The red flags and magic numbers that investors look for in startup's metrics

https://andrewchen.co/investor-metrics-deck/

by prostoalex • 8 years ago

384 66 8 years ago

resters• 8 years ago

One way to fake a leading indicator is to increase headcount and cash burn rapidly. Those increases create a "hockey stick" graph. Just use that graph when pitching to investors.

You can also time it so that your ad spend doesn't hit until the next financial period, which makes it look like there is actual growth commensurate with the headcount increase and disproportionate (in a good way) to cash burn. After all, what kind of founder would increase headcount unless it was needed :)

Disclaimer: This works best when pitching a round after you have already got some early investors to help with the sales pitch to the next round of investors.

coenhyde• 8 years ago

I can't tell if you are being sarcastic or if this is intended as advice

theseatoms• 8 years ago

Cynical advice can be both.

freehunter2• 8 years ago

Lots of what startups do is some kind of fraud. Whether you're defrauding investors like `resters idea or defrauding users like Reddit's early days (each employee had multiple accounts to make it seem more active than it was) the trick is just not to get caught.

Of course, defrauding investors has a far higher likelihood of getting you into serious legal trouble than defrauding users. And with this one, even if you don't get caught, if it doesn't work out properly you are fucked.

But hey, if it does work, it'll make a great story to tell at your IPO celebration party over a glass of champagne.

fapjacks• 8 years ago

"Fake it til you make it"

throwaway080383• 8 years ago

Shouldn't any halfway decent investor discover this when performing due diligence? Or is there more stupid money out there than I realize?

bkanber• 8 years ago

There is a LOT of money out there, and most of it is stupid.

Benjammer• 8 years ago

How is an investor going to realize that some manufactured needs over time for 2 more developers here or 1 more there are not _really_ needed to run the company at some objectively higher level of efficiency?

ccantana9• 8 years ago

Couldn’t agree more regarding his point on landing page optimization.

At TechLoaf, we experimented with a lot of different, elaborate, shiny landing pages that expounded on how amazing our newsletter was, etc...

And after falling flat on our face for months, we realized that an incredibly simple, borderline-mysterious landing page converted users far more effectively.

About 35% of all visitors to our site end up subscribing.

(For the curious, this is the landing page: https://techloaf.io)

athenot• 8 years ago

This is intersting. From a UX perspective, you're basically forcing the user into making a choice on the spot: to subscribe or not. You're in or you're out. It takes away the non-commital mind wandering, nudges those who are favorably on the fence to sign up ("why not; I might forget about this site so let's do it now") and weans out those who don't immediately see the value.

For this use-case, it's probably a good thing.

LiterallyDoge• 8 years ago

I think it's basically a paywall mental model, but without the pay part.

ccantana9• 8 years ago

Exactly. It’s also kind of jarring in a world where content is unlimited, free, and available on every channel. It piques some people’s curiosity to land on a site where it’s semi-restricted.

noname120• 8 years ago

Could you host or give a screenshot of your previous landing pages? This would make a good learning experience for us. Thanks!

ccantana9• 8 years ago

I wish I had saved them — but, essentially, our early landing pages were feeds of content that were restricted after x stories at which point you were prompted to subscribe.

They were very similar to the CNN or NY Times home pages, but with less content visible and more (obnoxious) calls to subscribe to the email.

We also experimented with a minimalist landing page similar to the current one, but with screenshots of the email in the background. In hindsight, it was distracting and slightly confusing.

spullara• 8 years ago

By posting here your numbers are going to tank! Have to do your next report with HN referrals removed :)

Edit: I take that back. I went to the page after writing this and signed up. Well done.

ccantana9• 8 years ago

Glad you dug it :)

And agreed, conversion numbers are highly dependent on how thoughtful our targeting is. We generally shoot for almost laughlibly small, but super targeted, outreach. Certainly factors into our unusually high conversion.

nielsbot• 8 years ago

Wonder how many people stay subscribed tho? And also what's the click through rate on the newsletter for subscribers? (And how that compares to the "shiny" landing pages)

ccantana9• 8 years ago

Open rate: 60% (+- 5%) Click through: 7% (+- 2%) Unsubscribe rate: <1%

ryanwaggoner• 8 years ago

I think this is probably dependent on where the traffic is coming from and to what extent they’ve been primed. I’d also be curious what percentage of subscribers clicked on preview or archive before subscribing.

ccantana9• 8 years ago

100% is. We’ve mostly done super targeted, smaller scale marketing. When we have something get huge on Reddit, for example, conversion drops off because it’s a general crowd.

