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Adora Cheung - How to Set KPIs and Goals
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About speaker

Adora Cheung
Partner at Y Combinator

Adora Cheung was co-founder and CEO of Homejoy, which was funded by Y Combinator in 2010. Before that, she ran product at Slide. She has a bachelor's in computer science from Clemson University and is an economics PhD dropout at the University of Rochester.

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About the talk

Topic: Business

YC Partner Adora Cheung covers the importance of defining and tracking KPIs to understand how effectively your startup is reaching your goals.


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All right, so I am going to be talking about sitting York apis and goals for early-stage startups. So I'm going to be pretty pedantic in this lecture. And the reason why is doing this correctly as a necessary condition for starting a 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 so This

is important because obviously you should know what state your business is in at all times. So setting the right keep using Goldwell ejected Lee tell you if you're doing well. Just okay or bad. So nothing keeps you more grounded Humboldt and realistic about where you are than a bunch of numbers. Cuz if you interpret those numbers correctly, they don't lie. It will also act as a feedback mechanism for whether your current strategy like he's requisition building the speech wanting new features and so on so forth are actually working. So if you do something and things go up, that's probably

good. If you do something something that's probably bad and it will it will not only help you prioritize your time, but also a course, correct. So it follows if you do this in correctly, you're such a UK PSN goes incorrectly. You can director start up into a bunch of circles or if you do it for too long on to the wrong path will lead to it's unnecessary to my eyes. So what are the right to apis two sets? I'm going to break this down. Two two pieces primary metric and secondary metrics and most of today is going to be focused on the primary metric. So every week in

startups cool, we've asked you in a software to fill out to Define your partner in my truck and then update its current value by definition. You can only pick one one parametric in a symmetric if if you had to 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 gets what's a 91% of the job done in this case the job to get done as quickly determining how well your startup is doing. So, what are

the characteristics of a good primary metric there four of them? 124 Parmer metric to quantify how much value you're delivering to your customer that is obviously want to build something that people want now how much do they actually want it and users often indicate value throughout a training you through money or time. So it revenue is always the best metric. I pay you $100 to use your product or software. I must at least value that $100 active users using the product once a week or once a day we call that Weekly active use your daily active

user is a weaker, but another good decent indication of whether you're giving value or not. The second one here. Is it your parametric must capture whether your product has recurring or enduring value to your user or should anyway. So for example, when is a samosa stools use MRI monthly recurring Revenue? As a primary metric I commit to forking over a hundred bucks a month continuously every month because you're part of demonstrates to me every month that has value to me. Another example is if you're building an online digital Daily Newspaper,

then obviously d a u daily active users a good one because I expect you I expect to be delivering content to you that is valuable to you every single day. So hopefully he'll come back every the third one here is your part of my truck should be a lagging indicator Forex success to a common trap that Founders do to trick themselves by picking a primary metric. Let's say something like email sign-ups because one it's easy to move. But while it may eventually influenced revenue or actual usage and actually doesn't represent real value the best. So the best indication is when the

value has already been delivered as already occurred. So when someone is already forked over their time or money then to use it then that is what allowed it that's a definition of what a lagging indicator is. Revenue increases it's because more customers have already paid for the product's value versus a potential customer came to your site gives you an email and maybe they'll sign up one day or maybe it'll use your product one day to buy something and lastly your primary. My truck should be usable as a feedback mechanism that is it help you prioritize strategies and make decisions

quickly. One of the key things to be to being successful in getting past product-market fit stages to iterate very fast, right? So while you want it to be a lagging indicator, you also don't want to like too much. So for example, a lot of people pick Mau monthly active user but this is but this is usually not a great metric because it takes time to understand the impact of movement especially in a start up this early as in your startup and so many things can happen within a month and also another reason why I don't like Mau generally is because If your user only comes back once a

month the 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 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 heading over real hard-earned dollars to you and even better is picking Revenue that people keep giving you over and over and over again

like monthly recurring review Mir. It's the best test for whether people really want what you're making so that being said some people do pick Revenue but a common trap they fall into is that they don't actually get paid and usually I hear something to the variant of oh, I'm going to get these I have these 1000 users not paying me anything. I just want to get their feedback and see how they're using the product and make a little bit better and then eventually I'll get them to pay or the next one thousand users. I'll get my pay. That's a trap because free users. Give you different types of

