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Adora Cheung - How to Set KPIs and Goals
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About the talk

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

Transcript and lecture slides here: https://www.ycombinator.com/library/6j-how-to-set-kpis-and-goals-sus-2019

This lecture is part of YC's Startup School, a free online program and global community of founders. Register and join the community at https://www.startupschool.org/

Timestamps

00:00 What is a Key Performance Indicator (KPI)?

00:39 Why do KPIs matter?

1:33 What are the right KPIs to set?

1:46 Setting your primary metric

2:22 What are the characteristics of a good primary metric?

5:32 The two best primary metrics

6:50 When should you consider active users as a metric?

9:20 KPIs for bio and hardtech businesses

11:15 Secondary metrics

12:56 The best KPI for an unlaunched company

13:55 Setting metric-based goals

15:20 How fast should I grow?

17:15 What does success look like for you?

17:40 Guidelines for defining a goal

19:45 How to pick a goal

20:44 Tracking Progress

21:18 Leveraging your primary goal

22:27 Using the Startup School weekly update

00:00 What is a key performance indicator (KPI)?

00:39 Why do KPIs matter?

01:33 What are the right KPIs to set?

01:46 Setting your primary metric

02:22 What are the characteristics of a good primary metric?

05:32 The two best primary metrics

06:50 When should you consider active users as a metric?

09:20 KPIs for bio and hard tech businesses

11:15 Secondary metrics

12:56 The best KPI for an unlaunched company

13:55 Setting metric-based goals

15:20 How fast should I grow?

17:15 What does success look like for you?

17:40 Guidelines for defining a goal

19:45 How to pick a goal

20:44 Tracking progress

21:18 Leveraging your primary goal

22:27 Using the Startup School weekly update

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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All right, so, I am going to be talking about sitting here. Keep you eyes 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, is a necessary condition for starting a successful startup. So the acronym kpi stands for key performance indicator, if you go around for their 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 are businesses doing. So. This

is important because obviously you should know what state your business is in at all times. So sitting there, right? Keep you guys in goals were ejected Lee. Tell you if you're doing well. Just okay or bad. So nothing keeps you more grounded. Humbled, and a realistic about where you are then 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 music watching new features and so on so forth or actually working. So if you do something and things go up,

that's probably good. If you do 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 incorrectly, you're such a York AP. I can go is incorrectly. You can direct her start up into a bunch of circles or if you do it for too long. I was on to the wrong path. Italy to it's unnecessary to my eyes. So what are the right? Keep you eyes to set. 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 we can start of school, 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 time that you work 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 us, a 91% of the job done. I'm 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 parametric there for them? 1 2, you're probably my trip 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 the value through other training? You threw 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 delivering value or not. The second one here. Is it your parametric must capture whether you're part of his recurring or enduring value to your user or should anyway, so for example, when is ASL most as tools use Mr. Are monthly recurring Revenue? As our 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 Dau, 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 3rd. One here is your part of my truck should be a lagging indicator for 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 influence revenue or actual usage, and actually, it doesn't represent real value the

best. So, the best indication is when the value has already been delivered as they're ready. 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 is lagging indicator. Revenue increases. It's because more customers have already paid for the product value. Versus a potential customer came to your site, give 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 partner. My truck should be usable as a feedback mechanism. That is. It

helps 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 this poor character. Characteristics of a primary metric that there are really two primary metrics to pick from so when 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 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 weather people. Really want what you're making. So that being said, some people to 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 1,000 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 1,000 users.

I'll get my pay. That's a trap because free users. I'll give you different types of feedback from users were actually paying you unpaid users are just more serious about the product and hopefully will be more serious about giving you feedback. So I heard you two, just get paid. All right. To what are reasons why? So, given 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 as it is actually a prerequisite to

monetization. So an example of this is if your business models Advertising based like a Facebook or Google and yeah, you need millions and millions of users coming back to your site every day 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 throw me. Just a multiple of your active users. Another reason is also but much much more, much more rare is if you have a 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 our 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, I asked okay, users, how many years that I have 100 users? What is users mean, in that situation? Sometimes two people, that means 100 uses that just signed up and gave you an

email. Sometimes, that means, 100 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 hurt yourself. I just sent you there, then get having a Really easy, definition of users. And another example of users where it's not exactly as ours if you're in the marketplace and there are two types of customers are two types of users. So a good examples Air B&B for your two users. You

