About the talk
YC Continuity Partner Anu Hariharan breaks down the important metrics we look for when we’re evaluating a startup’s business model and common mistakes to avoid when measuring them.
Lecture slides and Transcript can be found here: https://www.startupschool.org/videos/66
Find more Startup School and YC content at https://www.startupschool.org/library.
01:06 What Is an enterprise business model
05:28 Gross Mrl Churn
10:54 Transactional businesses
11:41 Gross transaction volume
16:26 Reflect on your user behavior
23:07 Common mistakes
23:46 Presenting metrics
I am a Partner at Y Combinator's Continuity Fund focused on growth stage investments. More recently at YC Continuity, I led investments in Boom, Instacart, Convoy, Brex, Gusto and Faire. I am also personally passionate about global technology investing and the convergence of great entrepreneurs between US, China and India and have invested in a personal capacity in a few companies including Jinri Toutiao. Previously, I was an investment partner at Andreessen Horowitz, where I focused on consumer internet growth investments, and worked actively with the management teams of a number of portfolio companies including Airbnb, Instacart, Medium, OfferUp and Udacity. Prior to Andreessen Horowitz, I was a Principal at The Boston Consulting Group's Private Equity practice in NYC where I led multiple growth equity due diligences in the consumer and fintech sector. I started my career as a senior engineer at Qualcomm and hold a MS in Electrical Engineering from Virginia Tech and MBA from The Wharton SchoolView the profile
Thank you all for having me and it's so awesome to see so many of you at 9 a.m. In the morning to discuss metrics. So let's hope we keep you engaged till the end of the session. So, how do we think about what metric to track an audit visors? Find out which business model you fit in? You know, the most common thing people do is, which industry. Where the hell are you in? Are you, Healthcare IU, biotech, or are you Enterprise? But that's not really the best way to think of metrics. The best way to think of metrics is how do you plan to charge your users, which is
the business model and which of these business models? Do you fit in? So roughly that are 9 versus Immortals. I mean, I would say 99% of you should fit into one of these categories. If you don't you probably building something that's incredibly hard, which is what we called moonshot. So let's all walk you through for the rest of the presentation on each business model and what three or four mattress you need to drag Beyond 324. Honestly, at this stage is going to work out. So these are the things that would matter. So what is an Enterprise business model. This is a company
that sells software or so. What is this to a large Enterprise? Pretty simple. Very few startups, do that. So I would expect majan very few of you. Try to our planning to launch something from day, one that sells to say Facebook or Google or Apple or any of that. But if you are one of those companies, examples are like Doc Docker Cloud it off, but I even in the white support for you, that are very few that did that from day one, but if you are one of them that sells to large Enterprises, you would categorize yourself in this category. And the large Enterprises 10 to work
in terms of contracts. So your business model will come into three things, which are the three metrics you track, which is bookings. So if you're working with say Facebook that say, hey, you're going to help us hide X Engineers. We'd like to sign a $100,000 contract for next year. So that's why you would say what is my booking? What's the total number of unique customers that have and what's Revenue? The difference between booking and revenue is Facebook might sign a contract ahead of time will tell you how to start of the earth that at 100,000 ft x higher though. The
York that doesn't mean you recognize Revenue straightaway. You recognize Revenue. Only, when you've delivered the service, either your place or the highest that you said in your contract or if it's an animal contract, you just divided monthly. So the common mistakes. We see Founders do is confusing, bookings and Revenue. They would have signed contracts with them and Delaware anyting. The subcontractor hasn't even kicked in but they are already reporting it as Revenue. That's not true because you haven't done with service. So that's what it's not for Avenue. And so you should hold
yourself accountable that I'd like the company is not generating Revenue, the second, no mistake, which is probably more relevant at the states that you are in is, you know, Facebook might have bubbly told you, I will come to the 100K contract. Beautiful. Damn hundred Kays, not a big deal for a lot of you. It's a really big deal. That's native booking North Avenue, because it's a verbal offer. So the other even if he was even if they sign a letter-of-intent, it means nothing. So you really have to have the contract written down sign for it to be bookings. And for Revenue, only when you
start celebrating yet. The second business model, the stats, which is probably where most of you fit in a specially. If you're in B2B or, you know, still missing two other companies, you're all probably thinking of that tomorrow. It's a very prompt and model of these days. You do you see a number all these saraiki startup segment, iron plants. And birds they all started with sass model right from day. One starts as software-as-a-service in terms of bed tomorrow. It's ready subscription business. You tried something monthly for the software that you provide. So what are the four metric
