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`andreessen.
`Sorowitz
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`Q
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`16 Startup Metrics
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`by Jeff Jordan, Anu Hariharan, Frank Chen, and Preethi Kasireddy
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`Wehavetheprivilegeofmeetingwiththousandsofentrepreneurseveryyear,and in the course of
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`those discussions are presented with all kinds of numbers, measures, and metrics thatillustrate the
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`promise and health of a particular company. Sometimes, however, the metrics may not be the best
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`gauge of what’s actually happening in the business, or people mayuse different definitions of the
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`same metric in a way that makesit hard to understand the health of the business.
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`So, while some of this may be obvious to many of you who live and breathe these metricsall day
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`long, we compiled a list of the most common or confusing ones. Where appropriate, we tried to add
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`some notes on whyinvestors focus on those metrics. Ultimately, though, good metrics aren’t about
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`raisingmoney from VCs — they’re about running the business in a way where founders know how
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`and whycertain things are working (or not) ... and can address or adjust accordingly.
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`Business and Financial Metrics
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`#1 Bookings vs. Revenue
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`A common mistakeis to use bookings and revenue interchangeably, but they aren’t the same thing.
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`Bookingsis the value of a contract between the companyand the customer.It reflects a contractual
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`obligation on the part of the customer to pay the company.
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`cognized when the serviceis actually provided or ratably over the life of the
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` eement. How and when revenue is recognized is governed by GAAP.
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`Letters of intent and verbal agreements are neither revenue nor bookings.
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`#2 Recurring Revenuevs. Total Revenue
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`Investors more highly value companies where the majority of total revenue comes from product
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`revenue (vs. from services). Why? Services revenue is non-recurring, has much lower margins, and is
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`less scalable. Product revenue is the what you generate from the sale of the software or product
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`itself.
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`ARR(annual recurring revenue) is a measure of revenue componentsthat are recurring in nature. It
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`should exclude one-time (non-recurring) fees and professional service fees.
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`ARRper customer:Is this flat or growing? If you are upselling or cross-selling your customers, then it
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`should be growing, which is a positive indicator for a healthy business.
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`MRR (monthly recurring revenue): Often, people will multiply one month’s all-in bookings by 12 to
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`get to ARR. Common mistakes with this method include: (1) counting non-recurring fees such as
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`hardware,setup, installation, professional services/ consulting agreements; (2) counting bookings
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`(see #1).
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`#3 Gross Profit
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`While top-line bookings growth is super important, investors want to understand how profitable that
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`revenue stream is. Gross profit provides that measure.
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`What’s includedin grossprofit may vary by company,but in general all costs associated with the
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`manufacturing, delivery, and support of a product/service should be included.
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`So be prepared to break down what’s included in — and excluded — from that grossprofit figure.
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`#4 Total Contract Value (TCV) vs. Annual Contract Value (ACV)
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`TCV(total contract value) is the total value of the contract, and can be shorter or longer in duration.
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`Makesure TCValso includes the value from one-time charges, professional service fees, and
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`recurring charges.
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`ACV (annual contract value), on the other hand, measuresthe value of the contract over a 12-month
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`period. Questions to ask about ACV:
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`https://a16z.com/2015/08/21/16-metrics/
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`Whatis the size? Are you getting a few hundred dollars per month from your customers, or are you
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`able to close large deals? Of course, this depends on the market you are targeting (SMB vs. mid-
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`marketvs. enterprise).
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`Is it growing (and especially not shrinking)? If it’s growing, it means customers are paying you more on
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`average for your product over time. That implies either your product is fundamentally doing more
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`(adding features and capabilities) to warrant that increase, or is delivering so much value customers
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`(improved functionality over alternatives) that they are willing to pay morefor it.
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`See also this post on ACV.
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`#5 LTV (Life Time Value)
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`Lifetime value is the present value of the future net profit from the customer over the duration of the
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`relationship. It helps determine the long-term value of the customer and how much netvalue you
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`generate per customer after accounting for customer acquisition costs (CAC).
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`A common mistakeis to estimate the LTV as a present value of revenue or even gross margin of the
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`customerinstead of calculating it as net profit of the customer over the life of the relationship.
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`Reminder, here’s a wayto calculate LTV:
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`Revenue per customer(per month) = average order value multiplied by the numberoforders.
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`Contribution margin per customer (per month) = revenue from customer minus variable costs
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`associated with a customer. Variable costs include selling, administrative and any operational
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`costs associated with serving the customer.
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`Avg. life span of customer (in months) = 1/ by your monthly churn.
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`LTV = Contribution margin from customer multiplied by the averagelifespan of customer.
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`Note, if you have only few months of data, the conservative way to measureLTVis to look at historical
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`value to date. Rather than predicting average life span and estimating how the retention curves might
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`look, we prefer to measure 12 month and 24 month LTV.
