10 key business metrics every startup founder needs to know
As a startup founder, you need to run a tight ship.
In order to secure investment, allocate budget correctly, and achieve your long-term growth ambitions, you must keep a close eye on your key business metrics.
But which metrics? I hear you ask.
Whilst there are several business KPIs that can be used to track the success of your marketing, product and sales initiatives, there are a handful of core business metrics that offer a birds eye view of your company’s progress towards exponential growth.
These are the numbers that venture capitalists will look at when deciding whether to invest in your startup. They are the metrics that you should discuss in your board meetings and with your employees. They will help you pinpoint and fix the fault lines in your strategy, and ensure that your company continues in a straight line towards sustainable profit.
If you ever find yourself stuck in an elevator with an angel investor, these are the metrics you want to know off the top of your head.
The North Star Metric
The term ‘North Star Metric’ was first coined by startup investor Sean Ellis. In his own words, the point of the North Star Metric is: “to align everyone on your team to work together to grow it.”
Your North Star Metric is a way of ensuring that everyone in your company is moving towards a common goal. If a project is not contributing to the North Star Metric, there’s a high chance your employees shouldn’t be working on it.
Silicon Valley leaders use the North Star Metric to prioritise projects and efficiently assign resources. For example, the North Star Metric at Meta is ‘monthly active users’. This metric sits at the top of Meta’s strategy, and all their initiatives contribute in some way towards improving it.
When choosing your North Star Metric, it’s important to look at the big picture.
Take for example a SaaS business which generates revenue through a monthly subscription model. The founders of this business might choose ‘monthly sign ups’ as their North Star Metric, and congratulate themselves on a job well done.
Following this North Star Metric, the marketing team could decide to put all resources into driving sign-ups to a free trial. This isn’t necessarily a bad strategy, and would certainly increase interest in the product, but problems will arise if the free trials never convert to paid subscriptions.
For this reason ‘monthly sign ups’, whilst an important metric, may not be the best North Star for the business, as it only provides one half of the overall goal.
The best North Star Metrics offer a clear picture of a company’s overarching objective. They should be simple to understand, easy to track, and align with your company mission.
[Related: Choosing your North Star Metric]
Cash Burn Rate
Cash burn rate is a measurement of how quickly your business is spending (or burning through) money. It’s a particularly critical business metric for startups, which are likely to be operating at a loss in their early years.
Burn rate is used for calculating cash runway—that’s the amount of time your business has left before it runs out of money.
Venture-backed businesses use burn rate and cash runway when planning their funding rounds. In turn, investors use burn rate as an indication of how wisely a business is spending its money.
Running out of money is the number one reason startups fail, and no venture capitalist wants to invest in a doomed project, but that doesn’t mean you should aim for the slowest cash burn rate possible. In fact, VCs are likely to view a sluggish burn rate as a red flag, as it could indicate that you aren’t investing money in your business’ growth.
There are two ways to calculate cash burn rate:
1. Gross burn rate: this is the amount your company is spending on operating costs each month. It does not take into account your revenue. The formula for gross burn rate is:
Operating costs / number of months = gross burn rate
2. Net burn rate: this is the amount of money your company is losing each month. Net burn rate takes your revenue into account. So if you’re spending a lot, but also making a lot of money back in revenue, your net burn rate will be mitigated. You should always use net burn rate when calculating your cash runway. The formula is: (Starting balance - ending balance) / number of months = net burn rate
Ultimately, managing cash burn rate means finding the right balance between profitability and growth. As a founder, you need to decide whether to retain your profits, or invest them back into your business.
[Related: How to calculate cash burn rate the right way!]
💵 Top tip: A good way to lower your cash burn rate is to cut out needless expenses. With an Airwallex account, you can collect customer payments in multiple currencies without paying high FX or transaction fees. Meaning you can scale your business globally without the associated costs. Sign up for a free account to learn more.
Working capital, also known as net working capital or NWC, is a metric that investors use to evaluate a company’s financial health and operating efficiency.
Positive working capital indicates that a company has enough available liquid assets to fund future growth. Negative working capital suggests that a company does not have enough cash to pay off its debts and continue running with the same operational costs.
A company with negative working capital may have to sell its assets and cut its operational costs or risk bankruptcy.
To calculate working capital, you subtract your current liabilities (money that will need to be paid within the next 12 months, including staff wages, accounts payable and tax) from your current assets (assets that you have or expect to receive within the next 12 months, including accounts receivable, unsold inventory and cash).
The formula looks like this:
Current assets - current liabilities = working capital
As with cash burn rate, both high and low working capital can be a cause for concern. Negative working capital indicates that a company is in financial difficulty, but a high working capital could mean a company isn’t making the most of its available assets or investing in long-term growth.
[Related: Net working capital: How to calculate it and why it's important]
Customer Acquisition Cost (CAC)
Customer acquisition cost (CAC) is a measurement of how much money it takes for your business to win a new customer. CAC is an important metric in business performance management, as it indicates whether your sales and marketing strategy is working efficiently.
The formula for calculating CAC is: Cost of sales and marketing / number of new customers acquired = CAC
When calculating CAC, you should include sales and marketing spend, salaries, bonuses and overheads.
CAC is an important metric for any business that uses sales and marketing to generate new customers. That includes eCommerce businesses, professional services, and even bricks and mortar businesses such as supermarkets.
