After seeing a post on a16z.com titled 16 Startup Metrics, I decided to look at them through the lens of hardware startups. Or, at least what I know of hardware startups with a dash of overall product design mixed in. After all, many if not all of these metrics can provide valuable information to companies selling all matter of hard product.1
For the purposes of this post, let’s assume we’re evaluating a company that sells a bluetooth-connected light switch. They sell them through a small handful of regional retailers. They managed this with funding from an angel investor a couple of years ago, and have accrued no other debt otherwise.
Also, I don’t specialize in finance or web analytics so feel free to correct me if I have the wrong idea about anything here. This is written to be read alongside the original article, perhaps in iOS 9’s or Mac OS X El Capitan’s new Split View, the latter of which I haven’t been able to try yet.
1. Bookings vs. Revenue
Bookings wouldn’t much apply to this industry, but you could categorize bookings (as they’re not specifically defined) as an order that’s payable upon delivery to a retailer, although I’m not sure why that would be part of the agreement with that retailer. So in this case, bookings and revenue are pretty close to the same thing, with the same dollar amounts and timelines.
2. Recurring Revenue vs. Total Revenue
Recurring Revenue would overlap significantly with Total Revenue, because you can sell the light switch to the same customer again and again. The distinction comes in where we might begin selling services such as installations or access to a light-controlling software since these only occur once for a customer (depending on the software license, where you may set up a yearly fee for enterprise services, in which case it would turn into Recurring Revenue).
3. Gross Profit
This one should be pretty straight forward, so I’ll leave it as an exercise to the reader.
4. Total Contract Value (TCV) vs. Annual Contract Value (ACV)
This is an interesting one. It primarily relates to Software as a Service (SaaS) companies but depending on the market may be applicable in our little theoretical company. For instance, if you’re providing these light switches to a local housing development company, you can look at those contracts to get a feel for these figures. Light Switches as a Service (LSaaS).
5. LTV (Life Time Value)
Again, largely software/web based. Since the duration between purchases of the same hardware products (or product types) tends to be quite long, this value stays quite low because you’re dividing contribution margin from customer (incredibly low) by monthly churn (see number 11).
6. Gross Merchandise Value (GMV) vs. Revenue
GMV would be the total sales dollar value for merchandise sold through a particular marketplace over a certain time frame2.
7. Unearned or Deferred Revenue … and Billings
So, you sign a large deal with a distributor in New York City. You get a big initial payment, as well as later payments as you deliver truckloads of switches. How do you look at that? It’s not quite revenue, as you haven’t (yet) provided your end of the deal. It’s more like credit, but in your favor. You only get to realize it as revenue when you fulfill your side of the agreement. Until then, it’s somewhat a liability. Think of it as present liability that converts to future revenue. This mechanism can make some startups appear healthy (growing even), despite the fact that they’re simply working off billings for several months/years.
8. CAC (Customer Acquisition Cost) … Blended vs. Paid, Organic vs. Inorganic
This looks at how customers are obtained (or acquired) and how those costs are considered. For example, imagine you run a coupon on Twitter that entitles a customer to 10% off when they enter a code at checkout. You sell them $120 worth of products, which means that it cost you $12 to acquire that customer. You still made $108 you otherwise wouldn’t have, but you can’t ignore that $12.
9. Active Users
This may be a bit trickier. Fortunately, in our Internet of Things era, most the products offered by most hardware startups contain an app component that can be used to accurately judge active users. The main takeaway is to define for yourself (and your possible investors) what ‘active users’ means.
10. Month-on-month (MoM) growth
Andreesen Horowitz’ formula to calculate Compounded Monthly Growth Rate (CMGR) is an interesting example of why it’s important to take a step back from single, absolute number and integrate other factors to understand not where a startup is, but where it’s going and even how that direction is changing.
Knowing what the loss of a specific metric is (even if it’s only loss of growth acceleration) is incredibly useful. I see this being a bit more spread out for hardware companies, where the lifecycle is slower than with software, but still informative.
12. Burn Rate
Pretty much just like what it sounds like; all businesses go through cash. Hell, this metric is so widely relevant that I may even implement a Burn Rate metric for my own personal finances although that would probably end in disappointment (and possibly tears).
This may not be useful for a software-centric company; but what about a hardware one? After all, people aren’t likely to download an app that only ties into a hardware product, are they? What insights can we gather from subtracting unit sales from total downloads? What if we take, say, 10% of total app downloads away (due to mistaken downloads or downloads that were forgotten on some tertiary home screen) and look at those numbers? Perhaps with further analysis some interesting insights may spring forward.
14. Cumulative Charts (vs. Growth Metrics)
15. Chart Tricks
One habit I try to follow for charts is constant skepticism. What’s not being shown can be as important as what is shown, and considering other ways to portray the same information may be helpful. After all, if you’re a startup founder looking for funding, you want the most skeptical people possible helping your company succeed.
16. Order of Operations
I’ve got little to add here, other than to say that keeping as many metrics available as is necessary to demonstrate growth (and potential) is incredibly important. Just be sure that the story you’re telling lines up with the numbers.