Why do startups keep focusing on the wrong KPIs

Almost all founders think that the KPIs of their startup are so obvious that they barely give it a second thought. That’s one of the main reasons startups fail, especially in the early stages.

There are two main mistakes that founders make when they’re choosing the right KPIs for their startup. The first one is that they are mesmerized by the KPIs they see in the media and pitch competitions. KPIs like monthly active users, number of downloads, website visits, etc. While these KPIs might be the right one for other startups, it doesn’t necessarily mean they’re right for yours too.

The second mistake is a bigger mistake that even seasoned founders repeatedly make. They pick KPIs that are not appropriate for their “stage”. Your KPIs will change in every growth stage of your startup. Choosing a KPI that’s important in the growth stage might not be the right KPI for the idea validation stage.

Most startups make their mistake because they’re comparing themselves to their well-established competitors, and they think they should have the same KPIs as their competitors. However, they forget that they’re not at the same stage, and more importantly, they should not have the same strategies.

“If you can’t measure it, you can’t improve it.”
- Peter Drucker

KPI is the magic word in startups

Some call it KPI (Key Performance Indicators), while others monitor it under the name “Key Results” in their OKR plans. Some believe we should have a North Star (which I’ll explain) or follow OMTM (one metric that matters) method. While different companies created different methods to define and track their metrics, their goal is the same:

1. Every business has limited resources
2. Therefore, we need to prioritize some things over others
3. The things we prioritize will define our strategy
4. We need to monitor and track our strategies to understand how successful they are
5. We need to judge the performance of our strategies. Numbers are impartial metrics, undisputable, and understandable to all.

So as you can see, strategies and KPIs are tied together. The goal of our KPIs is to answer whether our strategies are working or not.

Strategies define KPIs, and KPIs visualize whether our strategies are working or not.

How to pick the right KPIs?

To answer this question, we have to define our strategies first, and that’s where most startups have the most trouble. Your strategy is not revenue growth, growth in sales, etc. These are your goals, not your strategy.

Almost all founders determine their KPIs based on their goals, not their strategies, and that’s how they choose the wrong KPIs. Your goal might be the same as a goal of a restaurant chain; Should both of you have the same KPIs?

Most startups implementing methods like OKR for this often complain that it’s not working for them! Of course it’s not. You missed their whole point! You designed your objectives and key results based on your goals, not your strategies.

Step 1: Pay attention to where you are

The stage of your startup plays a critical role in defining your strategies and, thus, your KPIs. As your business evolves, your strategies will change, and your KPIs must change too.

Step 2: Understand your resources

Startups are not a place for wishful thinking and daydreaming. We typically don’t have a lot of money or a big established team when we start. First, we must be honest with ourselves and understand what we have and our limits.

Step 3: Visualize only the next step

It’s great to have long-term visions and goals. It’s great to have a big-picture roadmap of where we are and where we want to be. However, the difference between fantasizing and actually reaching our goals is how well we can decide the right “next step”.

Rather than being blinded by the brightness of our big goals, we should break them down into smaller steps to attain them gradually. One step at a time.

Defining the right next step is the most important part of defining our strategy. Now that we know where we want to go, how can we achieve it? This is our strategy.

Our strategy will determine how we can reach our next step. After reaching that step, we now decide on a new strategy to reach the next one, and so on.

Each strategy is more than a plan, it’s an idea, it’s a direction. Our strategy should not be just a list of plans and tasks; it should start with an idea that gives sense to all these plans and tasks.

The most important part of each strategy is its direction, which means we must choose. A direction means choosing one out of many. In a great strategy, more crucial than choosing what to do, is to choose what not to do.

KPIs in the starting stage: Idea Validation

Even before launching our MVP, we should have KPIs. Our goal at this stage is not to create a successful startup. It’s to understand whether our idea is worth pursuing or not.

All of our hypotheses might be wrong; maybe we shouldn’t even be working on this idea. So at this stage, instead of choosing business metrics, we should track validation metrics.

So how to define good validation metrics? If our friends like our social posts and congratulate us on our new venture, is that validation? No, of course not! Only one person can validate your idea, and that’s your target customer.

Great founders test their idea even before they start developing their products. Their strategies and KPIs are in line with these:

• I reached out to my potential customers and said I already developed my product. How many of them bothered to reply back and ask for more info?
• I created a landing page with a wait list for my startup idea. How many qualified leads actually signed up?
• I presented my sales deck to my potential customers. How many of them scheduled a second meeting?

Even without a working product, you can test to see if the problem you’re solving is a real problem or not. If a startup cannot pass these, there’s no reason to continue working on this.

