Adora Cheung - How to Set KPIs and Goals

All right, so I am going to be talking about setting your KPIs and goals for early stage startups. I'm going to be pretty pedantic in this lecture, and the reason why is doing this correctly is a necessary condition for starting as successful or building a successful startup.

So the acronym KPI stands for Key Performance Indicator. If you Google around for it, there are actually many definitions of what this actually means, but for the purpose of today, for this context, I'm going to define it as a set of quantitative metrics that indicate how healthy your business is doing. This is important because, obviously, you should know what state your business is in at all times.

Setting the right KPIs and goals will objectively tell you if you're doing well, just okay, or bad. Nothing keeps you more grounded, humbled, and realistic about where you are than a bunch of numbers because if you interpret those numbers correctly, they don't lie. It will also act as a feedback mechanism for whether your current strategy—like user acquisition, building new features, launching new features, and so on and so forth—are actually working.

So if you do something and things go up, that's probably good. If you do something and some things go down, that's probably bad. It will not only help you prioritize your time but also course correct. So it follows that if you do this incorrectly, if you set your KPIs and goals incorrectly, you can direct your startup into a bunch of circles, or if you do it for too long on the wrong path, it will lead to its unnecessary demise.

So what are the right KPIs to set? I'm going to break this down into two pieces: primary metric and secondary metrics. Most of today is going to be focused on the primary metric. So every week in Startup School, we've asked you in the software to fill out, to define your primary metric and then update its current value.

By definition, you can only pick one primary metric—one primary metric, and that’s the metric if you had to, you’d be willing to bet the whole company on. So why just one metric? It's a way to focus and keep things very simple. If there's a way to get 90% of the job done with just one variable, that's better than having a bunch of variables that get, let's say, 91% of the job done.

In this case, the job to get done is quickly determining how well your startup is doing. So what are the characteristics of a good primary metric? There are four of them.

One, your primary metrics should quantify how much value you're delivering to your customer. That is, you obviously want to build something that people want. Now, how much do they actually want it? Users often indicate the value through either trading you through money or time. So revenue is always the best metric: I pay you a hundred dollars to use your product or software; I must at least value that hundred dollars.

Active users using the product once a week or once a day—we call that weekly active user. Daily active user is a weaker but another good, decent indication of whether you're delivering value or not.

The second one here is that your primary metric must capture whether your product is delivering enduring value to your user, or it should, anyway. For example, in SaaS, most SaaS tools use MRR (monthly recurring revenue) as their primary metric. I commit to forking over 100 bucks a month continuously every month because your product demonstrates to me every month that it has value to me.

Another example is if you're building an online digital daily newspaper, then obviously DAU (daily active user) is a good one because I expect to be delivering content to you that is valuable to you every single day, so hopefully, you'll come back every day.

The third one here is your primary metric should be a lagging indicator for success. A common trap that founders do to trick themselves is by picking a primary metric, let's say something like email signups, because, one, it's easy to move. But, while it may eventually influence revenue or actual usage, it actually doesn't represent real value the best.

So the best indication is when the value has already been delivered. It's already occurred. When someone has already forked over their time or money to use it, then that is what a lagging indicator is. So if revenue increases, it's because more customers have already paid for the product's value, versus a potential customer who came to your site, gave you an email, and maybe they'll sign up one day, or maybe they'll use your product one day to buy something.

Lastly, your primary metric should be usable as a feedback mechanism. That is, it helps you prioritize strategies and make decisions quickly. In a startup, one of the key things to being successful in getting past product-market fit stages is to iterate very fast, right?

So while you want it to be a lagging indicator, you also don't want it to lag too much. For example, a lot of people pick MAU (monthly active user), but this is usually not a great metric because it takes time to understand the impact of movement, especially in a startup this early and so many things can happen within a month.

Also, another reason why I don't like MAU generally is because if your user only comes back once a month, they only value something that you're building once a month. I really question actually if you're solving a real problem.

All right. So you may have guessed from me talking about these four characteristics of a primary metric that there are really two primary metrics to pick from. So one is either revenue or active users. Ideally, you're picking revenue because nothing tells you more about delivering real value than people forking over, handing over real hard-earned dollars to you.

