For years, Megan had heard about KPIs, but she never knew what it stood for, so I asked her to Google it for this article. Investopedia defines Key Performance Indicators (KPIs) as a set of quantifiable measurements used to gauge a company’s overall long-term performance. They are the numbers that indicate the health and growth of your business.
Unfortunately, for various reasons — psychology, ignorance, lack of sophistication — founders often use meaningless (and even counterproductive) KPIs in order to feel good about their startups. So what’s a good KPI, and what’s a bullshit KPI? More importantly, how do you tell the difference?
Recently, a kid I mentor (ok, he’s like 25; I’m old) sent me an email saying he needs help figuring out what else he could be working on. He told me he is currently spending between 50 and 60 hours a week developing his core business, and he feels like that wasn’t enough effort, so he was wondering what else he could do to work harder and be a better founder.
Pop quiz, hotshot: is the number of hours worked per week a good KPI, or a bullshit one?
Hopefully the answer is obvious. Only in the toxic startup world of Silicon Valley is bragging about the number of hours worked an indicator of success. Almost every business icon will tell you that the true measure of success is the ability to take a month-long family vacation without their company crumbling to the ground.
You know what’s cooler than working 80 hours a week? Working four hours a week (I see you, Tim Ferriss). Not to mention that the harder you work, the less each of those hours are worth as you slowly inch towards exhaustion and burn yourself out. Working 80 hours a week is rarely as productive as 40, especially after a sustained period of effort. They call this the “Death March” in the games industry for a reason. The number of hours you work per week is a bullshit KPI.
On the flip side, there are loads of good KPIs. And there are plenty of great ones. A good KPI would be your gross revenue, total number of customers, or daily average users. Great KPIs would be your net revenue, your customer churn rate, and the average number of visits per user per month.
If you can’t see the pattern, the primary difference between good and great KPIs is whether it’s a lagging or leading indicator. Good KPIs are lagging indicators and they tell you what has already happened to you business (i.e. how many customers you had yesterday). Good KPIs represent purely historical information, providing meaningful benchmark data about the status of your company. Leading indicators are great KPIs because they help you predict the future. Your customer churn rate gives you a solid idea of how many customers you’ll have in a week or a month.
Your app’s activation rate is great KPIs. I have a client who is getting 2,000 downloads a month, but only a few percent of those people are actually using it. So while downloads (a lagging indicator) might look good, his activation rate (a leading indicator) says otherwise. We’re working on it by focusing on the app’s UX (how much friction is placed in front of the core activation step) and reliability (how often their video calls fail). If all we looked at was downloads, we’d be missing a critical part of growing his business.
And then, of course, there are KPIs that are just total bullshit. I’ll give you a minute to think of one…
If you didn’t immediately think “FUNDING!!!” well, give me a call. Because funding is the biggest bullshit KPI there is. It’s great to have funding, no doubt, but it says nothing about the health of your business. All it says is that you’re good at convincing investors to give you money. And plenty of people have been very good at fundraising while running completely nonviable businesses (see: Theranos, Magic Leap, MoviePass, or Pets.com if you can remember back that far).
Raising capital does not indicate the viability of your company. If it did, 60 percent of funded companies wouldn’t fail. There is no correlation whatsoever between funding and success.
Another bullshit KPI is headcount. I get that it feels good to hire people. But if you’re adding staff left and right while all other variables stay the same, you’re putting your company on the path to destruction. Now, revenue per employee? That’s a pretty sweet number.
Same thing with lines of code (CTOs, I’m looking at you) and features (yeah, you, Product Managers). A larger code base or more complex product does not correlate with success. It often means the opposite, and all of those numbers are meaningless if not counterproductive to predicting your company’s future.
In 2010 I was running OneTrueFan in San Francisco. We had raised our seed round and I was sure we’d soon raise our Series A. In the rebound to the Great Recession, it was difficult for SF companies to find office space. So even though we only had five employees, we rented out nearly 5,000 square feet of office space . The idea was we’d scale so fast that we’d need office space immediately, so we should pull the trigger now. It had two floors, including an amazing upstairs meeting room with 600 square feet and a deck. I bet you I went up there six times in the year we had the office. Eventually, we did add one more employee before closing up shop (and the office). Did we need that much office space? Hells no. My co-founder Todd shared a three-floor building that had a basement apartment that could have easily housed us during the day. Really, I just liked the idea that we had a huge office because it made me feel like we were on the precipice of something big. Office space is not a valid KPI.
When you’re a founder evaluating how your company is doing, you need to be looking at just three to five numbers that not only indicate historical performance but also help you see the future of your business. And ONLY those numbers. Anything else is a distraction.
If your great KPIs’ numbers aren’t that great, and you think you can fool people by replacing them with bullshit KPI numbers, well, you can’t.
Whenever I hear someone bragging about the hours they put in or the last funding round they closed, I know in a heartbeat that they’re just trying to snow me and, likely, themselves. Brag about your CAC to LTV ratio. Or your Net Promoter Score. Everything else is bullshit.
— Eric Marcoullier
One of my new favorite people, incoming Techstars Boulder MD Andres Barreto, recently asked one of my clients the following two questions: If you had to pick one KPI to capture the value generated or the aha moment for your users, what would it be? What’s the biggest obstacle to grow that KPI this week? What an incredible way of framing things!
If you want to get more of that good thinking, apply for Techstars. And, you know, feel free to reach out to me too. I’m always excited about meeting new founders and I’m pretty direct with my feedback. Hit me up at email@example.com or visit my coaching web site.