Don’t fudge the metrics. You’ve calculated your economic model to predict your future profits from current losses. Now, don’t be overly optimistic. Pay attention to the metrics that signal the greatest impact on your business and be realistic in your measurements.
One very strong piece of advice, don’t fudge the metrics. Let me tell you what I mean by that. You’re scaling your company, you’re growing quickly, you’re incurring losses. To explain those losses to yourself, to your team, and to your investors, what you’ve done is you’ve calculated your economic model and you’ve figured out how much extra profits in the future you’re going to make from incurring these up front losses now to attract these customers. You’ve proven to yourself and hopefully to your investors you have a good business. That’s why you’re growing quickly. But if in doing that, you are in any way overly optimistic about these future numbers, believe me, you’re going to get caught. Investors deep in their heart hate these metrics. And why not? It would be so much easier if you were making profits and your financials showed from the basic financial accounting that this was a good business. What tends to happen as a result is that companies that are losing money and relying on these kind of metrics to justify their aggressive growth plans, get the benefit of the doubt in good times. Investors will frankly listen to any metric when they’re being optimistic. And then they can turn on a dime and in the next section we’ll talk about how to manage that problem. But what you can never do is have a metric that you fundamentally don’t believe in. It’s not legal, and it’s not right to lie to investors. But it is beyond stupid to lie to yourself. I always think of these metrics, this understanding of the economic model, as being what you use to navigate your ship by, to steer the ship that is your company. And I used to be a sailor. And one thing you remember is when you’re losing money, I think of that like being far away from shore. You’re far away from the safety of profits. You’re far away from the safety of cash flow. You’re alone on the big, blue sea. If you navigate honestly and correctly, and if you understand when you’re creating value, then you’ll be fine. Ultimately, you will be able to steer back to shore, back to profits. But if you’re fooling yourself about these metrics, and that you’re not calculating them honestly, and being really objective about these future revenues that you’re going to get for these current costs now, well if you’re fooling yourself, you’re going to end up lost. And at some point, it’s all going to catch up with you, and you’re going to are realize your business is not going to converge. I cannot emphasize this enough. These metrics are a necessary part of being a high growth/loss making company, but please don’t delude yourself. It just won’t work.
One way to keep an ever-growing company aligned is to pick one or two key metrics and orient the whole company around them. First, simplicity counts for almost everything. You can’t rally people around the complex metric that most people don’t even understand. Secondly, even though we said earlier that you have to understand your economic model and the relationship between growth of new customers and the costs associated with them, what we found from a one key metric perspective is it’s really hard to incentivize people around costs or managing costs. But it is really easy to rally people around an aggressive accelerated growth plan. So pick something like, add one million new subscribers next year, or a hundred new business customers every month for the next twelve months. You have to be able to wake people up in the middle of the night, and say, “How are we doing on the one key metric,” and get an answer. That’s worked a lot more than a complex answer on how are we doing on 17 different metrics.
Dave Cliffe. “How metrics-based monitoring can help prevent your next outage.” Tech Beacon. Blog post. November 2015.
Mark Suster. “How Startups Can Use Metrics to Drive Success.” Both Sides of the Table. Blog post. April 4, 2011.
Questions for You
Am I being realistic with myself in analyzing these future profits according to the existing metrics?
What are the one to two key metrics my team and I should focus on?
Does my team know these key metrics?
Have I set aggressive, engaging goals around them?
Tools and exercises
Create a management dashboard for your key performance metrics in “Financial Monitoring: Your Performance Metrics” with Bill Reichert