My Numbers in a Startup

Financial statements reveal the strategies and the tactics for designing the go-to-market strategy. While there are innumerable metrics and number crunched data for reference, a few of them which standout as the most essential while sifting through a startup’s operational model, whether for an investment or in an internal progress analysis board meeting --

a) Revenue: the growth in income indicates how quickly the company can grow if it moves at the same pace on the same path as today. The revenue growth projections indicate the potential of the business.

b) Net Income: the bottom line or burn rate is the revenue minus all the costs incurred. Net Income dictates the minimum amount a startup needs to raise to become profitable. By comparing Cash, Net Income and Revenue, one can estimate the financial profile at the time of the next funding round.

c) Gross margin: a measure of how expensive it is to make the product. It is calculated by taking the revenue and subtracting all the COGS (costs of goods sold). Gross margin is the glass ceiling of profitability because the net margin can never exceed the gross margin.

d) Sales Quotas: provide indications of how easily the product is sold and how well run the sales team is.  At the initial stages of a startup, more importance is of the value consistency: smaller deal sizes but more predictable deal velocity.

e) Sales efficiency: a gauge for how aggressive a company can be in marketing and selling its services. The longer the payback period, the greater the risk that a customer churns and the marketing expenses paid to acquire the customer are lost, and vice versa. A 12-month recovery window is typical.

f) Churn: a quantification of the revenue potential and lifetime value of each customer. The greater the churn, the more challenging revenue growth becomes over time. This often means a company will stimulate demand using paid acquisition, decreasing contribution margin, and impacting profitability.

g) Contribution margin: it measures profit per unit, without considering fixed costs. To calculate contribution, take the total revenue generated by selling one unit and subtract the variable costs to sell that unit. The greater the contribution margin, the more profitable the business is on a unit basis, and hence more sales and marketing expenses can be spent to acquire customers and fuel growth.

h) Marketing Spend (Non-personnel): is the most significant controllable expense in a business. It typically includes ad spending and event spending. This expense bucket can be turned on and off from month to month unlike salaries or rent. 

i) Fixed costs (HR): single biggest expense for most startups is salary. By looking at salaries across functional areas, one can get a sense for how a startup pays its employees relative to market rates. Low salaries could spell employee retention questions in the future. Excessive salaries reduce the company’s runway.

j) Revenue per employee: the beauty of any business lies in their leverage. Google’s market cap is 40% larger than Walmart but it has only 2% the size of Walmart’s employee count. Revenue per employee is a measure of how efficient a business is in using technology to bring their product to market. Some sectors and products intrinsically need more people to be sold.