Setting Business KPI’s for Pre-Revenue and Early Revenue Start-ups
Recently my co-founders and I started a blog detailing the stories and lessons we have learned while we try and build our company Terrene. One thing I struggled with when we started was setting good KPI’s so I wrote this blog post to share some of the insights I learned, hopefully, some of you will find it helpful. To give a bit of background we are a B2B company selling a data analytics platform and about 6 months ago we went through the TechStars IoT program.
“When I first joined Terrene I was given the responsibility of internal organization and a key aspect of that was setting the companies Key Performance Indicators (KPI’s), particularly for the business. Setting the KPI’s was something I struggled with for a long time and am still trying to actively improve. One problem I found was so many of the KPI’s I read about were designed for companies who were either already into sales or had a very different focus (e.g. monthly active users for an app). I will share with you some of the lessons I learned and what we are trying to do now.
**KPI’s for Pre-Revenue Ventures**
**Lesson 1: Don’t get caught up in the numbers**
I love excel, I have worksheets for everything and I really like seeing numbers, so when I set out to track KPI’s I wanted everything to have numbers that were easy to track so I could monitor change over time and make some nice graphs. I still think this is a good mindset especially as you grow, but in the early days, everything changes really quickly and honestly, what matters to you now probably won’t matter in 6 months anyway so don’t be afraid to track more qualitative KPI’s if they matter now.
**Don’t Focus on Marketing Data**
Because of my love for numbers marketing analytics such as website views, facebook likes, etc. were some of the first things I recorded. They are very tempting because you can see the change every week, they’re easily trackable, and if people are seeing your product that’s good right? Well really for a B2B company like Terrene that was still developing they’re pretty useless. Chances are in the early day’s everyone who likes your facebook page is a friend of you or your co-founders and all of your website views are from people trying to sell you consulting services. And if they’re not, and you have an actual web presence you need to finish that product ASAP because increasing interest in a product you haven’t built isn’t very useful.
Since marketing data isn’t useful, you have to decide what is useful for your company. For Terrene when we started properly tracking KPI’s we were at the stage where we had a working prototype so we started tracking: the number of demo requests we got each week, the number of use cases we came up with, the number of new leads each week, and the number of key features we implemented. After a few weeks of tracking these KPI’s we realize they weren’t working because they didn’t directly correlate to how the company was doing and they were easy to inflate.
**Lesson 2: Choose KPI’s That Directly Correlate With Success**
This is a lesson we learned which seems pretty obvious in hindsight, but, some KPI’s seem like they matter, but once you stop and think you realize they don’t. When we started tracking the number of use cases our thought process was something along the lines: when we are talking to potential clients we need to know how we can help them. Therefore, coming up with new use cases every week will make us better at selling to potential clients. Also, since in our case we are building a product that is industry agnostic coming up with use cases in different industries helps us determine a total market size.
This is not a good KPI, because, in reality, it doesn’t matter if you can come up with 1 use case or 1000. If you’re not talking to anyone who the problem effects you’re not learning how to build the solution that they need. A much better way of tracking success in this situation would be to create a set of interview questions or a survey for potential clients. That way you’re finding out about real problems and you’re meeting potential clients who could use your solution in the future.
**Lesson 3: Set Rules About Your KPI’s That Make it Hard to Fake Numbers**
In the previous example I mentioned creating a set of interview questions or a survey, this in my mind is very important. Not because it’s better to have a script when interviewing a user, in fact, I think you learn more when you don’t, but because if you don’t have definable criteria for your KPI it can sometimes be tempting to inflate your numbers to reach your goal.
We were in Techstars when we used the use case KPI, and in Techstars every week you present your weekly KPI’s in front of your cohort. After looking back I realized we did inflate our numbers occasionally. Not intentionally, we weren’t trying to misrepresent ourselves, but each week when we would record our KPI’s there would be a small discussion between Francois and I that would go something like this:
Francois: “What use cases did we come up with this week?”
Me: “We talked about (lists 3 use cases)”
Francois: “Didn’t we also talk about (use case 4)?”
Me: “We did, oh and we also talked about (use case 5)”
and then we would tally 5 use cases. The problem is use cases 4 & 5 were small things we might have mentioned once in passing. But because we had no definition on what constituted a use case, and technically 4 & 5 were ways of using machine learning so we counted them. Your criteria don’t have to be as rigorous as a full set of interview questions or a survey, but you should at least set a minimum acceptable value for what you will tally to your KPI.
**KPI’s We Decided On**
After many iterations, these are a few KPI’s we used. A word of warning, we did not use these for long so there is a chance they are just as bad as our previous KPI’s and we just never realized. All those iterations took time and shortly after choosing these we changed our KPI’s again as we began entering into sales.
The best KPI we tracked, and the only KPI we kept from Techstars, was our weekly rock and monthly boulder. These were not quantifiable KPI’s but more so a set of weekly and monthly targets we set as a team and then tracked success rate. This should not be a to-do list, it should be 1-2 goals each week or month, we usually set one for tech and one for business. The obvious problem is setting goals which are too easy or too hard, but with some practice, it shouldn’t be a problem.
