Startup founders must focus with laser-like precision on key performance indicators (KPIs). Other names for KPIs are key success indicators, performance metrics, or key variables. KPIs are powerful tools that help companies and investors meaningfully measure progress. They also help startups to assess their growth relative to other companies in the same industry.
A company’s KPIs can provide valuable information about the performance and growth of a startup. When choosing KPIs that are most indicative of a startup’s performance, one consideration is the consistency and reliability of measurement. In addition, many KPIs are industry-specific, and investors expect companies within that industry to report those metrics.
GAAP Financial Measures
Generally accepted accounting principles (GAAP) measures are the financial metrics the company presents on the face of its financial statements. The Financial Accounting Standards Board (FASB) sets these standards.
One advantage of using GAAP metrics is that they are in a standard format, and companies widely accept them. As a result, this helps companies make performance comparisons across a wide range of companies. GAAP metrics also make it easier for investors and auditors to follow the financial reports.
Some examples of KPIs that are GAAP metrics include revenue, net income and gross profit. This data must be prepared in accordance with GAAP financial reporting standards. If the metrics deviate from GAAP principles, they are called non-GAAP or adjusted results.
Non-GAAP financial measures are supplemental measures. This means that they’re used when GAAP measures do not adequately capture the company’s business operations, liquidity, or financial position. Another name for non-GAAP metrics is adjusted results.
Several non-GAAP KPIs include adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization), adjusted net income, EBITDA, adjusted gross profit, and free cash flow.
Because non-GAAP KPIs differ, the SEC uses specific reporting requirements to increase transparency. The SEC sometimes requires reconciliation to the most directly comparable GAAP financial measure. For example, a company might reconcile its non-GAAP financial measure “industrial segment organic revenue.” This label could produce the GAAP financial measure “segment revenue” and explain what adjustments were made to arrive at the GAAP metric.
KPIs that are not financial in nature are often industry-specific metrics. For a video gaming or social media company, a prominent KPI might be monthly active users (MAU). For a retail chain, same-store sales might be a major KPI. Non-financial KPIs often include macroeconomic data that can impact a company’s growth.
Common KPIs Startup Founders Should be Familiar With
For any startup, KPIs that are useful gauges of financial and strategic performance are highly variable. Some KPIs that are informative for one startup might be irrelevant for assessing the performance of another startup. A list of some frequently-used KPIs follows.
Profit Margin: This metric looks at the ratio of a company’s profits to its sales. It is an indicator of the company’s return on investment.
Runway: This common KPI tool measures the survival prospects of a startup. It projects the amount of time a company has before it runs out of cash.
Monthly burn: A company’s monthly burn is a calculation of the amount of cash a company spends per month.
Daily active users (DAU) and Monthly active users (MAU): As the names suggests, these are both measurements of the number of unique users engaging with the platform in a specified time period. These metrics can provide insight into how effectively the website or app is monetizing users.
Customer acquisition cost (CAC): This metric refers to the amount of money that a company must spend to acquire a new customer. This spending encompasses sales, marketing, and related expenses.
Lifetime value (LTV): This indicator measures the net value of an average customer over the predicted amount of time they have a relationship with the company. The ratio of customer acquisition cost (CAC) to lifetime value (LTV) is an especially useful KPI for determining the sustainability of a company’s business model.
Customer retention rate: As the name suggests, the customer retention rate measures the percentage of paying customers who remain paying customers during a particular timeframe.
Gross merchandise volume (GMV): This refers to the total monetary value of goods or services sold over a given period of time through a marketplace.
Successful startups understand it is important to identify and optimize KPIs integral to the company’s strategic success. Accordingly, they focus on selecting and monitoring their KPIs.