Adora Cheung - How to Set KPIs and Goals

all right so i am going to be talking about setting your kpis and goals for early stage startups so i'm going to be pretty pedantic in this lecture and the reason why is doing this correctly is a necessary condition for starting as successful or building a successful startup so the acronym kpi stands for key performance indicator if you google around for it there are actually many definitions of what this actually means but for the purpose of today for this context i'm going to define it as a set of quantitative metrics that indicate how healthy your business is doing so this is important because obviously you should know what state your business is in at all times so setting the right kpis and goals will objectively tell you if you're doing well just okay or bad so nothing keeps you more grounded humbled and realistic about where you are than a bunch of numbers because if you interpret those numbers correctly they don't lie it'll also act as a feedback mechanism for whether your current strategy like user acquisition building new features launching new features and so on and so forth are actually working so if you do something and things go up that's probably good if you do something some things go down that's probably bad and it will and it will not only help you prioritize your time but also uh course correct so it follows if you do this incorrectly if you set your kpis and goals incorrectly you can direct your startup into a bunch of circles or if you do it for too long on to the wrong path it will lead to its unnecessary demise so what are the right kpis to set i'm going to break this down into two pieces primary metric and secondary metrics and most of today is going to be focused on the primary metric so every week in startup school we've asked you in the software to fill out to define your primary metric and then update its current value by definition you can only pick one um one primary metric and as the metric if you if you had to you'd be willing to bet the whole company on so why just one metric uh it's a way to focus and keep things very simple if there's a way to get 90 of the job done with just one variable that's better than having a bunch of variables that gets let's say 91 of the job done um in this case the job to get done is quickly determining how well your startup is doing so what are the characteristics of a good primary metric there are four of them uh one so your primary metrics should quantify how much value you're delivering to your customer that is you obviously want to build something that people want now how much do they actually want it and users often indicate the value through either training uh you through money or time so revenue is always the best metric i pay you a hundred dollars to use your product your software i must at least value that a hundred dollars um active users uh using the product once a week or uh once a day we call that weekly active user daily active user is a weaker but another good decent indication of whether you're delivering value or not the second one here is it your primary metric must capture whether your product is recurring or enduring value to your user or it should anyway so for example in assassto most sas tools use mrr monthly recurring revenue as their primary metric i commit to forking over 100 bucks a month continuously every month because your product demonstrates to me every month um that has value to me another example is if you're building an online digital daily newspaper then obviously dau daily active user is a good one because i expect you i expect to be delivering content to you that is valuable to you every single day so hopefully you'll come back every day the third one here is your primary metric should be a lagging indicator for success so a common trap that founders do to trick themselves is by picking a primary metric let's say something like email signups because one it's easy to move but while it may eventually influence revenue or actual usage it actually doesn't represent real value the best so the best indication is when the value has already been delivered it's already occurred so when someone has already forked over their time or money then to use it then that is what a ladder that's a definition of what a lagging indicator is so if revenue increases it's because more customers have already paid for the product's value versus a potential customer who came to your site gave you an email and maybe they'll sign up one day or maybe they'll use your product one day to buy something and lastly your primary metric should be usable as a feedback mechanism that is it helps you prioritize strategies and make decisions quickly in a startup one of the key things to be to being successful in getting past product market fit stages to iterate very fast right so while you want it to be a lagging indicator you also don't want it to lag too much so for example a lot of people pick mau monthly active user but this is but but uh this is usually not a great metric because it takes time to understand the impact of movement um especially in a startup this early as in your startup and so many things can happen within a month and also another reason why i don't like mau generally is because if your user only comes back once a month they only value something that you're building once a month i really question actually if you're solving a real problem all right so you may have guessed from me talking about these four characters characteristics of a primary metric that there are really two primary metrics to pick from so one is either revenue or active users ideally you're picking revenue because nothing tells you more about delivering real value than people forking over handing over real hard earned