key metrics? You would want to track. Well, if it's subscription by definition that Avenue is vectoring, Right, which means if you hopefully have built something that people really like they'll continue to use it and they pay you every month. So that's why your track Mr. Are at the highest level. That is monthly recurring Revenue. How much are you making monthly? And what is the customers coming through it? ARR is annual recurring Revenue because of this phase, you're really growing fast. You may be growing 30%, week-over-week of 40% week-over-week. So it's
helpful to track, your annual recurring Revenue run rate. So if this month you made, 30,000 and Mr. Are, and if it's true lyrics, rain, you should expect to the Alano cycling is 12 times that. So it's just a good metric to use internally as well, because it helps show the paste rather than just looking at Absolute. The third thing, you should pay attention to his chart. So when you launch, they'll be a few users who are early adopters that use it, but you really should be paying attention to it. They stop using it, right? And if you're a subscription business, the chances are, you
probably make 5000 to $10,000 a month from two or three customers or maybe even 10. So losing a customer means real impact on your revenue. And so, this is why we re recommend Doing something called girls and my daughter charm which is how they are the start of the month. You expected, your monthly recurring Revenue, to be ten thousand, but one customer churn and David Payne, 2010. Your grocery on 3000, B, 10000. So, don't blend it. Because you're obviously acquiring new users. And if you measure Blended you numbers to look great, right? Because you're growing a lot, but
you're not paying attention to users that you're losing and it's really important to learn from users. You're losing. Which is why we asked you to measure the charm. Pink Cactus comes in the little later. Hopefully, almost all of you are equating uses. Organically. I wouldn't recommend doing any pay that position at the stage. But if you do start doing some experiments where you say, hey, I'm going to do a little bit of paid marketing or advertising to get a few customers. Then you should measure what was the cost to get that user to paid mechanism?
So which is literally saying, if I spent $10,000 on Facebook or any other channel that you used and you got five customers from that channel, how much did you pay for that? Common mistakes to really common mistakes in this happens again, and again, and even side of like highlighting it, which is a r r e l. L e stands for annual recurring, recurring is the most important Revenue. If you don't have a recurring business, which is you don't chat subscription, your customers are not committing to 12 months of payment. You don't have a recurring Revenue business. So don't leave you start calling
it. A r r. Everyone thinks up. It's wrapped its repeat business. It's not because you have to go back and acquire them each month or you have to have you, do you have to work with your customer to make sure they pay every month. So the most common to take his people, instead of saying adding will run braids. We have sleep. Is is not that useful even gave you a business. If you use, they are be absolutely sure you have a recurring Revenue. And the second mistake people make is when there would, they would say. Oh, yeah, it's recurring Revenue, but actually the customer
it up, coming it to only one time payment or, you know, you may have done a Consulting project and it's not clear whether they're going to pay second month or the month, but they would still included a seminar, you know, it's not make sure you're including only what's truly regret by? The customer said, I'm signed up for a 12 month or six month, and we'll plan, and this is what I'm doing. The third is subscription. This is probably more relevant for Consumer businesses. So if you Dollar Shave Club, Blue, Apron athletic that a lot of companies, especially subscription
of the service is becoming so popular in consumer right now. It's very similar to SAS, but it has a slight nuance. So, similar to stop because you have Emma. Which is recurring, right? You may have signed up on Netflix on oz of scription is recovering. Its monthly recurring. The two difference is is instead of looking at me at all or any of that. We actually say measure your monthly growth and you lectured not Dollar Tree on why is that? Because if you're selling two companies, usually is a person, has more value, right? It's like they're paying $2,500 so that if you lose a
customer, the impact on revenue is a lot. So you should really look at 3 Avenue turn. If you look at Netflix, everybody pays 7 or $10 a month. So it's about volume of customers, which is why we say, pay attention to growth. Because you need to make sure that the number of users using Netflix continues to increase a new message or not. Because if you lost a customer who's paying $10, it's $10, but if you lost a thousand customers being generous, is that significant? Right. So, which is why we say measure grows unit show was as if you had a side business, selling two companies
