How do you measure your startup's financial performance?

Recurring revenue can be the holy Grail of revenue sources; but growth at any cost won't work out in the long run as a business model so be careful.

For years in the Venture Capital world, ARR and MRR in Startups has been virtually the key and all-powerful metric, along with CAC. However, we are already seeing how things are changing, with the ecosystem increasingly looking at sustainable growth, rather than exponential growth. From looking for unicorns, to looking for camels.

Many startups look at revenue without analysing the customer acquisition costs. One of the biggest killers of startups is not having a refined go to market strategy at a optimal cost of customer acquisition. Having a proper analysis of buying habits and understanding the best channel of sales with a deeper insight into the ones that work along with proper customer service backup is what will be a game changer for revenue and growth.

These are some great metrics to consider. A few other metrics with the same level of impact to the business are ARPU (Average Revenue Per User) and CLTV (Customer Lifetime Value). ARPU = Total Revenue in a period/Total active users in the same period CLTV = (Avg annual spend by customer * Avg customer lifespan with product) - CAC

Imagine a startup as a bakery. Revenue is the money from selling goods (like cupcakes), and growth is how fast the bakery is getting popular. Just like money keeps the bakery going, revenue keeps the startup running. And growth is like the bakery becoming famous, attracting more people. Investors like to see both because it means success and potential for more. Just like plants need care to grow, startups need revenue and growth to thrive.

The endless fundraising party is over in 2023. The focus is more on profitability because the exponential growth era (at all costs) is over. There used to be three types of startups: those that had no market and were going to die; those that had a product that fit in the market and were going to end up being profitable; and others that were neither of one type or the other, all of them fundraising actively. By the time there is no round after round, mainly because later-stage investment funds are not as active. These startups go back to the original dichotomy: either they have a market and work or they die. They have gone back to looking at profitability and business fundamentals. As it always should have been.

Profitability is the holy grail of any business. Most people confuse ROI with profitability. Your ROI could take many months or a couple of years. This doesn't mean that you can't be profitable as soon as possible. Getting to the top line as soon as possible is what seperates the winners from the wannabes.

To add to these business level metrics, here is a user level metric that provides significant actionable insights: AMPU (Average Margin Per User) AMPU = (Operating income - Operating Expenses)/Total Active Users in the period. Another business level metric is ROIC: Return on Invested Capital ROIC = Net Profit after Tax/Total Invested Capital

Profitability and margins give you the revelation on how financially healthy your startup is. They show how much cash stays in your pocket after paying the bills. Profitability is the diff between what you make and spend, while margins tell you how much profit you're raking in from your earnings. These numbers, like gross profit, net profit, and all that jazz, help you see if you're spending smart, pricing right, and staying financially solid. It's like a money checkup for your startup – helping you see if you're using your resources wisely and if your pricing game is strong.

In my opinion, one of the biggest problems in recent years in the startup ecosystem has been the obsession with the EBITDA metric, completely forgetting the liquidity available and therefore entering into liquidity traps. Not only Warren Buffett considers EBITDA as a wrong valuation metric, but also Seth Klarman argues that EBITDA is an analytically flawed metric, which has led to a chronic overvaluation of companies. In 2023 cash is key, sustainable growth will be key and we will see many bootstrapped startups in the next year.

Focus on ca$h - a good business generates cash and that's what investors look for Sales are only good only if they actually generate enough cash to cover expenses

In my experience, cash flow is the only vital health metric of a startup, especially when you are bootstrapping your company. Generating enough cash flow (through sales, ideally recurring) to not only cover your expenses but leave some to build reserves might be the only hope you have for the survival of your business. This is especially true if you are operating in markets where funding and financing are hard to come by, but I suspect this is going to be the norm globally as investors are beginning to look at businesses with sound business models that are reflected on their cashflow statements, rather than just growth at any cost.

Focus on ca$h - a good business generates cash and that's what investors look for Sales are only good only if they actually generate enough cash to cover expenses

Evaluating metrics like operating cash flow, free cash flow, cash burn rate, and cash runway helps to ensure liquidity, solvency, and sustainability, enabling startups to attract investors and confidently pursue growth without compromising financial stability.

For a start-up, these metrics tend to be subjective assumptions. It's best to track actuals against the planned assumptions but tweak the assumptions as the experience rolls in.

2023 is proving to be the year in which startup valuations have returned to normal after a period of skyrocketing valuations. This year has seen falls in the number and volume of transactions of up to 30%-40%, which has also influenced valuations. The perfect storm of rising interest rates, market turmoil and stagnant IPOs is having a considerable impact on the startup sector in 2023. I would love to be optimistic for the remainder of the year but I fear the same trend will continue, I don't think we will see a bottom until 2024.

From my experience, how founders calculate the value of their business for investment purposes seems to be a regular challenge. With multiple models out there and start-ups at different life stages it's a common question I get asked about regarding support.

There are loads of tools out there for this. the key is to understand your data and how it flows. Then be critical on what KPI / dashboard to build. Keep it simple. A good dashboard, only needs to track one or two things. And you don't need loads of dashboards. And no, a dashboard is not about identifying problems and communicating results - it's about helping to direct resources to understand why one or two Key metrics are out of kilter. Reporting is not analysis.

Remember, startup success is a journey that involves a combination of these elements. Each aspect contributes to building a strong foundation and navigating the challenges of entrepreneurship.

In the remainder of 2023, a wave of company shutdowns and M&A deals is approaching. In every country we see several companies trying to solve the same problems in different ways. In the market where the funding wheel worked, whoever raises the most money wins by growth, speed or team. When that slows down or doesn't exist, we go back to the basics of business. If two companies try to do the same thing under similar conditions, together they improve their market share, reduce costs, improve product and bring together the best of the teams. We will see many corporate operations the rest of the year.

In my experience as a Growth Strategist and Entrepreneur, financial indicators are essential; however, most organizations benefit from adding predictive metrics derived from the Sales Team. This is where pipeline dashboards come in. While some CRM solutions offer pre-existing pipelines with intelligence reporting, I generally customize pipelines during sales force analyses to locate the best predictive indicators for the C-Suite. After identifying these metrics and gathering data, the CEO/CFO would have critical insight into what to expect in the next 30-60-90 days. For entrepreneurs, this information is invaluable.