feedback from users were actually paying you on paid users are just more serious about the product and hopefully we'll be more serious about giving you feedback. So I ordered you to just get paid. All right to what are reasons why so Kevin an early lunch or said 99% of you should actually use Revenue as your primary metric. So what are reasons why you should consider active users? So one main one is because you because building a large audiences is actually a prerequisite to modernization. So an example of this is if your

business models advertising base like a Facebook or Google and yeah, you need millions and millions of users coming back to your site everyday before you can actually get Brandon people to buy ads and so in this case active users is actually reasonable proxy for Revenue because eventually when you start up start making money, it's usually just revenues just a multiple of your active users. Another reason is also a much much more much more rare is if you have very strong Network effects. That is if you're like a Marketplace that requires tons of users. If you 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 do find user appropriate. I hear often ask. Okay, how many users do I need yours that I have a hundred users what is users mean in that situation? Sometimes two people that means under uses that just signed up and give you an email. Sometimes that means a hundred users that signed up and start using your

product and come back every day for about 10 minutes a day, which is by far much better than just people just like little darling on your site, right? So you really need to get that definition correctly and don't treat yourself by Justin users and get having a Really easy definition of users another example of users where it's not exactly is yours. If you're in the marketplace and there are two types of customers are two types of users. So a good examples Airbnb for your two users. You have not just the guess but you also have the hosts. So what are you to do? How

do you how do you pick just one? Will you pick a value that actually represents them both getting value? So in there miss case would be nights booked. Right? And another example is Uber. So we were two users. Are you have writers and you have drivers and so an example of a metric unit pick their is weekly trips. All right, so there are always exceptions to the rules and there are there is one exception in which your primary metric is neither revenue or active users. And that is if you run a biotech a hard tech business and

you're still trying to figure out what are the signs are Tech is actually going to work. Can you actually build a product in another definition of this is for a bite to carjack many businesses. It it often takes a lot of time and money to get your first product to Market. So what's the founder to do especially you have little little funding there's to answer to this one is if there are no regular three issues to doing sales proof product. You should actually do the same as everyone else. It should be most likely Revenue your priorities should be Revenue in the form of paid contracts, LOL

eyes. POC proof of contracts on proof that if you build it they will actually come now if you are in a space with regulatory issues me and you can't sell it at all without having to go through the FDA or some kind of body like that. Then you're parked. My truck is actually less quantitative per se and more of a binary thing. So it's about figuring out the technical Milestones that you but you need to demonstrate to mitigate the risk of whether the drug Ortegas working. So she'd have to think about experiments to prove this out. I'm you can ask a question like what are with minimal things I

need to do to truly answer the question of whether this works or not. So if you fall into the category you to actually just go watch these two lectures. Are there actually fireside chat chat. So I did last night school with Lizabeth and Eric Elizabeth is an expert in biotech and Eric is an expert in heart attack and they actually go through deep deep deep sea dive into how do you think about your goals? And how do you think about Jamal stones and what metrics actually track? All right, so people have referred to the primary metric as a

Northstar metric and I actually don't like the term Northstar because it kind of people of interpret it as something you just focus on this one metric and ignore everything else. But like I said earlier, there's no metric that actually tell the store that sells 90% of the story. Maybe 90%. But not 100% And so sometimes Founders full themselves by literally only tracking their primary metric and nothing else. So common example is just look at user growth and just ignoring retention completely but their attention is obviously just as important as user growth as it is as is a 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. So there are a ton of choose from so many to choose from what you choose is actually very dependent on your business next week. We're going to have to lectures on these sorts of metrics for Consumer. I'll be giving one on consumer startups. And another by T-Pain renew will be giving one on B2B companies and so will deep-diving metrics these metrics

next week. The key here though is just picking a few right at North 5325 clothes are probably the three you don't want to boil the ocean and pick everything sleep find attract all this kind of stuff, but it's really not a good idea to optimize too many at once. It was really just suffer from analysis paralysis. All right, so a common question I have when I say you should what is your problem? That one is what what if I have a moment yet? 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. Usually just focus on that first you be really putting the cart before the horse by worrying too much about this kind of stuff that's said, once you get to the point where your building the product it's really good idea to get this down. Even if you haven't launched yet by at least you finding your primary metric you'll be able to think about who your user really is you get everyone the same page on who you're targeting and even you can't I popped use the metrics and goals of hypothesize on how you might get your first. uterus And trust me nothing is more motivating than