Even better is picking revenue that people keep giving you over and over and over again, like monthly recurring revenue (MRR). It's the best test for whether people really want what you're making.

That being said, some people do pick revenue, but a common trap they fall into is that they don't actually get paid. Usually, I hear something to the variant of, "Oh, I'm going to get these 1,000 users not paying me anything. I just want to get their feedback and see how they're using the product and make it a little bit better, and then eventually I'll get them to pay or the next 1,000 users I'll get them to pay." That's a trap because free users will give you different types of feedback than users who are actually paying you.

Paid users are just more serious about the product and hopefully will be more serious about giving you feedback. So I urge you to just get paid.

All right, so what are the reasons why? So Kevin, in an early lecture, said 99% of you should actually use revenue as your primary metric. So what are reasons why you should consider active users?

One main one is because building a large audience is actually a prerequisite to monetization. An example of this is if your business model is advertising-based, like Facebook or Google, then yeah, you need millions and millions of users coming back to your site every day before you can actually get brands and people to buy ads.

In this case, active users is actually a reasonable proxy for revenue because eventually, when your startup starts making money, revenue is just a multiple of your active users.

Another reason is also, but much, much more rare, is if you have very strong network effects. That is, if you're like a marketplace that requires tons of users to just get the flywheel going and grow, then maybe that's a reason for you to focus on active users today versus revenue and then just do revenue later down the road.

Now, that being said, if you're using active users as a metric, it's important that you define user appropriately. I hear often, I ask, "Okay, how many users do—what's your primary metric? Active users!" "How many users?" "I have 100 users." What does users mean in that situation?

Sometimes to people, it means 100 users that just signed up and gave you an email. Sometimes it means 100 users that signed up and started using the product and come back every day for about 10 minutes a day, which is by far much better than just people just like little dabbling on your site, right?

So you really need to get that definition correct and don't trick yourself by just saying users and having a really easy definition of users. Another example of users, where it's not exactly users, is if you're in a marketplace and there are two types of customers or two types of users.

A good example is Airbnb. Who are your two users? You have not just the guests but you also have the hosts. So what are you to do? How do you pick just one? Well, you pick a value that actually represents both getting value. In their case, it would be nights booked.

Another example is Uber. So who are your two users there? You have riders and you have drivers. An example of a primary metric you could pick there is weekly trips.

Okay, all right, so there are always exceptions to the rules. There is one exception in which your primary metric is neither revenue nor active users, and that is if you run a biotech or hard tech business and you're still trying to figure out whether the science or tech is actually going to work. Can you actually build a product?

Another definition of this is for biotech or hard tech businesses. It often takes a lot of time and money to get your first product to market. So what's a founder to do, especially if you have little funding?

There are two answers to this. One is, if there are no regulatory issues to doing sales pre-product, you should actually do the same as everyone else. It should be most likely revenue. Your primary metrics should be revenue in the form of paid contracts, LOIs, POCs—proof of contracts—proof that if you build it, they will actually come.

Now, if you are in a space with regulatory issues, meaning you can't sell it at all without having to go through like the FDA or some kind of body like that, then your product's primary metric is actually less quantitative per se and more of a binary thing.

So it's about figuring out the technical milestones that you need to demonstrate to mitigate the risk of whether the drug or tech is working. If you have to think about experiences to prove this out, you can ask a question like, "What are the minimal things I need to do to truly answer the question of whether this works or not?"

So if you fall into this category, I urge you to actually just go watch these two lectures. They're actually fireside chats I did last Startup School with Elizabeth and Eric. Elizabeth is an expert in biotech, and Eric is an expert in hard tech, and they actually go through a deep dive into how do you think about your goals and how do you think about your milestones and what metrics to actually track.

All right, so people have referred to the primary metric as a north star metric, and I actually don't like the term north star because it kind of—people have interpreted as something you just focus on this one metric and then ignore everything else. But like I said earlier, there's no metric that actually tells the story—100% of the story. Maybe 90%, but not 100%.

Sometimes founders fool themselves by literally only tracking their primary metric and nothing else. A common example is just looking at user growth and just ignoring retention completely. But retention is obviously just as important to user growth as new user acquisition.