Some founders fear doing this kind of validation and mostly say what if they steal our ideas? A founder who is paranoid about stealing their startup idea will never create a successful one, that’s for sure. Ideas are worthless. Execution is key. Everyone can copy you any time they want.

If a startup has acceptable KPIs on these metrics above, then they should start building their MVP (minimum viable product) right away. After launching the first version of your product, now your strategy must change, and the most important question that you should answer will become this: Is my MVP useful or useless?

We established that the problem exists, but that doesn’t mean your MVP is necessarily useful in solving that problem. Most MVPs suffer from two main pain points:

1. Our MVP is too big: Instead of focusing on solving one aspect of a problem, we now have a bloated product that has a lot of different buggy modules, and none of them is perfect. (And now we’re out of money and time)
2. Our MVP focused on the wrong aspect of the problem: Our product is not answering the most major issues of our customers right now, so they cannot use it right now.

So now we should define KPIs to see determine if our MVP is working or not and, more importantly, what we should change. Questions and KPIs for MVPs are in line with these:

• How many active users do we have? What is their persona?
• Which modules are they using? At what frequency? What modules they’re not using?
• What are the most frequently asked questions before using our product?
• What are the most frequently asked questions after using our product?
• How long will it take for our solution to work? From the moment they use our product until they have their desired outcome? Is this time getting shorter as they use our solution or not?
• What’s our churn rate? At what frequency? What is their persona? What are the main reasons they give us for churning?
• How many of our users switch from a competitor to us? Which ones?
• Tracking performance issues, bugs, UI issues, UX issues, etc. to determine which part of our product needs to be updated and how urgent it is.

Each great startup will define its KPIs to answer these questions, and by tracking, they imminently solve their main issues. Nobody cares if your MVP is buggy or ugly, but everyone cares about how fast you improve your product.

“If you are not embarrassed by the first version of your product, you’ve launched too late.”
- Reid Hoffman

Winner startups are the ones who are getting better faster than their competitors.

Rule of 3 growth periods: Pivotting based on your KPIs

Most startups will fail, even if they’ve picked the right metrics because they’re simply in the wrong business. Even the most experienced CEO in the world cannot sell a bad idea that’s not solving a real problem.

So how can we tell that we’re in the wrong business? How can we tell if our idea is worth doing or not?

The rule of 3 growth period is very simple:

If the startup’s most important KPI has not grown in the past 3 months, that startup is dead and we should pivot.

So if our most important KPI is not growing (or it’s declining) for 3 consecutive months, that means something is seriously wrong in our operation and now it’s time for drastic changes.

These times are the best times to pivot the idea until it works; until our main KPI is growing again. Bear in mind that while this month-over-month tracking is appropriate for most startups, it doesn’t apply to all. Some startups might have longer growth periods or shorter ones.

For example, Y Combinator (the biggest accelerator in the world), is notoriously famous for using the rule on a weekly basis for most of their startups. If one of their startups doesn’t show growth for even 3 weeks, they should start pivoting or even shutting it down.

Product/Market Fit KPIs

As we grow our startup, our startup becomes more and more like a real business. Now the main question is, when can we say we have a real thriving business? When will we achieve product-market fit?

This question does not have a single answer. Everyone defines their product-market fit moment differently, and in the interest of making this topic short and to the point, I’ll suggest reading Paul Graham’s essays on this topic.

When you have a working product with many happy customers, you’re near the Product/Market Fit Stage. The best metric for this stage is Month over Month Growth.

Startups that reached Product/Market Fit, have steady month over month growth on their key KPI(s)

This growth shows that not only you have successfully attracted some customers, but you’re able to grow in your market very fast. So to reach this stage, all your strategies should be surrounding how to grow, and your KPIs should paint you a clear picture of how well you’re growing.

These are the most common KPIs startups use at this stage. Remember your business and strategies are unique, so your KPIs are not all of them, but they should be some of them:

• Month over Month growth on your main KPI (Active users, MRR or monthly recurring revenue, No. of customers, No. of active installs, No. of website visits, Total sales, etc.)

Note: For some startups, this growth rate period might be longer or shorter. For example, social networks keep track of Daily Active Users or even Hourly Active Users.

• Month over Month Churn rate (Should decrease over time, how many of my customers are leaving our product or even using it less)
• Month over Month Stickiness rate:
  How crucial and important is your product to your customers? How deeply are they using you in their business or life? How much is it growing? (Examples: Avg seats per client, No. of interactions per client)
• Ambassador growth rate:
  How much are our customers referring us to new customers? How much are they talking about our product in their communities, social media, etc.? How much “word of mouth” are we getting? Is it growing?
• Network effect growth rate:
  How our new customers are related to our old customers? How can we enable a network effect to acquire new customers from our current ones?
• CLV / CAC growth rate:
  How can we make our customer lifetime value (all the money they give us in their lifetime of using our product) bigger? How can we make our customer acquisition cost (What we spend to acquire an average customer) smaller?