dollars to you um and even better is picking revenue that people keep giving you over and over and over again like monthly recurring review mrr it's the best test for whether people really want what you're making so that being said some people do pick revenue but a common trap they fall into is that they don't actually get paid and usually i hear something to the variant of oh i'm going to get these i have these 1000 users not paying me anything i just want to get their feedback and see how they're using the product and make a little bit better and then eventually i'll get them to pay or the next 1000 users i'll get them to pay that's a trap because free users will give you different types of feedback than users who are actually paying you um paid users are just more serious about the product and hopefully will be more serious about giving you feedback so i urge you to just get paid [Music] all right so what are reasons why so kevin in an early lecture said 99 of you should actually use revenue as your primary metric so what are reasons why you should um consider active users so one main one is because you because building a large audience is actually a prerequisites to modernization so an example of this is if your business model is advertising based like a facebook or google then yeah you need millions and millions of users coming back to your site every day before you can actually get brands and people to buy ads and so in this case active users is actually a reasonable proxy for revenue because eventually when your startup starts making money it's usually just revenue is just a multiple of your active users another reason is also but much much more much more rare is if you have very strong network effects that is if you're like a marketplace that requires tons of users to just get the flywheel going and grow then maybe that's a reason for you to focus on active users today versus uh revenue and then just do revenue later down the road now that being said if you're using active users as a metric it's important that you define user appropriately i hear often i ask okay how many users do or what's your primary metric uh active users how many users have i have 100 users what does users mean in that situation sometimes to people it means 100 users that just signed up and gave you an email sometimes it means 100 users that signed up and start using a product and come back every day for about 10 minutes a day which is by far much better than just people just like little dabbling on your site right so you really need to get that definition correctly and don't trick yourself by just saying users and get having a really easy definition of users another another example of users where it's not exactly users is if you're in a marketplace and there are two types of customers or two types of users so a good example is airbnb who are your two users you have not just the guests but you also have the hosts so what are you to do how do you how do you pick just one well you pick a value that actually represents um them both getting value so in thermis case it would be knights booked right another example is uber so who are your two users there you have riders and you have drivers and so an example of a primary metric you could pick there is weekly trips okay all right so uh there are always exceptions to the rules and there are there is one exception in which your primary metric is neither revenue or active users and that is if you run a biotech a hard tech business and you're still trying to figure out whether the science or tech is actually going to work can you actually build a product um and another definition of this is uh for our biotech card documents businesses it it often takes a lot of time and money to get your first product to market so what's a founder to do especially you have little little funding so there's two answers to this one is if there are no regulatory issues to doing sales pre-product you should actually do the same as everyone else it should be most likely revenue your primary metrics should be revenue in the form of paid contracts lois poc's proof of contracts proof that if you build it they will actually come now if you are in a space with regulatory issues meaning you can't sell it at all um without having to go through like fda or some kind of body like that then your product primary metric is actually less quantitative per se and more of a binary thing so it's about figuring out the technical milestones that you that you need to demonstrate to mitigate the risk of whether the drug or tech is working so if you have to think about experience to prove this out you can ask a question like what are what minimal things i need to do to truly answer the question of whether this works or not so if you fall into this category i urge you to actually just go watch these two lectures uh they're actually firesat chat chats i did last startup school with elizabeth and eric elizabeth is an expert in biotech and eric is an expert in hard tech and they actually go through deep deep dive into how do you think about your goals and how do you think about your milestones and what metrics to actually track all right so people have referred to the primary metric as a north star metric and i actually don't like the term north star because it kind of people have interpreted as something you just focus on this one metric and then ignore everything else um but like i said earlier there's no metric that actually tells the story that tells 100 of the story maybe 90 but not 100 and so sometimes founders fool themselves by literally only tracking their primary metric and nothing else um so a common example is just looking at user growth and just ignoring retention completely but retention is obviously just as important to