So one suggestion I have is to select a set of three to five other metrics—secondary metrics—to pair with your primary metric. This gives you a good 360-degree overview of the health of your company.

There are a ton to choose from—so many to choose from. What you choose is actually very dependent on your business. Next week we’re going to have two lectures on these sorts of metrics for consumer. I'll be giving one on consumer startups, and another YC partner I know will be giving one on B2B companies, and so we'll deep dive into these metrics next week.

The key here, though, is just picking a few right—at most five—three to five. You don't want to boil the ocean and pick everything. It's totally fine to track all this kind of stuff, but it's really not a good idea to optimize too many at once and suffer from analysis paralysis.

A common question I have when I say you should set your primary metric is, "Well, what if I haven't launched yet?" Well, obviously, metrics don't matter if you don't know what the problem you're solving is. You don't even know who your customer is yet. You should really just focus on that first.

You'd be really putting the cart before the horse by worrying too much about this kind of stuff. That said, once you get to the point where you're building the product, it's really a good idea to get this down. Even if you haven't launched yet, by at least defining your primary metric, you'll be able to think about who your user really is.

You get everyone on the same page on who you're targeting, and even you can hypothesize the metrics and goals to hypothesize on how you might get your first few users. Trust me, nothing is more motivating than staring down the barrel of zero users and zero dollars of revenue for weeks on end.

You're going to get very antsy about launching very quickly, and that's actually the effect you want.

All right, so I'm going to go into how do you set goals for your primary metric for your KPIs. Paul Graham actually wrote a great essay a few years ago called "Startup Equals Growth" and explains why startups should focus on growth, and I really urge you to go read it. This section of this lecture draws a lot of insights from it.

The goal of your startup is to grow your primary metric. By doing this, it does two things: it proves that you're making something lots of people want, and second, it proves you're making something that has the possibility of reaching and serving all those people.

Each week, your goal should actually be to set a weekly growth rate. Now, we use weekly increments because startups early on need frequent feedback from their users to tweak what they're doing. But also, we use weekly growth rate because it helps to divide up the progress you need into doable chunks.

So say your goal in a couple of months is to get 10,000 daily active users, which requires growing new users, let's say 10% week over week. To grow 10% this week may amount to actually just getting 100 new users, which is a different problem to solve than trying to get 10,000 new users.

Right? You should be focusing on what's directly ahead of you in that week. Do things that don't scale today if that's actually the best way to get those 100 users and don't worry about the eventual goal of 10,000 too soon.

So naturally the next question is how fast should I grow? What should this rate actually be? Well, there's no good formula, there's no right formula for this, but one angle that we could tackle it from is looking at good startups and seeing how fast they were growing in the beginning stages of their life.

I actually went back and I looked at the good startups who pitched in recent YC demo days. If you think about these startups, they were three months prior—they were all in the phase that you are probably in today. It turns out the growth rates range anywhere from 20% to 200% month over month, but clustered more closely to 20% to 50% month over month, which you could back it out—it amounts to about 5% to 10% week over week.

This chart, just to explain it real quickly, the left-hand column is the weekly growth rate and then these are the equivalents that you need to grow by month, and then what the multiple is by year.

This is actually in line if you read that essay PG wrote a few years ago which he said a good growth rate during YC is 5% to 10%. If you can hit 10% a week, you're doing exceptionally well. This is the green area which we've seen consistently actually in the recent batches of YC.

So growth is a little hard to grok, but if you look at this chart, you'll see that how small variations in weekly growth rates can make a huge difference on the monthly and yearly time horizon. You also get the sense that to get big fast, it actually seems doable if you have something people want.

On the flip side, if you only manage 1% weekly growth, it's a sign you haven't figured out things yet. It doesn't mean that you have a horrible business—you can run a great small profitable business growing 1% week over week—but it's not a good sign that you have a startup with a billion-dollar potential.

So you should think about that trade-off there and what you really want out of your business. If you're growing at that rate, that said, the main thing in terms of setting your goals is to think for yourself, to define your own goal based on not what others are doing, but what you think is ambitious and achievable based on the product you're building.