staring down the barrel of zero users and $0 of revenue for weeks on end. You're going to get very antsy about launching very quickly. And that's the 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 at 4 for your kti's to program a few years ago call startup equals growth in explains. Why startups should focus on growth. I really urge you to go read it in this section of this lecture draws a lot of insight from it is to grow your primary metric by doing this it does two things. I approve that you're making something

lots of people want and second. It proves. You're making something that has a 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 started early on need frequent feedback from their users to tweak what they're doing. But also we use weekly growth right because it helps to divide up the progress you need into doable chunks. So it's a you're going a couple of months is to get 10,000 daily active users. Which requires growing new users what's a 10% week-over-week to grow 10% this week May

amount to actually just getting a hundred new users, which is a different problem to solve then trying to get 10,000 new users right ahead of you in that week do things that don't scale today if that's actually the best way to get those hundred users and don't worry about the eventual goal is 10,000 too soon. So naturally next question is how fast should I groom? What 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 tack quit from is looking at good startups and see

how fast they were growing in the beginning stages of their life. So I actually went back and I looked at the good start up to pitch in recent YC demo days. So these if you think about these startups, they were three months prior. They're all in the face that you are probably in today and it turns out the growth rates range anywhere from 20 to 200% month-over-month a clustered more closely to 20 to 50% month-over-month what you did back up back it out. It amounts to about 5 to 10% week-over-week. And so this chart just 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 months. And then what the multiple is by year. To this is actually mine. If you read that sapg road a few years ago what she said a good growth rate during why she is 5% 5 to 7% a week. If you can hit 10% of week you're doing exceptionally well, and so this is a green area which we seen consistently actually in their recent batches of YC the growth of a little hard to grok but if you look at this chart, you'll see that house 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 and actually seems doable. If you have something people want on the flip side, if you'd only managed 1% weekly growth. It's a sign you haven't figure it out things yet. It doesn't mean that you have a horrible business. You can run and 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 up there and what you really want out of your business if you're growing at that rate. That's it. The mean things in terms of

setting your goals is is to think for yourself is to find your own goal based on not what others are doing. But what you think is it ambitious and achievable based on character building so, you know your users and business better than everyone else. What does success look like like for you and what does being on track look like to you? So here are some general guidelines when defining a goal All right first if you're solving a real problem in a large market, then that means there's a ton of waiting the man out there people would use a just about anything to use your product. Even

if it's half-broken half baked or just solved 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 it's on a revenue, you will probably know that at that volume as a volume increases what you need every week to grow gets harder over time so I can most startups that grow very quickly. And then over sometime they kind of the growth rate kind of slows down a little bit. The second one is time to sell. So when you tryna set your goal, you need to consider how long it takes to acquire user. I

make a sale. So for Consumer startup General 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 start up where you're actually probably going through some red tape. You have a bunch of stakeholders you have to deal with and it's like you can show up for the company and they're not going to be leaving by it right away cuz you're maybe not even talking to the right person. So it might take some wants to actually get your first sale. Do you have to take that and count

overtime this time to sail should actually decrease over time like good Enterprise startups that comes and goes for months to hopefully days. It's not ours and so it shouldn't impact your growth rate in the future. But in the near-term it actually might third if you really want to focus on organic vs. Paid users are paid growth in the beginning organic means they discovered the word of mouth. Basically, you're not paying for the user. They kind of just maybe searching for it and using it themselves. I think in the early days using paid users is actually cheating growth. I mean

should avoid as much as possible and finally because your startup startup sequence growth, you should focus on exponential goals and not in linear angles. All right. So in terms of picking the goals, I think there's two ways to do it one. You can just pick a growth rate and then pick up for that you can if you think you can hit and if you hit it great, you probably should change it. If you're hitting it consistently do something higher. If you don't if you're not hitting it then you should be a little bit alarmed and you should figure out why. And all the way to

do it is time box in absolute goal is what I mean by for that is safe for the purpose of start of school at the end of start school. How many active users or how much revenue do you want to have hot water? What would it look like? What was something meaningful look like at the end of 10 weeks then go back out your weekly growth rate and then go week-to-week finger out the obstacles and how you should hit that hit that Weekly goal in the beginning with your somewhere close to as your users today. I lost and you'll get something higher if you hire if you do this method than 5 to 7%