user growth as it is as is a new user acquisition so one suggestion i have is to select a set of three to five other metrics secondary metrics to pair with your primary metric this gives you a good 360 degree overview of the health of your company so there are a ton to choose from so many choose from what you choose is actually very dependent on your business next week we're going to have two lectures on these sorts of metrics for consumer i'll be giving one on consumer startups and another yc partner i knew will be giving one on b2b companies and so we'll deep dive into metrics these metrics next week uh the key here though is just picking a few right uh at most fives three to five close to probably the three um you don't want to boil the ocean and pick everything it's totally fine to track all this kind of stuff but it's really not a good idea to optimize too many at once to really just suffer from analysis paralysis all right so a common question i have when i say you should what is your primary metric you should set one is well what if i haven't launched yet well obviously metrics don't matter if you don't know what the problem you're solving is you don't even know who your customer is yet you should really just focus on that first um you'd be really putting the cart before the horse by worrying too much about this kind of stuff that said once you get to the point where you're building the product it's really a good idea to get this down even if you haven't launched yet by at least defining your primary metric you'll be able to think about who your user really is uh you get everyone on the same page on who you're targeting and even you can hypoth use the metrics and goals to hypothesize on how you might get your first few users and trust me nothing is more motivating than staring down the barrel of zero users and zero dollars of revenue for weeks on end you're going to get very antsy about launching um very quickly and that's that's actually the effect you want all right so i'm going to go into how do you set goals for your primary metric for for your kpis so paul graham actually wrote a great essay a few years ago called startup equals growth and explains why startups should focus on growth and i really urge you to go read it and this section of this lecture draws a lot of insights from it the goal of your startup is to grow your primary metric by doing this it does two things it proves that you're making something lots of people want and second it proves you're making something that has a possibility of reaching and serving all those people each week your goal should actually be to set a weekly uh growth rate now we use weekly increments because startups early on need frequent feedback from their users to tweak what they're doing but also we use weekly growth right because it helps to divide up the progress you need into doable chunks so say your goal in a couple months is to get 10 000 daily active users which requires growing new users let's say 10 week over week to grow 10 this week may amount to actually just getting a hundred new users which is a different problem to solve than trying to get 10 000 new users right you should be focusing on what's directly ahead of you in that week do things that don't scale today if that's actually the best way to get those hundred users and don't worry about the eventual goal of ten thousand too soon so naturally the next question is how fast should i grow what should this rate actually be well there's no good formula there's no right formula for this but one angle that we could tackle it from is looking at good startups and seeing how fast they were growing in the beginning stages of their life so i actually went back and i looked at the good startups who pitched in recent yc demo days uh so these if you think about these startups they were three months prior they were all in the phase that you are probably in today and it turns out the growth rates range anywhere from twenty to two hundred percent month over month but clustered more closely to twenty to fifty percent month over month which you could back up back it out it amounts to about five to ten percent week over week um and so this chart uh just to explain it real quickly uh the left-hand column is the weekly growth rate and then these are the equivalents that you need to grow by month and then what the multiple is by year so this is actually in line if you read that essay pg wrote a few years ago which he said a good growth rate during yc is five to ten five to seven percent a week if you can hit 10 a week you're doing exceptionally well and so this is the green area which we've seen consistently actually um in the recent batches of yc so growth is a little hard to grok but if you look at this chart you'll see that how small variations in weekly growth rates can make a huge difference on the monthly and yearly time horizon you also get the sense that to get big fast it actually seems doable if you have something people want on the flip side if you only manage one percent uh weekly growth it's a sign you haven't figured out things yet it doesn't mean that you have a horrible business you can run a great small profitable business growing one percent week over week but it's not a good sign that you have a startup with a billion dollar potential so you should think about that trade off there and what you really want out of your business uh if you're growing uh at that rate um that said the main thing uh in terms of setting your goals is is to think for yourself uh is to define your own goal based on not what others are doing but what you think is ambitious and achievable based on the product you're building so you knew your users and business better than everyone else what does success look like like for you