figure out for itself, but as the chart below shows – where halving the burn rate still leaves the business in the wrong zone – sometimes revenue growth may still be the most effective strategy.

A graph showing the relationship between ARR and burn rate for startups

Rule of 40 — A cousin of multiple burn, the rule of 40 is well known in the SaaS world and is a metric that combines a company’s growth rate and profitability. It’s calculated by adding a company’s year-over-year revenue growth rate to its Ebitda margin (more on that below). It should be noted that the rule of 40 is more useful for more mature companies, because in the very beginning of a startup, growth and profitability are most often in direct conflict.

EBITDA (earnings before interest, taxes, depreciation and amortization) margin It’s an old-fashioned business 101 and a classic measure of profitability. While the majority of early-stage and even growth-stage companies are unlikely to be Ebitda positive, it is now imperative to at least understand your path to positive Ebitda and have an idea of ​​what kind of Ebitda business that you ultimately build.

Recovery period — In place of the CAC/LTV metric now comes the “recovery period”. In other words, the time required to amortize the costs of acquiring a customer or making an investment. It’s much harder to fake and it really helps focus on the time horizon that the company and its investors are willing to invest. With payback periods now a priority, we are likely to see a rollback from the aggressive international expansion and speculative brand extensions of recent years and a greater focus on investing in core markets with their longer payback periods. short.

Productivity – If there is one thing Twitter layoffs have done – beyond providing a masterclass on how not to make layoffs from a legal and communication point of view – this brings to light the concept of employee productivity. Investors are now abuzz with conversations about the “right size” of their “overweight” portfolio companies, with metrics such as revenue per head and revenue per selling head now front and center.

Market leadership – Above In the past two years, you could be the 3rd, 4th, 5th, or even 10th fast trade start and get funded, in what Jason Lemkin has dubbed the “Post companions effect”. However, in this new era, we are returning to what has always been: most markets are winners. This means you need to credibly demonstrate how you will get to number one or two in your category, and stay there.

Impact – 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 revenue, job creation, and customers. You will need a dashboard of your key impact metrics which will likely include your carbon emissions, resource use, pollution, biodiversity, and impact on social equality. Ultimately, there will be no better return on investment than investing in the future of humanity, which means strong impact metrics will command the highest valuations, so it’s worth the hard to get a head start.

Master of your own destiny

During the radical change that we are going through, it is really important that the founders are at the forefront. If you proactively address this new era, you can save investors from micromanaging over your shoulder and make your business more investable. Either way, it brings you one step closer to being the master of your own destiny.

Tessa Clarke is co-founder of OLIO. She tweets from @TessalFClarke.