measure Revenue. Turn has very similar like the last time, but just make sure if you're spending paid marketing measure the cost associated with acquiring. Dozers. Don't do it on a blended basis. So when you are at the stage, you will tend to grow and spikes. So this month, you may go 80% next Monday, would grow, 10% next month. You make another 90%, right? That's not true. Because you're learning your eating and you're trying to figure out, you know, what really resonates with the user. So what's really important just to make sure that since launched, since the month you
started acquiring users, you measure compounded monthly grocery. So which is the current month divided by the first month and decrees that growth rate proportionately for the number of months since launch. What is often do as Miss take, is they would just do the average. So they would do 90% this month plus 10%, second month. Plus 80% of what happened to the averages. It makes you a good look good because he had some spikes. You want to be true to yourself because this one be problems when you are two or three people team, you know, but
hopefully you are Scale and will start hitting 10 people team and then when you said goals, someone will be very happy that its 50% growth rate, but that's because you're measuring the wrong. The next is transactional business, as it's probably more than you knew in the sense that happened in the last eight to ten years. And again, you see that with striped PayPal coinbase brags, a lot of pain tech companies, especially fall in this category. So what is a transactional company, which is you feel safe in Decker payments, pays you probably process a lot of pain and swollen, right?
Let's take stripe. For example, they cover the payments for most startups. And so, every startups payment volume goes to stripe that the transactional business, but stripe collects a fee for the transaction. So if you are a type of business, that process of someone else payments volume, then you should put yourself in the transactional bucket. So the girls transaction volume is the tpv, you're the total payment volume that close to the black pants with stripe, had 30 customers that you are staged, and all 30 customers, that process things, 100 million, and tpd. But it all went
through stripe that TV, but that's not revenue. Revenue is what goes to your bank account. So that's your cut, which is why it's called net revenue. So the portion of transaction volume that you make. So stripe with a hey, I charge two and a half percent for the payment volume that flows through my platform that you want to have to stand at the net revenue that they take. If you want the transactional business, it's very common that you'll have lots of customers right? To within a year of lunch. You could even have thousand two thousand customers. Then the important metric to
track is used a retention because you want to make sure that six months after they're using you or 12 months after they started using you. Hopefully they still using you. Why? Because you are powering their platform, unless you've gone out of the, under the gun out of business. There should be no reason they're not using opossum. How are they doing business? Like imagining someone stopped using stripe? Well, are they out of business or who is processing? The payments? So that's why it's really important to measure your cohorts attention on a monthly basis. If your a transaction business and
paid back is very similar to what, you know, in all cases. The same thing just measured differently channels. But again I said, hopefully none of you were doing paid marketing. So what is the common mistake here confusing? Gross, transaction volume to net revenue. As I said, like if you are processing hundred billion in transactions volume, that's not naturally. That's not the cash that it's a bank two and a half percent of the hundred million a bank. That's a much smaller number so you should really make sure what you called Revenue was a transaction volume and I've often seen
Founders here sometime come up with like, oh, but I got the volume. Snyder Avenue. No excusas is, literally the catch. You making the bank and then use their attention is a cohort metric. It's not one number. It's not like oh I retain 30% of my users. That means nothing to us, right? You weren't for you and should not because if it's if you're pouting payments, you should say. Well, 40% of my customers have used it consistently for the 12 months since they joined us next to Marketplace again. This is more simple. It looks like transaction, but it's different. It's typically used by
consumers. Company, so Airbnb, eBay are all good examples of marketplace. What's the marketplace? You have two sides to an Airbnb host? And yes. Yes, go to the park phone. Select a room booked at the hostess happy that the marketplace. So what are the three or four metrics that matter here? Gmv, right. So when the guest books flat room or the horse might take $200 per night. And so the $100 per night, say they say, 2:00 to 9. So it's $200. $200 gmv that Airbnb Kendrick, but that's not natural because
everybody doesn't make the full $200 Airbnb. Probably makes 12% of that. Right? So, 12% off that $200 is what you would classify as next timer. Two other metrics again, similar to the other Mortals that we talked about, you want to track here is compounded monthly growth rate. If you see, this is a more important metrics of consumer businesses, right? Because volume of consumers matter and therefore it's really important to track your monthly growth rate in a compounded way. So you can keep yourself on as how you're growing. And similarly, when it comes to Consumers businesses, you
