This blog was contributed to Paro by Andreas Rekdal at Built In Chicago. Built In is a network that allows people to get connected to local startup communities in Austin, Chicago, Colorado, and Los Angeles.
Data is king, and in 2016, startups have the ability to make mature data-driven financial decisions that can dramatically influence their outcomes.
Startups sit on a gold mine of financial data. Detailed analytics on where customers are coming from and how much money it cost to acquire them can be automatically captured and quantified. The same goes for data on how customers engage with products and how profitable different customers — or groups of customers — are. This data, when used properly, is ripe with actionable insights. Yet surprisingly few startups take advantage of this competitive edge.
“Startups often fail to investigate trends across data sets, thereby losing out on the opportunity to understand their customers better,” said Michael Burdick, CEO of Paro. “They have all this information at their fingertips, yet many don’t know how to use it efficiently.”>
In Burdick’s experience, many companies do ad hoc analytics, pulling the data they need when they need it without systematizing it or looking for trends over time. As a result, they miss out on opportunities to learn from what they’re doing right and, perhaps more importantly, what they’re doing wrong.
We asked Burdick to share how startups can leverage their data to make smarter financial decisions.
1. Understand your key performance indicators (KPIs)
How does your startup measure success, and why? If you haven’t thought through these questions in a while, it’s time to sit down with your co-founders and have a serious conversation about performance indicators.
“The founding team may have preconceived notions about what the ideal KPI is for moving their business forward,” said Burdick. “But since a startup is a growing, evolving, experimenting entity, as the business model grows or pivots, so should the KPIs.”
One example of a KPI success story comes from a B2C startup that had KPIs focused primarily on the number of users signing up for their platform. After taking a step back and analyzing which customers brought in the most revenue, they pivoted, centering their business around a white-labeled B2B version of their product. Upon pivoting, they moved away from B2C metrics like website clicks and time on the site, toward B2B metrics related to partnership acquisition and sales pipeline.
In general, Burdick recommends revisiting your KPIs every other month to ensure that they’re still a good fit for your business strategy.
2. Get an outside perspective
Sometimes when working with data, it’s easy to get caught up in one way of thinking. That’s particularly true for startups, who have often been pouring over the same data day after day for months, or even years. Even if your company isn’t large enough to hire a full-time CFO, you may still want to consider hiring an outside pair of eyes or a part-time CFO who can take a look at your financials and help you put your numbers in perspective.
“There isn’t a go-to resource for entrepreneurs to figure out what metrics they should consider for their business,” said Burdick. “Since analytics and business strategy are so closely tied, it really takes someone getting their hands on all the data to guide CEOs and founders in the right direction.”
3. Make your performance indicators as specific as you can
Many startups measure success primarily by looking at generic KPIs, such as revenue and cash burn. But if you’re looking to really boost your customer lifetime values, you have to know that all customers are not created equal.
“One performance indicator that we’ve been seeing more often is revenue and upsell per cohort,” said Burdick. “So you can ask yourself how customers acquired in month X compare to customers acquired in month Y.”
While doing this, it’s also important to measure how customer acquisition costs are trending for each cohort. Some customers may be expensive to bring in, but they may be well worth the extra money if they stick around longer, or spend more money on your products.
Moreover, focusing on cohorts can reveal which customers are leaving and why. This can help establish a better product-market fit and show your investors that your financial trends are improving.
4. Use data to tell your story to investors
When presented correctly, your data tells a story to current and prospective investors. When you’re pitching your company, make sure your data visualizations enhance the overarching message of your story.
That means carefully selecting the data you’re presenting to illustrate your vision — too many numbers may muddy your message and make your pitch hard to follow. In the same vein, make sure you present your data as clearly and effectively as possible. Visuals make numbers far easier to read — even for investors who deal with numbers on a regular basis.
Once you’ve figured out your data and had a look at your visuals, take a step back and think about how it all fits together. Are your story and your data’s story the same? Where in the story do your visuals fit? Are you focusing on the data that tells your company’s story best?
Whether your startup is just getting off the ground or preparing for a major round of funding, be sure to make 2016 the year you start leveraging your financial data more efficiently. Your bottom line will thank you for it.
See here for the original blog post on Built In Chicago.