and what does being on track look like to you so here are some general guidelines uh when defining a goal all right first um if you're solving a real problem in a large market then that means there's a ton of latent demand out there uh people will use of just about anything to use your product even if it's half broken half baked or just solves a bit of their problem which means that startups usually have fast initial growth that said where you are today matters so if you have a ton of users and a ton of revenue you will probably know that at that volume as a volume increases what you need every week to grow gets harder over time so again most startups they grow very quickly and then over some time they kind of the growth rate kind of slows down a little bit the second one is time to sale so when you try to set your goal you need to consider how long it takes to acquire user and make a sale so for a consumer startup generally you have an app or a website i show up to it i look at it i see if i want it and then if i do bam i buy it or i sign up for it and so it's instantaneous for an enterprise startup where you're actually probably going through some red tape um you have a bunch of stakeholders you have to deal with um and it just like you you can show up to the company and they're not going to even buy it right away because you're maybe not even talking to the right person so it might take some months to actually get your first sale so you'll have to take that in account over time this time to sale should actually decrease over time like good enterprise startups that time sale goes from months to hopefully days um uh if not hours and so it shouldn't impact your growth rate in the future but in the near term it actually might uh third is you really want to focus on organic versus paid users or paid growth in the beginning organic means they discover it through word of mouth basically you're not paying for the user they kind of just may be searching for it and using it themselves i think in the early days using paid users is actually cheating growth and you should avoid it as much as possible and finally because your startup startups equals growth you should focus on exponential goals and not linear goals all right so in terms of picking the goals i think there's two ways to do it one you can just pick a growth rate and then pick up growth rate that you can you think you can hit and if you hit it great you probably should change it if you're hitting it consistently to something higher if you don't if you're not hitting it then you should be a little bit alarmed and you should figure out why another way to do it is time box an absolute goal so what i mean by for that is say for for the purpose of startup school at the end of startup school how many active users or how much revenue do you want to have how what what would it look like what would something meaningful look like at the end of 10 weeks then go back out your weekly growth rate and then go week to week figure out the obstacles and how you should hit that hit that weekly goal in the beginning if you're somewhere close to zero users today uh often you'll get something higher if you higher if you do this method than five to seven percent week over week tracking progress so metrics and goals obviously don't mean anything if you don't leverage them use these as a motivational tool so one way to do this is get a piece of paper draw a forward-looking graph of what the growth you want to hit in the next 10 weeks print it out and put it everywhere put on top of your desk put on the bathroom mirror put on the fridge and update once and once once a week this is in fact what airbnb founders did in the beginning and if they hit the numbers great if they did not and that's all they would talk about and so i would follow something to like this now you want to leverage your parametric and goal to help you prioritize your time week over week so week to week you should be stack ranking all the ideas you have of how to grow it and make a good guess on what's going to have the biggest impact for the next week to meeting your goal and then choose accordingly occasionally you won't hit your goal for the week we can dream that our growth will be flawless and look like this but in reality in the beginning it always looks something like this it's okay if you don't hit your goal one or even two weeks in a row as long as you understand why you should be always asking yourself what is the biggest obstacle in my way of hitting my weekly target how do i overcome this and be obsessive of this uh if you don't know the answer then the answer is go talk to more users and don't spin in circles i'm trying to figure it out yourself a good startup idea will keep growing at some point so not hitting uh your weekly targets week on end uh will maybe just help inform you you're not working on the right thing or even the right idea finally to end as you already know our startup school software asks you to set your primary metric and goals uh it is important to be honest about where you are and one of the best ways to do that is to fill this out every week we've given you the software to do this very easily it is not for us i promise you it is for you to use and get in the habit of doing it we hope you fill us out throughout the course and moving forward even after the course you keep doing it it's a good habit to have i guarantee you if you're not already doing this just adding this one simple thing to your workflow is going to help you and change things dramatically all right that's it we'll next have ilya from segment thanks you

Channel: Y Combinator

Views: 176,258

Keywords: YC, Y Combinator, startup school

Id: lL6GdUHIBsM

Length: 23min 31sec (1411 seconds)

Published: Thu Aug 01 2019