have not just the guests, but you also have the host. So what are you to do? How do you, how do you pick just one? Will you pick up value? That actually represents them both getting value? So in their music case would be nights booked. Right? And I know example is Uber. So we were two users. Are you have writers? And you have drivers and so an example of how I met your cute pic. There is weekly trips rules. And there are, there is one exception in which your

primary. My truck is neither revenue or active users. And that is, if you run a biotech, a hardtack 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 bike to car deck 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 funding. There's to answer to this one is if there are no regular Tori issues to doing sales proof product. You should actually do the same as

everyone else. It should be most likely revenue revenue in the form of paid contracts, Eloise. 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

associate have to think about experience 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 I heard you to actually just go watch these two lectures. Are there, actually fireside chat chats I did last night at school with Elizabeth and Eric, Elizabeth is an expert in biotech, and Eric is an expert in heart attack, and they actually go through deep deep deep deep deep dive into. How do you think about your goals? And how do you think about? Your milestones and what metrics

actually track. Alright, 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 have interpreted as something. You just focus on this one metric and ignore everything else. But like I said, earlier, there's no metrics that actually tell the store that sells, 20% of the story may be 90%. But not a hundred percent. And so sometimes daughter's 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 the retention is obviously just as important to user growth as it is as is a new user acquisition. 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 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 I know

the white part of a new will be giving one on B2B companies. And so will Deep dive into metrics these metrics next week. The key here though is just picking a few, right? At most 5, 325 clothes are probably the three. You don't want to boil the ocean and pick everything, 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 comment a question I have when I say you should, what is your problem is? 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 you're 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 to get everyone. The same page on here, you're targeting. And even you can hypothesize 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 0 users and $0 in revenue for weeks on end. You're going to get very antsy about launching very quickly. And that's that's actually the fact you want. All right, so I'm going to go into how do you set goals for your primary? My check at 4 for York apis to a few years ago called startup equals growth in explains why I started 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. 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 WeeklyChris, 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 10000 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 100 new users, which is a different problem. The 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 the 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 it 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, why she'd Emmett is. So these, if you think about these startups, they were three months prior. They're all the things that you are probably in today. And it turns out the growth rates ranged, anywhere from 20 to 200% month-over-month, but 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 at the left-hand column is the weekly growth rate. And then these are the equivalence that you need to grow by months. And then what the multiple is by year. To this is actually mine. If you read that sap, gyro it a few years ago, which he said a good growth rate during why she is 5% 527 % a week. If you can hit 10% a week, you're doing exceptionally well, and so this is a green area, which we seen consistently actually, in their

recent batches of ycso. Growth is 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 Orizon. 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 manage 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 thing in terms of setting your goals is, is to think for yourself. It's a defined, your own goal based on not what others are doing. But what you think, is it in fishes? And achievable based on product your 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, Alright, first, if you're solving a real problem in a large market, then that means there's a ton of weight in 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 solve the bit of the problem, which means that startups usually have fast initial growth. That's said where you are today matters. So if you have a ton of uses and it's on a revenue, you will probably know that at that volume, as volume increases what you need every week to grow gets harder, or time to start

up the group 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 try to 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 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 Enterprise start up, where you're actually, probably going through some red tape. You have 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 at 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 sell should actually decrease over time. Like do Enterprise startups that time still goes from Once to hopefully days. It's not ours and so it shouldn't impact our 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 discover it through Word of Mouth basically, not paying for the user. They kind of just may be searching for it and using it themselves. I think in the early days using paid users is actually cheating growth initiative, way it as much as possible and finally because your startup startup sequence growth, you should focus on exponential goals and not linear angles. All right, 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 her for that. You can do, you think you can hit and then 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. It's a weekly goal in the beginning with your somewhere. Close to, as your users today. I lost and you'll get something higher and higher. If you do this method than 25 to 7% week-over-week. Tracking progress, so metrics and gold obviously. Don't mean anything. If you don't leverage them, use these as a motivational fall. So one way to do this is get a piece of paper and draw forward-looking graph of what the girls he want to hit in the next ten weeks, print it out and put it everywhere. But 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 us something to eat like this. Now, you want to live with your partner, Mexican goal to help you prioritize our time week-over-week so we can wake. You should be stack. Writing 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 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 looks 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 asking yourself. What is the biggest obstacle in my way of hitting my weekly Target? How do I overcome this? And be obsessive of our 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 to 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, ask you to set your partner metric and goals. It is important. To be honest, about where you are in the one. At one of the best ways to do that is to fill this out every week. We've given you this afternoon to 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. Romantically. Alright, that's it. Will. Next travel uniform placement.

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