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12 KPIs you must know before pitching your startupMore posts by this contributorIt is critically important for the founders of a company to intimatelyunderstand the company’s key performance indicators (KPIs). Founders cannothope to grow a company in any meaningful way without an almost obsessive focuson its KPIs.Why? Because KPIs, if constructed correctly, give management and potentialinvestors a cold, analytical snapshot of the state of the company, untaintedby 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 anunderstanding of what levers can be pulled and what tweaks can be made toimprove the business, which will then be reflected in its KPIs.The focus should not be on the KPIs themselves, but the meaning behind themand knowing what impacts each one.Let’s review some of the KPIs that are important for founders to thoroughlyunderstand and for which they should have a strategy, or set of strategies,for optimizing. Please note that some KPIs are not relevant to some types ofbusinesses. Finally, I am not going to go into very much detail on each metricand how to calculate it as (a) that is beyond the scope of this article, and(b) that information is readily available from other sources.Customer acquisition cost (CAC). CAC is the amount of money you need to spendon sales, marketing and related expenses, on average, to acquire a newcustomer. This tells us about the efficiency of your marketing efforts,although it’s much more meaningful when combined with some of the othermetrics below, and when compared to competitors’ CAC.Acquiring new customers is one thing, but retaining them is even moreimportant. Your customer retention rate indicates the percentage of payingcustomers who remain paying customers during a given period of time. Theconverse to retention rate is churn (or attrition), the percentage ofcustomers you lose in a given period of time. When we see high retention ratesover an indicative time period, we know the company has a sticky product andthat it is keeping its customers happy. This is also an indicator of capitalefficiency.Lifetime value (LTV) is the measurement of the net value of an averagecustomer to your business over the estimated life of the relationship withyour company. Understanding this number, especially in its relation to CAC, iscritical to building a sustainable company.We consider the ratio of CAC to LTV to be the golden metric. This is a trueindicator of the sustainability of a company. If a company can predictably andrepeatedly turn x into 10x (note: 10x is just an illustration and not meant toimply any sort of minimum or standard), then it’s sustainable.> 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.CAC recovery time (or months to recover CAC). This KPI measures how long ittakes for a customer to generate enough net revenue to cover the CAC. CACrecovery time has a direct impact on cash flow and, consequentially, runway.Whereas CAC measures the variable expenses attributable to acquiringcustomers, overhead measures the company’s fixed expenses incurredirrespective of the number of customers acquired. Overhead relative to revenueis a reflection of the capital efficiency of a company (i.e. all things beingequal, a company that generates $1 million in revenue on $200,000 in overheadis twice as efficient as one that generates $1 million in revenue on $400,000in overhead).Understanding your revenue and monthly expenses (fixed and variable) enablesyou to calculate the company’s monthly burn. This is simply the net amount ofcash flow for a month when net cash flow is negative. If the company startsthe month with $100,000 in cash and ends the month with $90,000 in cash, itsburn rate is $10,000. If a company’s monthly net cash flow is positive, it isnot burning cash.A keen focus on runway is critical to the survival of any startup. Runway isthe measure of the amount of time until the company runs out of cash,expressed in terms of months. Runway is computed by dividing remaining cash bymonthly burn. We prefer to view a conservative estimate of runway thatcalculates the monthly burn utilizing current revenue and projected expenses(after accounting for the increased expenses to be incurred post-investment).We require an absolute minimum of 12 months of runway, but have a strongpreference for 18 months or more. Short runways cause entrepreneurs to bymyopic and not to have the liberty to tweak and iterate when necessary. Italso forces them to almost immediately focus on the next fundraising roundinstead of growing the company.Expressed as a percentage, profit margin tells us how much your product sellsfor above the actual cost of the product itself. Put another way, it revealshow much of the selling price is “mark-up.” This invaluable metric allows usto consider the return on investment on the cost of the product and issignificant in understanding the scalability and sustainability of thecompany.We consider conversion rate to be a very telling KPI in that it reveals acombination of the company’s ability to sell its products to its customers andcustomers’ desire for the product. It is particularly instructive to track andreview conversion rate over time and regularly run experiments to improve it.Certain businesses find that revenue may not be the most informative indicatorof their financial performance. This is especially true for marketplaces forwhich revenue (i.e. their take rate) represents a small portion of overalltransactions. Gross merchandise volume (GMV) can be a useful KPI in thesecases. GMV is the overall dollar value of sales of goods or services purchasedthrough a marketplace.For companies that have apps, online games or social networking sites, monthlyactive users (MAU) is an important KPI. MAU is the number of unique users whoengage with the site or app in a 30-day period. Understanding MAU is helpfulin determining the revenue potential of a company or how well it is currentlymonetizing.When we speak to founders to learn more about their companies, we ask them forthese KPIs, along with their narrative and other information. It is a quickway for us to understand the current state of the business and we have seriousconcerns about founders who do not know their KPIs. We find that the mostsuccessful founders tend to be those who have an obsessive focus on their KPIsand the drive to constantly experiment and optimize them.