About 50% of visitors click either the “preview” or “archive” link

btilly2• 8 years ago

You should double-check it again every few years. User behavior around forced signups is not constant.

In the early 2000s at Rent.com we found that forcing an email address to get content gave us a great conversion rate, and fit our business model. But over time people came to be less and less willing to hand over email addresses, and more and more convinced that equivalent content was available elsewhere without the prospect of spam. Our conversion rate therefore slowly slid.

A decade later the conversion rate slid so much that Rent.com eventually abandoned its business model.

ccantana9• 8 years ago

Great insight. Only caveat would be that our core product is the email newsletter (not sure if that was true of rent.com back in the day).

WalterBright4• 8 years ago

It is refreshing to see a page that is simple and straightforward these days.

mobjack2• 8 years ago

Learned the exact same thing in a different industry.

We had a landing page that always won the AB test for over a year, but our lawyer wanted us to change the chart on the top.

We didn't know what to replace it with so I decided to test what will happen for a week if we removed it to better understand the value it provided.

It turned out that removing the chart increased email capture by 20% and we now have a bare bones landing page.

It isn't always the case, but often times less is more.

olliej• 8 years ago

I’d think revenue would have been important - I read the entire article expecting something in that (which is what would have been interesting).

Instead it’s just a variation of “how many email addresses do they have”

DevX101• 8 years ago

The point of his presentation was how to identify real, sustainable growth before the point where it is self-evident that the company is a winner. To do that you have to go upstream of revenue.

Also, you can hack revenue in the short term by spending $1.20 to get $1.

jacquesm• 8 years ago

You can't really focus on a broad spectrum of anything. Broad is broad, focus is narrow.

It's also ironic that many failed start-up founders end up on the investment side, I'd love to see more successful people in charge of who gets funded and who does not.

nostrademons• 8 years ago

Outside of the angel ecosystem, there's likely a reason for that: being a successful founder is more profitable than being a VC, so people whose startups took off have every incentive to keep managing them, while successful startup founders who exited aren't exactly in need of money or further success. There's also a bunch of bullshit that goes with the VC world (managing LPs, constantly searching for dealflow, taking board seats on the companies that are failing or going sideways) that you don't have in the angel world.

Alex39172• 8 years ago

It's also much harder to be a successful VC than it is to be a successful founder, so if you're at all successful there isn't much reason to switch sides unless you're just interested in corporate finance or something. Being a VC is like running a restaurant in NYC, where you're literally competing against people who are fine with losing money, and in some cases are even purposely trying to lose money.

TylerE• 8 years ago

My favorite nitpick along those lines, frequently seen on contractors trucks, is something like "We specialize in all kinds of repairs".

No you don't! They're no shame in being a generalist, but by definition it makes you NOT a specialist.

ma2rten• 8 years ago

I know what you mean, but you could also interpret that differently.

Maybe they specialize in repairs as opposed to new construction?

Also, they could have meant "all kinds" as a figure of speech (not "every kind" but "various kinds").

tyre• 8 years ago

I'd love to see more successful people in charge of who gets funded and who does not.

On the other hand, a successful startup founder has seen one story. Let's say they went from founding to exit in 10 years. They know everything there is to know about their company, their market, and their specific journey. A lot of that is execution. Some of it is also luck (timing, uncontrolled variables like competitors screwing up or incumbents moving slowly or whatever.)