You know your users and business better than everyone else. What does success look like for you, and what does being on track look like to you? So here are some general guidelines when defining a goal.

First, if you're solving a real problem in a large market, that means there's a ton of latent demand out there. People will use just about anything to solve your product, even if it's half broken, half baked, or just solves a bit of their problem, which means that startups usually have fast initial growth.

That said, where you are today matters. So if you have a ton of users and a ton of revenue, you'll probably know that at that volume as volume increases what you need every week to grow gets harder over time.

So again, most startups grow very quickly, and then over some time, the growth rate kind of slows down a little bit. The second one is time to sale. So when you try to set your goal, you need to consider how long it takes to acquire a user and make a sale.

For a consumer startup, generally, you have an app or a website. I show up to it, I look at it, I see if I want it, and then if I do, bam! I buy it or I sign up for it, and so it's instantaneous. For an enterprise startup, where you're actually probably going through some red tape, you have a bunch of stakeholders you have to deal with.

You show up to the company and they're not even going to buy it right away because maybe you're not even talking to the right person. So it might take some months to actually get your first sale. You'll have to take that into account.

Over time, this time to sale should actually decrease. Over time, like good enterprise startups that time sale goes from months to hopefully days, if not hours. It shouldn't impact your growth rate in the future, but in the near term, it actually might.

Third, you really want to focus on organic versus paid users or paid growth in the beginning. Organic means they discover it through word of mouth; basically, you're not paying for the user—they may be searching for it and using it themselves.

I think in the early days, using paid users is actually cheating growth, and you should avoid it as much as possible. Finally, because startups equal growth, you should focus on exponential goals and not linear goals.

In terms of picking the goals, I think there are two ways to do it. One, you can just pick a growth rate and then pick a growth rate that you think you can hit, and if you hit it, great—you probably should change it if you're hitting it consistently to something higher. If you're not hitting it, then you should be a little bit alarmed, and you should figure out why.

Another way to do it is time box an absolute goal. What I mean by that is say for the purpose of Startup School, at the end of Startup School, how many active users or how much revenue do you want to have? What would something meaningful look like at the end of 10 weeks? Then go back, figure out your weekly growth rate, and then go week to week and figure out the obstacles and how you should hit that weekly goal.

In the beginning, if you're somewhere close to zero users today, often you'll get something higher if you do this method than 5% to 7% week over week.

Tracking progress—so metrics and goals obviously don't mean anything if you don't leverage them. Use these as a motivational tool. One way to do this is to get a piece of paper, draw a forward-looking graph of what the growth you want to hit in the next 10 weeks, print it out, and put it everywhere.

Put it on top of your desk, put it on the bathroom mirror, put it on the fridge and update it once a week. This is, in fact, what Airbnb founders did in the beginning. If they hit the numbers, great. If they did not, that's all they would talk about.

So I would follow something like this. Now, you want to leverage your primary metric and goal to help you prioritize your time week over week. So week to week, you should be stack ranking all the ideas you have of how to grow it and make a good guess on what's going to have the biggest impact for the next week to meet your goal, and then choose accordingly.

Occasionally, you won't hit your goal for the week. We can dream that our growth will be flawless and look like this, but in reality, in the beginning, it always looks something like this. It's okay if you don't hit your goal one or even two weeks in a row, as long as you understand why.

You should be always asking yourself, "What is the biggest obstacle in my way of hitting my weekly target? How do I overcome this?" Be obsessive about this. If you don't know the answer, then the answer is go talk to more users and don't spin in circles trying to figure it out yourself.

A good startup idea will keep growing at some point, so not hitting your weekly targets week on end may help inform you you're not working on the right thing or even the right idea.

Finally, to end, as you already know, our Startup School software asks you to set your primary metric and goals. It is important to be honest about where you are, and one of the best ways to do that is to fill this out every week.

We've given you the software to do this very easily. It is not for us, I promise you—it is for you to use and get in the habit of doing it. We hope you fill this out throughout the course and moving forward, even after the course, you keep doing it. It's a good habit to have.

I guarantee you, if you're not already doing this, just adding this one simple thing to your workflow is going to help you and change things dramatically.

All right, that's it. Next, we’ll have Ilya from Segment. Thank you.