Right KPIs, at this stage, will make your startup master of the market. Great startups that pick and focus on the right KPIs experience tremendous growth at this stage and jump to the next step.

Even the best startups don’t have a secret

Scale & Growth Stage KPIs

Now you have a growing business, and you’re growing. At this stage, everything changes, and also everything will stay the same. Most of the KPIs that most business focus on at this stage are the same as the PMF stage. However, the main differentiation is sustainability.

At this stage, it’s not enough that your most important KPIs grow each month. More crucial than growing, is sustainability. Your KPIs should show a sign that your business is well-established and sustainable for the foreseeable future, even if it’s not growing.

An interesting additional KPI for some businesses at this stage is that not only do they try to grow the number of their customers but also to go up-market.

Going up-market means that you want to increase the average contract value (ACV) per customer. This means you want to charge bigger tickets, work with bigger brands and acquire bigger customers compared to before.

This stage has a very known pitfall for founders too. As they get busy building a growing team and product, they get used to their ways. It’s not the same as the PMF stage, where you had to risk every day to finally achieve it, which meant you had to be as creative and as adventurous as possible. Now you want a less risky business, a scalable business.

That means less creativity and not taking any risks. Over time it has a danger of making a business rigid. In the battle of growth and sustainability, you need to be careful to pick a balanced route.

Committing cardinal sin with KPIs: No Direct Connection

This is the most common and also the biggest mistake founders make when they’re defining their KPIs. They choose 5 or 6, and if they put all their metrics next to each other, you can’t paint any picture with them because they are unrelated.

Founders tend to discover relationships between their KPIs from thin air. Oh, the number of our website visits directly translate into our revenue goals. Oh, the number of people wearing a red shirt today directly translates into our active installs. At the end of the day, these founders ask themselves a very basic question:

We’re hitting almost all of our KPIs, so why the f* we’re not growing?

Short answer is that their KPIs are not helping each other. They have become just some statistics of your business, they don’t have a purpose.

KPIs should be directly in service of each other. After all, KPIs are defined by your strategy. And your strategy should not have unrelated or clashing results.

Over the years, many designed different methods to align all their KPIs. A very famous method, OKR (Objectives and key results), try to create a hierarchy of goals and results through the compy, each division, and ultimately, each person. This way, you ensure your KPIs (key results) are aligned all throughout the company.

Example source: Lattice

Another well-known method is called North Star and OMTM (one metric that matters). The North Star Metric (NSM) is a metric that a company uses as a focus for its growth.

The North Star Metric is the most accurate reflection of the value your company offers to its customers. This metric also serves as a guide for your company’s long-term growth, as opposed to focusing solely on short-term gains.

For example, the well-known North Star Metric of Spotify is how much time our users spend listening to music. For TikTok, it’s how much time in a day our users get entertained by our app.

The idea behind the North Star Metric is simple: If your company provides value to your customers, your company will grow. The reasoning is that when customers receive significant value, they are more likely to remain loyal, buy more, and recommend your business to others.

Example: Dashly NSM

Remember that revenues are not a good north star metric. They’re the goal, not the strategy. Again, same as all KPIs, we should define our strategy to reach our goal.

It doesn’t matter which method you choose. As long as you align your KPIs based on your strategy, you will be golden.

How can I tell that I’ve picked the wrong KPIs?

If you’re hitting your KPIs, but your business is not growing, it’s obvious that you have picked the wrong KPIs. KPIs should visualize what’s happening inside your business in each division and even with each team member. Having a distorted picture of your business will not help you grow.

Another important job of a KPI is to show you the next step. A KPI is not just a number that we get happy to achieve. Its most important function is to tell us how to design our next strategy, our next step. Both hitting a KPI or failing to hit a KPI will play a significant role in changing our strategies.

When you have determined that your KPIs need to change, it’s best to return to basics.

• What’s your long-term goal?
• What’s your short-term goal?
• What’s the next short-term goal, the next step?
• What’s your strategy to get there?
• Based on this strategy, we should focus on X

Most founders fall under the sunk-cost fallacy on their KPIs, even when they see they’re not going in the right direction, they tend to stay on the wrong course. They will say, I’ve spent this much time and money to achieve this KPI. Now I have to abandon it? If we go a little further, it’ll start working.

Unfortunately, a KPI that’s not aligned with your strategy will never work.