That focus is great for the success of a single company, but investing isn't like that. There isn't one story. What worked for Airbnb or Dropbox or Gusto might be what the company in front of you needs to do. It also might be the worst thing for them to focus on.

So having a wide range of experiences to pull from—whether that is working at companies in various industries, advising founders at different stages and/or around different issues (hiring, product strategy, technical architecture, etc.)—and thinking through a wide range of problem might be a better background for investing.

VCs don't dive deep on a single company and devote everything to it. They have to be more flexible. Their "founder/market fit" isn't one market, it's a meta-level above that.

None of this is to discount the experience or expertise or value of successful founders (that would be absurd) but just to say that it may not be the case that the most successful founders would be the best VCs. It may actually be the opposite!

For parallels, the best players in many sports are horrible coaches, owners, general managers, etc. The "smartest" people in academia are rarely the best teachers. They are different skillsets. The important thing is to match the skillset of the individual with the role. "Successful company founder" sounds like it would be close, since that's what you want—more successful company founders—but what you actually need is a bit different.

apl002• 8 years ago

Theres a reason most great coaches or managers were terrible players. Some are naturally born great and others have an eye for greatness

jacques_chester• 8 years ago

It's also ironic that many failed start-up founders end up on the investment side, I'd love to see more successful people in charge of who gets funded and who does not.

Getting lucky doesn't teach you much and it's often hard to factor out how much of success was due to luck.

In sports there is a saying: great athletes make terrible coaches. Someone for whom a sport is as natural as breathing doesn't think about it, hasn't had to struggle, never spent months and years and days and nights and weekends and waking and dozing and sleeping and showering and eating and walking obsessing over it.

But the great coaches do. Because so many of them never made it as athletes.

Failure is a different kind of teacher from success.

top256• 8 years ago

I really like this article! Thanks for posting it

buf• 8 years ago

Disclaimer: I work at Reforge.

Also: It feels like I should be paying Reforge to work there.

The incredible depth of the material has helped me personally:

- articulate ideas in a common vocabulary that were difficult to explain prior

- identify loops within my own side projects which has led to explosive growth (even though the material is designed for larger companies)

- understand how to derive important metrics for many different types of companies

- connect with some of the most influential leaders in the growth space

WalterBright4• 8 years ago

I remember in the 1990s when Bill Gates was asked about how he crafted his decisions to maximize the stock price. He replied that he paid no attention to the stock price - he concentrated on running the company well and the stock price took care of itself.

Investing in MSFT during his reign was a spectacular investment.

A CEO of another company told me he adjusted the accounting to give the metrics that Wall Street was looking for. The stock tanked (the company has since disappeared). Apparently, investors are not so easily fooled.

rjvs2• 8 years ago

So the accounting practices that MSFT got in trouble for (as I recall, pulling and pushing sales into different quarters to smooth growth and suit projections) was the stock price taking care of itself?

WalterBright4• 8 years ago

Can you provide a year for that?

hammock• 8 years ago

Interesting as MSFT met or exceeded earnings forecast from the street for 41 out of the first 42 quarters. Makes you wonder

tim333• 8 years ago

Reminds me of the recent article on IBM https://news.ycombinator.com/item?id=18327634

CEO focused on customers did well:

Gerstner came into IBM and got it turned around in three years. It was miraculous… Gerstner’s insight was he went around and talked to a whole bunch IBM customers...

CEO focused on investment numbers did bad:

Palmisano failed miserably, and there is no greater example than his 2010 announcement of the company’s 2015 Roadmap, which was centered around a promise of delivering $20/share in profit by 2015

bogomipz• 8 years ago

The article states:

1) First, we seek to understand the existing state of customer growth – including growth loops, the quality of acquisition, engagement, churn, and monetization. 2) Then, to identify potential upside based learnings from within the company as well as across benchmarks from across industry.

Cold someone say what a "growth loop" is? And also what "upside based learnings" are?

arminiusreturns• 8 years ago

Does anybody have any insight on the things investors are looking for after the series C?

The red flags and magic numbers that investors look for in startup's metrics

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