What is a KPI you might well ask? You might want to start by reading this Wikipedia entry on Performance Indicator. But simply put KPIs or Key Performance Indicators are objective metrics for your business and vital for founders to understand.
Why? Because KPIs, if constructed correctly, give management and potential investors a cold, analytical snapshot of the state of the company, untainted by emotion or rhetoric. This focus must not be limited to the KPIs themselves, for they are merely measurements of outcomes. We look for founders to have an understanding of what levers can be pulled and what tweaks can be made to improve the business, which will then be reflected in its KPIs.
The focus should not be on the KPIs themselves, but the meaning behind them and knowing what impacts each one.
From reading Mr. Nadel’s post the first thing you will notice is that the first KPIs listed are about customers:
- Customer acquisition cost (CAC)
- Customer retention rate
- Lifetime value of a customer (LTV)
- Ratio of CAC to LTV
If you don’t have any customers yet you should ask yourself are you really ready to pitch to investors? Unless you have a true, protectable invention rather than an idea – and the difference between inventions and ideas are critical – you might well want to wait until you can provide these first four important KPIs.
Read the rest of the article to understand the other KPIs you must master. Get ready for primetime, for as Mr. Nadel concludes:
When we speak to founders to learn more about their companies, we ask them for these KPIs, along with their narrative and other information. It is a quick way for us to understand the current state of the business and we have serious concerns about founders who do not know their KPIs. We find that the most successful founders tend to be those who have an obsessive focus on their KPIs and the drive to constantly experiment and optimize them.