should pay attention attention to user retention, not necessarily dollar detention because of volume of users matter. So here you would say what percentage of customers came back to Airbnb. Airbnb, retained. You do 6 months or 12 months from now, how often do people travel? Does anyone want to take a guess? Was that once again, very good. So, how should they track? When should they be happy? When should they be sad? Once again, yes, so if you are, imagine when
everybody was going through my seat and they could see they're called repetition once-a-year. How are you going to know you're doing a good building? A good business that to wait till Monday. Can you wait 12 months to check with your customers are coming back? No, so this is why you have to get creative and the way to get creative is reflect on your user Behavior. So if you're going to book something, hopefully someone who's drowning is not booking the day before that probably be stopped doing research 6 months before and so Evan be studied. And so is what they would
track is, if you as users came back to at least search for City, Auto booking, 6 months. So you and this stage of your startup. What's most important is to really be truthful and honest about have, you want that uses to behave and come up with those retention metrics to measure, if your business is very healthy. And are you seeing what you want to see from your users? So what's a common mistake here? This was especially acute for Airbnb because they didn't pay anything for demand-side. Right? They had a brilliant value proposition. They were really good
designers. Very good storytellers gym and didn't pay anything, but they have to pay to acquire host. Because guess what? No one was ready to let their homes to strangers. So they had to work hard which was, you know, where to put in an advertising at an event. So they have to spend few dollars on acquiring hose, pretty much very early on. So the number one mistake for understand to do here is so you're acquiring a bunch of users organically and some users to pay and you'll blend everything you say I acquired hundred users this month until my check was 12, but what had happened
was, if you truly measured who you acquired some paid advertising Channel, it could be as high as 70. And so, you have to ask yourself. Is it sustainable? Is it is, I, you really seeing the auto I in So if you are in an unusual situation, like Airbnb, their your business frequencies, not very high because people use once a year, and you have to pay to acquire host. It's really important to pay attention to where your money is going. And whether you're getting a good Auto, I from that Ecommerce. E-commerce is literally you have certain Goods to sell
your selling them online. People are ordering it. Bobby Parker, bowling balls. Memebox. A lot of them. Yeah. That's what we would characterize as e-commerce, which is you make, the products are sourced products. But ultimately, it's your brand and someone's coming to the brand budget. So here again at the consumer business, you track monthly Revenue, know, what is the nautical? No subscription. It's just Revenue because people might buy a part of this Monday mentored by next month, right? So its monthly Revenue because its consumer business again, very important to track a compounded
monthly growth rate for e-commerce, even from day one. It's important to track your gross margin because you ate a make the good, all your sourcing and I'm running it under your name. So it's important to understand what it takes. What is your cost to get the good? So that you're making some profit on a product basis and it's more important. Commerce because it's not a recurring business, right? So you have to make sure that you're able to make money on a per transaction prices. So which is why gross margin is important to track a petcock very similar to all the other
examples. Common mistake. Gross profit for e-commerce. Is not accounting for all costs. Now Amazon does a great job of this and people often say, oh yeah, they have very thin margins. But actually eats net margin of all cops. And so this high-volume net margin X high-volume as a pretty good. It would do business with. You can use to find out for future Investments to the common mistake. Busy. Here is an e-commerce as people would say. Oh, say I bought you a clip and we know the cost of the tip of $10. They wouldn't include
shipping cost. They wouldn't include custom processing cause they worded. A payment processing cost. All that is important because if you don't even do this, cuz you're probably passing it wrong. And so it's so important that you're writing it wrong, pretty much from first transaction. Advertising we see far fewer companies in the advertising space these days. But if you happen to be in that space, then you know, the common companies that are analogues for you or SnapChat. Twitter, Reddit. They all have a huge social network that come to the aside for different reasons, but the primary
monetization model as advertisers advertise there, and the companies make money from advertisers. So at this stage because you probably will never be wanted. I using if you want an advertising business, it's all about the users. And so when it comes to users, there are really only three things that matter. Daily active, monthly active percent logged in. So, who are the users who use your app, daily monthly active, who use it monthly and then puts and logged in as actively logged in using a username and password the
