KPIs for early-stage software.
The KPIs we want to see at early-stage software companies
Obviously, it’s difficult to track anything at an early-stage startup. In addition, you as a founder are busy with generating actual output - so why bother to set up data collection? Actually, the best founders out there know how important their KPI tracking is to steer their business and also for their fundraising.
In later stages, VCs will pre-dominantly decide on the basis of your KPIs and growth data that you provide. And also as an early-stage investor, any provided data point has the potential to guide the investment decision and make it easier to gain confidence in a company.
Hence, at an investment decision, we are happy to look at any KPIs provided. However, we often see a tendency of founders to generate KPIs that are working in their favor, while neglecting important general KPIs. This can lead to the terrible consequence that they also steer their business in a potentially wrong direction.
Therefore, we want to share with you what KPIs we would love to see at an early-stage software startup.
Product-market fit indicators
One of the most important points for an early-stage startup is finding product-market fit. So any KPI helping to show your progress in this journey is extremely useful for both yourself and us. While revenue is of course a strong indicator on its own, it can also be potentially misleading and show only one side of the medal. In addition, we love to look at these indicators:
Retention and cohorts:
Most importantly, we want to see that customers are using the product regularly and that they are staying with your solution over time. It’s difficult to provide a benchmark here depending on your industry and stage. So most interesting for us is to see that you are able to push churn down over time - no matter where you started!
User engagement:
We want also want to see that your users are using your product frequently. The easiest metric for stickiness is to look at your Daily Active Users (DAU) divided by Monthly Active Users (MAU). Potentially, this could also be Weekly Active Users, instead of daily, depending on your use case.
This figure provides more context than just your DAU and gives a snapshot of your retention and activity levels.
Generally, the higher the better of course, while a 10-20% ratio is generally acceptable, only a handful of companies achieve ratios over 50% (as Sequoia found).
Superhuman framework:
Another helpful tool is the so-called “Superhuman framework”, developed by Superhuman CEO Rahul Vohra. While describing its functionality in depth would go beyond the scope of this article, the framework helps to establish and track a score of your champion users (e.g. people that would be ***very disappointed*** if you would stop your service).
While tracking the score is not super helpful for investors, it can be a revealing asset for you in order to identify your “champion” user segment and build the right features for them, while also addressing your “on the fence” user segment.
Read more about it here on FirstRoundReview.
Revenue growth per user:
Back to the hard facts, of course, we like to see that you are able to expand the Average Revenue Per User (ARPU). This can cover multiple ways such as showing you are upselling your users, that you are able to charge higher prices than before, or that you successfully executing a land-and-expand strategy.
Any product-specific success metrics:
In addition, feel free to add any product-specific metric that you deem critical to look at. This really depends on your product, for example, it could mean session lengths for info-consumption apps, number of activated features for modular software, booked courses for a platform, or users onboarded for a b2b SaaS company.
Sales Metrics
Next to general product-market fit metrics, we also want to understand how your sales process works. In general, again we are most interested in seeing a positive development here, even if you are starting at a poor benchmark.
Customer acquisition metrics:
This includes multiple very standard indicators. Especially, Customer Acquisition Costs (CAC) and the two contextual siblings of CAC Recovery Time and Customer Lifetime Value (CLTV) divided by CAC. Obviously, CAC Recovery Time should ideally be as low as possible (e.g. less than 12 months and/or lower than the minimum contract period), while we get excited to see ratios of 2-4 months.
In addition, CLTV/CAC puts CAC in relation to your Churn Rate or the Customers Life Span (see how to calculate CLTV here. Here we regard to be 3:1 as a good benchmark. Importantly, if your ratio gets too high (e.g. 5:1) this could serve as an indicator that you could potentially grow faster.
(b2b SaaS) Enterprise readiness
Because many b2b SaaS startups need to play an enterprise game to succeed in their fundraising roadmap later on, we are especially interested in understanding the Sales Cycles and Average Customer Revenue Value (ACV) in a year. For us, it’s mostly about understanding your current sales and customer structure, while also getting a glimpse of if you are or will be able to close enterprise clients.
MRR and growth
This is an obvious one. Though, we are particularly interested in all recurring revenue (MRR). For us, the total MRR or ARR does not matter that much if it is still rather low (>250k€ ARR). Instead, we are interested in month-over-month growth (ideally around 20%) and your customer structure (e.g. 2 vs 200 customers generating the revenue).
This gives us a more coherent impression of your trajectory and how you are executing your sales games.
Business Metrics
Finally, we look at your general business metric. As there is not too much to look at during the beginning phase of a startup, we are most interested in assessing capital efficiency.
Capital efficiency
If you already raised a round before, it’s very helpful for us to understand how well you executed this capital. A standard figure here is to look at your Burn Multiple (e.g. total money spent in a year divided by new ARR closed in the same year). This is actually more helpful than just looking at your prior fundraise, as you probably will have still a portion of your prior raise in your bank account.
Another figure here is to look at the Bessemer Efficiency Score which is the Net New ARR divided by the Net Burn of a given period. Bessemer Venture Partners defines three thresholds here:
Conclusion
In the world of early-stage software startups, tracking KPIs is essential for both founders and investors. These metrics provide invaluable insights into product-market fit, user engagement, revenue growth, sales efficiency, and capital efficiency.
As founders, embracing KPIs steers businesses in the right direction, while for investors, they are crucial for making informed investment decisions. At JVH Ventures, we prioritize KPIs that showcase progress, sustainability, and growth potential, guiding startups towards a path of success.
Are you a founder and currently raising?
Hit us up, we are happy to connect: www.jvh-ventures.com/pitch