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`https://a16z.com/2015/08/21/16-metrics/
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`Another important calculation here is LTV as it contributes to margin. This is important because a
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`revenue or gross margin LTV suggests a higher upper limit on what you can spend on customer
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`acquisition. Contribution Margin LTV to CACratio is also a good measure to determine CAC
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`payback and manage your advertising and marketing spend accordingly.
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`See also Bill Gurley on the “dangerous seductions”ofthe lifetime value formula.
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`#6 Gross Merchandise Value (GMV) vs. Revenue
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`In marketplace businesses, these are frequently used interchangeably. But GMV does not equal
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`revenue!
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`GMV (gross merchandise volume)is the total sales dollar volume of merchandise transacting
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`through the marketplace in a specific period. It’s the real top line, what the consumer side of the
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`marketplace is spending. It is a useful measure of the size of the marketplace and can be useful as a
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`“current run rate” measure based on annualizing the most recent month or quarter.
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`Revenueis the portion of GMV that the marketplace “takes”. Revenue consists of the various fees
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`that the marketplace gets for providing its services; most typically these are transaction fees based
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`on GMVsuccessfully transacted on the marketplace, but can also include ad revenue, sponsorships,
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`etc. These fees are usually a fraction of GMV.
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`#7 Unearned or Deferred Revenue... and Billings
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`In a SaaS business, this is the cash you collect at the time of the booking in advance of when the
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`revenueswill actually be realized.
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`As we’ve shared previously, SaaS companies only get to recognize revenue over the term of the deal
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`as the service is delivered — even if a customer signs a huge up-front deal. So in most cases, that
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`“booking” goes onto the balance sheetin a liability line item called deferred revenue. (Because the
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`balance sheethas to “balance,” the corresponding entry on the assetsside of the balance sheetis
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`“cash”if the customer pre-paid for the service or “accounts receivable”if the company expectsto bill
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`for and receiveit in the future). As the companystarts to recognize revenue from the software as
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`service, it reduces its deferred revenue balance and increases revenue: for a 24-month deal, as each
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`month goesby deferred revenue dropsby 1/24th and revenue increases by 1/24th.
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`A good proxy to measure the growth — and ultimately the health — of a SaaS companyis to look at
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`billings, which is calculated by taking the revenue in one quarter and adding the change in deferred
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`https://a16z.com/2015/08/21/16-metrics/
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`revenue from the prior quarter to the current quarter. If a SaaS companyis growing its bookings
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`(whether through new businessor upsells/renewals to existing customers), billings will increase.
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`Billings is a much better forward-looking indicator of the health of a SaaS companythan simply
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`looking at revenue because revenue understates the true value of the customer, which gets
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`recognizedratably. Butit’s also tricky because of the very nature of recurring revenue itself: A SaaS
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`company could showstable revenue for a long time — just by working off its billings backlog — which
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`would makethe business seem healthier than it truly is. This is something we therefore watch outfor
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`when evaluating the unit economics of such businesses.
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`#8 CAC (Customer Acquisition Cost) ... Blended vs. Paid, Organic vs.
`Inorganic
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`Customer acquisition cost or CAC should be the ful/ cost of acquiring users, stated on a per user
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`basis. Unfortunately, CAC metrics come in all shapes and sizes.
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`One common problem with CAC metricsis failing to include all the costs incurred in user acquisition
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`such as referral fees, credits, or discounts. Another common problem is to calculate CAC as a
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`“plended”cost(including users acquired organically) rather than isolating users acquired through
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`“paid” marketing. While blended CAC [total acquisition cost / total new customers acquired acrossall
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`channels] isn’t wrong, it doesn’t inform how well your paid campaigns are working and whether
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`they’re profitable.
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`This is why investors consider paid CAC [total acquisition cost/ new customers acquired through paid
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`marketing] to be more important than blended CACin evaluating the viability of a business — it
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`informs whether a companycan scale up its user acquisition budgetprofitably. While an argument
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`can be made in some casesthat paid acquisition contributes to organic acquisition, one would need
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`to demonstrate proof of that effect to put weight on blended CAC.
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`Manyinvestors do like seeing both, however: the blended number as well as the CAC, broken out by
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`paid/unpaid. Wealso like seeing the breakdownbydollars of paid customer acquisition channels: for
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`example, how much does a paying customer costif they were acquired via Facebook?
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`Counterintuitively, it turns out that costs typically go up as you try and reacha larger audience.Soit
`might cost you $1 to acquire your first 1,000 users, $2 to acquire your next 10,000, and $5 to $10 to
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`acquire your next 100,000. That’s why you can’t afford to ignore the metrics about volume of users
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`acquired via each channel.