Completion of product (%), one day we got into a room and wrote down everything we needed to have to complete V1 of our product. Then every ~2 weeks we would do an update and see how close we were to completing the project. For this, we had to rely heavily on Kash’s expertise as to how long each feature would take to implement.
The final metric was tracking progress to our first pilot, similarly to completion of the product, we estimated what steps (which became the basis for our sales pipeline) we would need to complete with our first client to get a pilot. As we completed each step we would estimate completion (%).
**KPI’s for Early Revenue Start-ups**
We are a new early revenue start-up so I’m sure we will learn about flaws in many of our KPI’s in the coming months but I will share with you what we are tracking for now and how we think they are working.
**Sales Metrics**
Revenue
The obvious metric to track for sales is revenue, that should be pretty self-explanatory. But, besides total revenue, we track a few metrics. Our product is sold in 3 categories small, medium, and enterprise and can be sold in multiple industries so we track revenue across all of those categories. This lets us see what industries we have traction in and what size of clients are our best performers. As a small company, you probably have a good idea of these insights already but revenue is a KPI you will want to continue tracking as you grow and it’s good to get in the habit as early as possible.
As we grow and our team expands we plan to also track revenue by sales person/team, however, for now, Francois and I are both actively involved with every client so we haven’t assigned clients to an individual.
Revenue Velocity and Acceleration
I, personally, am a huge fan of revenue velocity for a company at any stage and I think it’s better in the early days than revenue for a company with long sales cycles like us. Because we only have a few clients and our sales cycle is between 4-8 months our revenue plateaus for extended periods of time, which means it’s not a great indicator of our performance week over week. Revenue velocity is the rate at which deals are moving through your sales pipeline, or in other words how much new revenue you should be generating each week (if you measure the length of the sales cycle in weeks). The formula for revenue velocity is:
RV = (Average Conversion rate * Average Deal size * # of Deals)/ Length of Sales Cycle
In the early days, you will need to estimate the success rate of a deal at each stage in your pipeline but I recommend you track your success and conversion rates for the future.
I mentioned earlier revenue velocity is a measure of how much new revenue you are generating each week, which is not quite true. For an established company with a full sales funnel it’s a good estimate, but when you’re early in sales process your pipeline is very skewed to the early stages. So it is better to think of revenue velocity as the rate at which deals are moving through the pipeline.
The reason I like revenue velocity is that it quantifies success at all stages in the pipeline. Maybe you didn’t sign a new client this week, but you did bring one client from “give demo” to “Follow-up meeting” and another from “proof of concept” to “pilot negotiations”. The chance of success goes up with each stage in the pipeline so you can see your growth over time.
I also like tracking revenue acceleration which is the rate of change in velocity or week 2’s RV – week 1’s RV. Acceleration is useful for making sure you continue to grow at an increasing pace (as startups should). We think (haven’t done this yet) acceleration will also be good for quantifying the success of a new sales hire. Adding a new salesperson should increase the rate at which you are selling if your revenue acceleration does not grow with a new hire you should take some time to consider why the new person has not increased your sales output.
The last word of warning about revenue velocity. Make sure you are increasing your revenue at each stage in the pipeline, I track the value of each stage and the average duration a company is in the stage to ensure revenue velocity is increasing across the board and not because I keep adding a lot of companies to stage 2 and 3. I also purposely set the first stage of my sales pipeline to 0% chance of success to make it harder to artificially increase the revenue velocity by adding a lot of companies to the first stage.
**Hiring Metrics**
We are planning on expanding the team in the next few months so hiring has been on my mind. We have hired two co-op students in the past and we tried tracking a few metrics, but if I am being completely honest I have not found any that I like. Also, I feel that until you are regularly hiring (e.g. 1 new hire every month or more) hiring metrics are not super crucial, but I like planning for the future so I have one less thing to think about.
**Metrics I Don’t Like**
Last year when we hired our current co-ops we tested metrics such as interviews conducted and applications received. These metrics are not useful because they don’t measure success. If I conduct 100 interviews and have 100 bad interviews that means by selection process is bad and same with applications. If we receive 1000 applications but only 15 people are qualified something is wrong with our job posting.
**Alternatives I Plan on Trying**
To plan out what metrics I am going to track next time we hire I’ve been going through what would consititue a successful hiring process. First, it would be a good job posting. For this, I am going to modify the old metric of applications received to the percentage of applicants who are qualified (get selected for interview). To test for flaws in our selection process I will also be tracking the percentage of candidates who are invited back for a second interview.
For tracking the actual interview there are two questions I want to answer the first: Did we sell the candidate on the job? The second: Did we get an accurate assessment of the candidates quality. Unfortunately, I don’t think there will be a quick answer for either. My plan for the first question will be offer acceptance rate, but, until we are hiring for more than one question it will be hard to properly assess our interview process. As for determining the candidates quality that will likely be based on a performance review conducted a few weeks/months into their position. Again it will be hard to properly measure this until we hire multiple people (unless we really mess up the first time).
Thanks for reading! I hope that this post will help you avoid some of the mistakes I made. I will probably post an update in a few months about how our KPI’s have changed and any new lessons I have learned. I think we have better KPI’s now than we did 6 months ago, but we can always get better.”
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