common mistake and I will give many examples of this, not defining what? Actor me. So there was a company. I think three or four years ago that he reported a daily activity is symmetric and I remember asking them what is active and, you know, I had some sense of like maybe for somebody who's had engaged, whatever I am just found rant about those are the emails I sent. That's not active, you know, active again, it goes back to the Airbnb example. You should Define what you want your users to behave like when using your. So
if you're building a news app, does it mean Reading counts as active? Does it mean commencing council's active? You should Define that's really well. And so if you don't Define that you could be building something that has no stickiness and probably, you know, you're going to have users that are winding down pretty quick too and it's not worth it. Right. So make sure you really Define what activist and hold yourself to that metric. The other one is Hardware, it s very similar to eat, because at the end of the day that's selling a device. So if your Fitbit girl Pro Chamois, you do it, say
you're in the heart of a bucket. As you can see, it's very somebody, but you look at monthly Revenue. Compounded. Monthly growth rate. You look at gross margin really carefully. Hopefully, you're making profit from day one and then papia. Okay. So those are the nine business models. And one last thing I'd leave you with before I open it up, two questions is common mistakes. So calling this takes us, you've heard this and you probably read this in so many blocks charge that look up into the right a brilliant. Well, but cumulative charts are always up into the right do not
have any,. That is no rationale in the world to have a competitive. So, I don't know a single company and scale that shows a cumulative chart. So do not take a cooler to charge, s thing. I've seen is not labeling y-axis. Like I just said you were going to scale even if you hit 50 7 users, you know, if you are if you don't know what the y, axis label, it is. And if the charts look like straight vertical bars, it means nothing is changing by axis scale. This is something I never understood but quite a few of them do it, which is you do Exacta start Sub-Zero and y-axis starts at 8:50.
Those things don't really show. Well, you're growing show your problems by the way. Know why she started had a charge straight up into the right. No one it in the most successful Cummings generator. So I think the most important thing is to, really be honest, measure and fix things, right? It's okay to go down sometimes and also you should leave these, they don't show only percentage charts. It's very important that whatever you're measuring, that is gross revenue. Turn monthly growth theory about the absolute number and the percentage relative to the absolute number. We also have,
you know, I done detail post on Netflix while I was at a 16 seeds have included two links there if anyone wants to look at it, but at your stays only three or four metrics matter, if anything you took from here, hopefully you fit into one of these nine does this model so you can start with two or three of these metrics for each other tomorrow, and that itself would be a great head. Start for all of you. Thank you. Yep, question. Could you almost explains the bookings to like a cruel accounting?
Is that a one-to-one matching right there? Yeah, so the question is, can be mad bookings to accrual accounting, right? Yeah, I think that's not. I mean, the purpose of tracking bookings. With his revenue is not from an accounting standpoint. It's from how do you get your business? Meaning, bookings, the future Avenue, right? So, all, that's all you're saying is, I have signed a contract for $100,000. I am not ready to launch for them until two months from now, but you know, that it's you two bookings because it's all signed and the customer has committed to
working with you. So you say it's hundred K and then but you're not starting to deliver 702 months from now, which means you can recognize Revenue. So it's only a measure to manage your business internally. So, you know, that this is coming in the pipeline. This is why my teams are the sources of going to go, but even want to hit the goal of 200k by the end of the year, or how should I eat and maybe you need to go find one more customer or accelerate launching a service, which is most likely the case in the You know, in the face that you are in, which is why am I waiting two months to
launch this? What can I do to lunch tomorrow? Pick from a couple of different things to eliminate is 9 verticals and business model. Is there something that you were recommending for a community business to track early on before you decide. I think that the question was really a, what should we talk for community business. I put community business whether your business model out of is advertising or not in that category. Do really what he should be tracking ask Jeff Define who your
active users, and what you want that, you said to do. So, daily, active users, and monthly active and track Vicky how they're doing. Wk1 movie producer or when they know who's won the Super Bowl? Two different business models overtime, right? What's most important is, what is your short-term Focus? So if you shot them is like, for the next year or two, which is about finding product-market fit in your transactional business than dr. Are you want to start with? What is a word to say?