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`https://a16z.com/2015/08/21/16-metrics/
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`Product and EngagementMetrics
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`#9 Active Users
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`Different companies have almost unlimited definitions for what “active” means. Some charts don’t
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`even define whatthat activity is, while others include inadvertent activity — such as having a high
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`proportion offirst-time users or accidental one-time users.
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`Be clear on how you define “active.”
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`#10 Month-on-month (MoM) growth
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`Often this measured as the simple average of monthly growth rates. But investors often prefer to
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`measure it as CMGR (Compounded Monthly Growth Rate) since CMGR measuresthe periodic
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`growth, especially for a marketplace.
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`Using CMGR [CMGR = (Latest Month/ First Month)(1/# of Months)-1] also helps you benchmark
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`growth rates with other companies. This would otherwisebe difficult to compare due to volatility and
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`other factors. The CMGR will be smaller than the simple average in a growing business.
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`#11 Churn
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`There’s all kinds of churn — dollar churn, customer churn, net dollar churn — and there are varying
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`definitions for how churn is measured. For example, some companies measureit on a revenue basis
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`annually, which blends upsells with churn.
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`Investors look atit the following way:
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`Monthly unit churn = lost customers/prior month total
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`Retention by cohort
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`Month 1 = 100% of installed base
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`Latest Month = % oforiginal installed basethatarestill transacting
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`It is also important to differentiate between gross churn and net revenue churn —
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`https://a16z.com/2015/08/21/16-metrics/
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`Gross churn: MRR /ost in a given month/MRR atthe beginning of the month.
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`Net churn: (MRR lost minus MRR from upsells) in a given month/MRR at the beginning of the month.
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`The difference between the twois significant. Gross churn estimates the actual loss to the business,
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`while net revenue churn understatesthe losses(as it blends upsells with absolute churn).
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`#12 Burn Rate
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`Burn rate is the rate at which cash is decreasing. Especially in early stage startups, it’s important to
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`know and monitor burn rate as companiesfail when they are running out of cash and don’t have
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`enough time left to raise funds or reduce expenses. As a reminder, here’s a simple calculation:
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`Monthly cash burn = cash balanceat the beginning of the year minus cash balance end of the
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`year / 12
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`It’s also important to measure net burn vs. gross burn:
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`Net burn [revenues(including all incoming cash you havea high probability of receiving) — gross
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`burn] is the true measure of amount of cash your companyis burning every month.
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`Gross burn on the other hand only looks at your monthly expenses + any other cash outlays.
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`Investors tend to focus on net burn to understand how long the moneyyou haveleft in the bank will
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`last for you to run the company. Theywill also take into account the rate at which your revenues and
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`expenses grow as monthly burn may not be a constant number.
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`See also Fred Wilson on burn rate.
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`#13 Downloads
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`Downloads (or number of apps delivered by distribution deals) are really just a vanity metric.
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`Investors want to see engagement, ideally expressed as cohort retention on metrics that matter for
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`that business — for example, DAU (daily active users), MAU (monthly active users), photos shared,
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`photos viewed, and so on.
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`Presenting Metrics Generally
`https://a16z.com/2015/08/21/16-metrics/
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`#14 Cumulative Charts (vs. Growth Metrics)
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`Cumulative charts by definition always go up and to the right for any businessthat is showing any
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`kind of activity. But they are not a valid measure of growth — they can go up-and-to-the-right even
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`whena businessis shrinking. Thus, the metric is not a useful indicator of a company’s health.
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`Investors like to look at monthly GMV, monthly revenue, or new users/customers per month to assess
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`the growthin early stage businesses. Quarterly charts can be used for later-stage businesses or
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`businesses with a lot of month-to-month volatility in metrics.
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`#15 Chart Tricks
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`There a number of such tricks, but a few common onesinclude not labeling the Y-axis; shrinking scale
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`to exaggerate growth; and only presenting percentage gains without presenting the absolute
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`numbers. (This last one is misleading since percentages can sound impressive off a small base, but
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`are not an indicator of the future trajectory.)
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`#16 Order of Operations
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`It’s fine to present metrics in any order as you tell your story.
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`When initially evaluating businesses, investors often look at GMV, revenue, and bookings first
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`becausethey’re an indicator of the size of the business. Once investors have a senseof the the size
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`of the business, they’ll want to understand growth to see how well the companyis performing. These
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`basic metrics, if interesting, then compel us to look even further.
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`As one of our partners who recently had a baby observeshere: It’s almostlike doing a health check
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`for your baby at the pediatrician’s office. Check weight and height, and then compareto previous
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`estimates to make sure things look healthy before you go any deeper!
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`Sign upto get our Pest articles latest podcasts and news on our investments emailed to you
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`Want more a16z?
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`https://a16z.com/2015/08/21/16-metrics/
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`fe Siartup Vetrics | AndifeesseA Horowitz
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`© 2023 Andreessen Horowitz
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