week-over-week. Tracking progress so metrics and goes obviously don't mean anything. If you don't leverage them use these as a motivational tool. So one way to do this is get a piece of paper and draw forward-looking graph of what the Grotti want to hit in the next ten weeks print it out and put it everywhere put on top of your desk on the bathroom mirror put on the fridge an update once once once a week. This is in fact with Airbnb daughters did in the beginning and if they hit the numbers great they did not and that's all they would talk about. And so I would follow something to

eat like this. Now you want to live with your partner Mexican goal to help you prioritize your time week-over-week so we can wake you should be stacked liking all the ideas. You have how to grow it and make a good guess on what's going to have the biggest impact for the next week to meeting 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 and be obsessive over of this? If you don't know the answer then the answer is go talk to more users and don't spin in circles. I'm trying to figure it out yourself a good startup idea will keep crying at some point. So not hitting your weekly targets week on end will maybe just help inform you you're not working on the right thing even the right idea. Find me to end as you're ready know or start

school software asked you to set your primary metric and goals. It is important to be honest about where you are. And then one at one of the best ways to do that is to fill this out every week. We've given you the softer to do this very easily. It is not for us. I promise you it is for you to use I can 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 around Ackley. All right, so I am going to take questions. So the question is for nonprofit. What how should you set your primary my trick actually work with that why she we want them to get in the state where they don't have to rely on going out for donations like every quarter every year and so it's actually to develop a revenue model. And so while you're not looking to seek constant and profit you should still be having Revenue coming in the door. And so I would probably use

that as a as a yardstick. Is LTV ever of the metric to us a government to measure for cyber security early to be coming by? Good questions for the question is is LTV a good secondary metric or even metrics to track. So I'm assuming that's you should just ignore it for now. Sell TV is lifetime value. It's something we're like how basically it's how much revenue your customers actually going to generate over the course of your of the life with your product. And that's so

hard to estimate were actually impossible to estimate when you have just a few months of data or any day dental. When is the next we can talk a lot about this next week? But just to give you a preview like the jargon the LCD is often paired with CAC. And so people are like, oh your LTV should be more like at CAC meaning customer acquisition cost. I think the more important thing if your focus on paid growth is to look at Payback. In the early days and hopefully that pay back. Is 080 days like you are possible on the first on the on the first by

volume So the question is if your Enterprise start-up meeting you probably the cell cycle is a little bit longer. Should you actually be tracking something else like pipeline value in Chile karela wiser? I think these are great secondary metrics to actually tracked ultimately you want the revenue the actual Revenue that's booked and that you're getting in the door into underpriced or UPS. Do you often have metrics like that? The tracking the near-term because it's that were actual revenues 04 a

really really long time. But yet so hopefully Lancers going So the question is if you're building a hardware product often, you need to do marketing campaigns which requires a bunch of money. And so I believe the question is what is an ideal CAC actually spend I mean obviously 0 into I think when I think when I think about CAC, I'm thinking about maybe like a fixed marketing budget, but maybe you do need to spend like X number of dollars to do a video for your

Kickstarter campaign what I mean? My CAC is the amount you have to pay and scale on a per-user basis suits acquire use your I need to I need to pay $50 moving forward and so obviously you don't want to be paying you $50 if you're not making $50 from my customer. So at the very least you should be proud that you should be break even do not pay more than what the customers actually giving you on a possible bases on a margin basis again. I question whether people actually want to buy this product if your whole entire strategy is just paying users because at some point even if you pay for

users, they are hopefully enjoy the products so much that they're talking about it and that word of mouth and referrals are things like that are actually starting to and so you're back. Hopefully if you have to start with one is going down over time or at Walmart. If you need funding to build your MVP is your MVP too ambitious. Depends on some Michael just gave a lecture on MVP. And then also I'm guessing you're thinking about his definition of heavy and BP.

I think there are many ways to answer that question. But if you're in one of those business that requires a lot of capital to get the first part of the market, then you'll have to find other ways than to get obviously get funding whether its pre-sales if you can do priests all that's the best way to do if a contract is guaranteed Revenue up front to help you build your product. The other way if you have to go to investors is again you have to investor is going to want the situation as direct to him or her as possible. And so I would be setting up experiments that help output data

that shows that you know, what I'm building is actually feasible and actually people want it. All right, that's it will next have Ilya from segment.

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