Yes, absolutely. So the question was what should we talk to for investors at this stage? Honestly, the bed is only on two or three things, which is you at the founder what unique insight to you have that you're building this weekend has to be a big company. That's it. And so don't overcomplicate this. You have any other suggestions of four, double a batteries, required to track expenses in a settlement? Yeah, so great question about ex again. As I said, it's very easy to get caught up in what do investors want to see for the most important thing is,
you know, more about the business than anyone and it's about what should you track to? Make sure your business is healthy. So the two things is fonders. You should track very early on is born, right? Because you're spending cash. So you should always know don't run out of money. So make that has no excuse for running out of money. So make sure you do it up here and I'll tolerate so that your tracking your burn. And you know, that that's enough money in the bank to at least operate the company for another six to nine months to is the related to expenses. It's the gross margin.
Especially if you're in business categories, that are eCommerce or consumer-related, then they do pay attention. It's important for Farmers to pay attention to place margin, which is an important action blazes. Am I making money or not? Because if not, you're not making money, then it's a year. Do you have line of sight when? Make money because if you don't then you should really question you do. Is that a business to be built but I suspect it's quite early right now, which is why it's a focus on getting the users and how do you monetize? That's the first that For
business that has a model kind of like to ancestry.com where people signed off, they get a report and they may want to come back and referred to it later. But there's no additional revenue for what they usually purchase would you do that. So I can be Commerce business. Will be also monitor their engagement to do both but I would record revenue is just the revenue for that month because it was purchased only for that month. And then you just figured? I would like, how Airbnb did which is what's the behavior you expect to date. Do you expect them to come back once a year? If
so, are they and what percentage of them are coming back? Yeah. I'll go to the site. Can you play the marketplace just like you being able to use it after the inspection need to supply our side? I position my mind would be one of the mattresses. Yeah, so great question. At this is why I brought up the Airbnb, host example, right. The only thing that I would say that's probably most important is to measure the paid acquisition cost of the Ring because it did, you
know, in most marketplaces. It's actually really hard to get the demand side, which is the user's, right? And if you get enough business for the supply to supply, what state I'm especially at this point again. If you were three years old and you're scared and you are as like, 20, 30 million. Gmv Demons of your questions different. At this point. It's about how do I get both sides organically as far as possible if you have to spend on the supply side for a little bit, okay, but try experiments every now and then, but then you're trying experiment, most important thing to measure, that's
what you're paid for the shipping cost because hopefully, it's not so much that you're born goes our back so that those are the two that reading Facebook. Kudos. So, what's your recommendation like me to bring down to the smaller for just go down the lights, party mode of individuals in Defiance? I am given an Enterprise businesses. You can't release L2 Facebook from day one. How should we focus about to go to market? Should we just go to small teams? You almost always start with small things out. A pilot, right? Towing
companies do so you can focus on Enterprise. You usually start with the pilot, but the pilot could be something like it's a six-month pilot or it could be a three-month pilot in those cases. You don't report them as bookings are Avenue. You just say it's a pilot at the end of the pilot we visit, whether we can get a contract and the face that you're in. Usually, if you have only one or two customers over the course of twelve to twenty-four months. That's okay because we a CD, if it works out the contract on a contract with the really huge and that's expected. One
more,, but let me just say that that's the best customer acquisition cost especially at this stage. Because if you have built something that people really want, you will get it without spending much, right? So at this stage, it's only 0. Ask you, what scale does obviously room. It's not necessarily a date or correct. Answer is not an absolute Jolla. Number the way you look at it. If you compare your acquisition cost to the lifetime value of the customer, so, if you had the customer for one year and I'll be in this case. For example, if everybody says, yeah, you know, this
customer books twice with me and if they do that every year, I make $100 from them, then you say, I can, you know, you should have a 5x Gap so you if you're willing to spend $20 to acquire, but at this stage, The answer is 0.
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