Ultimately, the less you spend on acquiring new customers, the greater your profit margins will be.
When looking at CAC, it’s important to think about the lifetime value (or CLV) of the customers you acquire. This is an obvious consideration for SaaS businesses and other enterprises that collect recurring revenue from their customers, but CLV can also be applied to other businesses.
For example, an eCommerce business has a CAC of £50, and the average order value on their website is £55. This low margin initially causes concern, but after analysing the data, the business finds that a large percentage of its customer base return to make further purchases. Using this data, the business finds that the average customer lifetime value is £800, thereby justifying their CAC.
Customer lifetime value
Customer lifetime value (CLV) is a performance metric that measures the revenue your customers bring in throughout their relationship with your business.
It costs more money to acquire new customers than it does to keep existing ones, so increasing CLV is an obvious lever to pull to maximise the profitability of your business.
CLV also offers a good insight into your customer satisfaction. If your customers continue to use your products over an extended period of time, it means you’re doing something right.
You can use CLV to determine whether your customer acquisition cost (CAC) is justified, and when deciding your pricing strategy. The formula for calculating customer lifetime value is:
Annual customer value x average customer lifespan in years = CLV
In order to measure CLV, you need to understand your customer lifecycle. If you own an eCommerce business, that means tracking the purchase frequency of your returning customers. If you own a subscription business, it means understanding your upsells, cross sells and churn rate.
[Related: Stop overlooking customer lifetime value in eCommerce]
As a founder, it can be difficult to decide which initiatives to invest in. Should you put your budget into developing a new product? Or should you spend money on equipment that will help your team work more efficiently?
Payback periods allow you to calculate the opportunity and risk associated with an investment. The shorter the payback period, the better the investment.
The formula for calculating payback period is:
Investment / annual cashflow from investment = payback period
Payback period is a useful metric to use when building a business plan, as it helps you prioritise where to spend your budget.
[Related: Determining payback periods: How to plan for startup success]
Gross, operating and net profit margin
Profit margin shows the revenue your company has retained after expenses have been accounted for, and offers a clear indication of the growth potential of your business.
There are three ways to calculate profit margin, and all of them are usually expressed as a percentage.
Gross profit margin
Gross profit margin shows the percentage of revenue that remains after accounting for cost of goods sold (COGS).
The formula for calculating gross profit margin is:
(Gross profit / revenue) x 100 = gross profit margin
Operating profit margin
Operating profit margin shows the percentage of revenue that remains after accounting for operating, administrative, sales and overhead costs. The formula for calculating operating profit margin is:
(Operating income / revenue) x 100 = operating profit margin
Net profit margin
Net profit margin is your bottom line. This is the amount of revenue you have left after accounting for all expenses, including operating costs, overheads, COGS, tax, one off expenses and debt repayments.
The formula for calculating net profit margin is:
(Net income / revenue) x 100 = net profit margin
Profitability metrics vary by industry, so it’s best to benchmark your business against others in your sector. You can also use profitability metrics to understand how your business is performing YOY.
🌎 Top tip: Airwallex helps startup founders scale their business globally whilst improving profit margins. Our bank-beating FX rates and foreign currency accounts can help you add 4% back into your bottom line. To learn more, sign up free today.
Net revenue retention
Net revenue retention (NRR) is a key performance metric for SaaS businesses and other companies that operate under a recurring revenue model. It shows the percentage of revenue retained from existing customers over a period of time.
NRR takes into account your monthly recurring revenue, the additional revenue you have generated from upselling and cross selling to your existing customers, and the revenue you have lost from customers that have churned or downgraded their subscription plan.
NRR is a great way to measure customer success and establish the profitability of your pricing models.
The formula for calculating NRR is:
[(total revenue + expansion revenue) – churn] / total revenue = NRR
[Related: Net revenue retention and the 3 things every venture capitalist looks for]
Monthly recurring revenue (MRR)
Monthly recurring revenue (MRR) is another key performance metric for SaaS businesses, streaming services, and other companies that follow a recurring revenue model.
MRR provides a simple and effective way to measure your business’ growth, and predict future cash flow.
If your MRR isn’t moving in the right direction, you may have an issue with customer churn, in which case you should look into ways to improve customer satisfaction and product market fit.
In order to calculate MRR, you first need to know your average revenue per user (ARPU). Once you have this, the formula is simple:
Monthly ARPU x number of monthly users = MRR
Churn rate is the main metric which SaaS companies and other businesses that follow a monthly recurring revenue model use to measure customer success.
Simply put, churn measures the number of customers that stop using your product or service over a period of time. The lower your churn rate, the higher your customer retention, and the more monthly recurring revenue (MRR) you will make.
Churn rate is expressed as a percentage, the formula is:
(Customers at the beginning of the month - customers at the end of the month) / customers at the beginning of the month = churn rate
As a startup founder it’s essential that you keep a close eye on your churn rate. All businesses experience some churn, but if your churn rate is creeping up MOM, you may need to assess the value that you are offering your customers versus competitors.
Remember, it costs more to acquire new customers than it does to retain existing ones, so keeping churn rate low should always be a priority.
Improve profit margins and scale your business with Airwallex
The key to running a successful business is to grow and retain your customers whilst keeping profit margins high.
Here’s where Airwallex can give you an advantage over competitors.
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Tilly manages the content strategy for Airwallex. She specialises in content that supports businesses in their growth trajectory.
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