Startups Turn To New Metrics To Measure Traction

Every money-making company describes its bottom line in the same way: profitable.

Every unprofitable company, however, seems to have its own metrics for putting the most positive spin on financial results.

A perusal of recent earnings reports reveals some of the standby favorites. There’s adjusted EBITDA profitability, dollar-based net retention rates, non-GAAP gross margins, non-GAAP net earnings … and the list goes on.

Not everyone’s a fan. Berkshire Hathaway Vice Chair Charlie Munger once famously advised: “Every time you see the word EBITDA, you should substitute the words “bullshit earnings.”

Luckily for startups, he’s not a venture capitalist. And for investors who really do focus on startups, some of the more unusual metrics do play a role in vetting companies that may be a ways from profitability.

These days, as startup backers shy away from high cash-burn, high-growth models, favored metrics are in flux. Companies are under more pressure to show they can get to break-even on comparatively modest capital infusions.

Retention at a reasonable price

“There’s a huge push to sustainable growth,” said Justin Bauer, chief product officer at Amplitude, a digital analytics platform that counts startups among its power users. Whereas a few quarters ago, investors might have prized fast growth above all, they’re now more sensitive to how much a startup is spending to acquire new users.

One of the metrics startups are tracking more assiduously now, per Bauer, is payback period for acquisition. This measures how long it takes to make enough money from a user to cover the marketing cost of getting them on the platform. Ideal time frames vary by industry, he said, but broadly it should be well below a year.

Having acquired a customer, startups are also increasingly expected to prove that a user is likely to stay, even in the face of budget cuts. To do that, startups need to show that users prefer them to rivals, based on metrics like frequency of visits and time spent on the platform. With both enterprise and consumer customers juggling more subscriptions than they need these days, it’s crucial to have a sense which will survive a culling.

Revenue per employee

Unprofitable companies also need to do more to instill confidence that they’re operating lean. Battery Ventures made this point in September, with a blog post noting how “the market has shifted to valuing cloud companies’ profitability, even when that comes at the expense of growth.”

For the current environment, Battery notes one of the increasingly popular metrics to track is  net burn/net new annual recurring revenue. The idea here is to get a sense of how efficient a company is at funding growth.

Taking things a step further, Battery also advises SaaS companies to employ a metric called APE, or ARR per employee, which offers a more detailed sense of productivity. Since costs for a cloud company are mostly driven by workers, the firm argues, tracking these costs specifically gives investors a sense of operating efficiency.

The most important metric: not needing the money

At the end of the day, the metric that arguably matters most for startups seeking to raise capital and negotiate terms is the one that is hardest to reach: Demonstrating that you don’t need the money.

Sure, it would be nice to grow faster, and to build out the core product. But if you can get by for a while with what you’ve got, it certainly aids the negotiating leverage.

Illustration: Dom Guzman

Learn More