For startups trying to find product-market fit, lots of metrics can actually distract from the real work of launching a sustainable business. That’s why we asked several venture capitalists and investors what essential metrics startups should track. We’ve compiled their generous insight around five key metrics.
Tracked together, these metrics help founders keep a pulse on the viability of the startup and signal when a course correction is in order. We’ve also included a short description and the calculation for each one.
1. Burn Rate
The Burn Rate is the negative cash flow of a company. It shows how quickly a startup is spending money. This key metric is essential for determining how much cash the company needs to keep operating and growing.
“[Burn rate] is what signals to existing investors how quickly their teams need to be fundraising and the level of risk the company is facing. It also signals to potential new investors both how quickly you need to raise (i.e. you have less leverage if you’re in a rush) and how much cash you’ll need if they fund you.” - Mark Suster, Managing Partner at Upfront Ventures
“Assuming a constant burn rate can be very dangerous. Always know if your burn rate is going up or down and include that fact in your analysis.” - Fred Wilson, Partner at Union Square Ventures
“If the startup is just at inception and there is literally no product at all, then the only metric I care about is burn rate.” - William McQuillan, Partner at Frontline Ventures
“It’s OK if you want to spend money to be aggressive for growth or speed. The thing that is not OK is if the plans change or environment changes, you should be able to reach profitability on the money you have. What is OK is to spend money for productivity. What is not OK is just to light money on fire.” - Sam Altman, President of Y Combinator (from an interview with Business Insider)
How to calculate Burn Rate
Gross Burn Rate Calculation: [ ($) total amount spent month B - ($) Total amount spent month A ] / ($) Total amount spent month A X 100 = (%) Gross Burn Rate
[ ($) total amount spent month B - ($) Total amount spent month A ] / ($) Total amount spent month A X 100 = (%) Gross Burn Rate
Net Burn Rate Calculation:
($) total amount spent month A - ($) total revenue month A = ($) Net loss month A
($) total amount spent month B - ($) total revenue month B = ($) Net loss month B
[ ($) net loss month B - ($) net loss month A ] / ($) net loss month A / 100 = (%) Net Burn Rate
View the pros, cons, visualization examples, benchmarks and more for the Burn Rate here.
2. Activation Rate
The Activation Rate measures how many visitors are engaging with your website or app. Activation can be defined several different ways depending on your business including number of clicks, time on website, pages viewed, downloads, email/blog subscription, or even a trial signup.
The Activation Rate can be any action that will lead a visitor to a return visit (retention). This startup metric measures the first experience a visitor / potential customer has with your product/service/app.
“The top three metrics that are most important for early startups to track are active user numbers, 2nd month retention, and engagement rates. Do customers just open the product or do they actually use it?” - George Northcott, Co-Founder and Head of Business Development at Founders Factory
How to calculate Activation Rate
(#) of website sessions / (#) activities completed = (%) Activation Rate
View the pros, cons, visualization examples, benchmarks and more for the Activation Rate here.
3. Daily Active Users (DAU) to Monthly Active Users (MAU) Ratio
The Daily Active Users (DAU) to Monthly Active Users (MAU) Ratio measures the stickiness of your product - that is, how often people engage with your product. DAU is the number of unique users who engage with your product in a one day window. MAU is the number of unique users who engage with your product over a 30-day window (usually a rolling 30 days).
The ratio of DAU to MAU is the proportion of monthly active users who engage with your product in a single day window.
“The best thing to measure the growth rate of is revenue. The next best, for startups that aren’t charging initially, is active users. That’s a reasonable proxy for revenue growth because whenever the startup does start trying to make money, their revenues will probably be a constant multiple of active users.” - Paul Graham, VC and Co-Founder of Y Combinator
“The metrics we start with are total active users (monthly/weekly/daily) it’s growth, alongside any ratios like DAU/MAU or DAU/WAU. These help us understand how frequently active people are in using the products. When we assess a growing startup, the number one thing we look for is deeply retained usage. There are lots of ways for something to grow, but growth without deepening engagement is just like empty calories. So core usage alongside a path to growth is all that matters to us.” - Josh Elman, Partner at Greylock Partners
“I would argue that the single most telling metric for a great product is how many of them become dedicated, repeat users.” - Andrew Chen, Angel Investor
How to calculate DAU/MAU Ratio
(#) Daily active users / (#) Monthly active users = (%) DAU/MAU Ratio
View the pros, cons, visualization examples, benchmarks and more for the DAU/MAU Ratio here.
4. Customer Churn Rate
Customer Churn Rate is the percentage of customers lost during a given period of time. For SaaS or mobile apps, this means customers who cancel their subscription. For ecommerce, this means customers who fail to make a repeat purchase within an average timeframe for the business (could be 90 days, 120 days, or some other length of time).
The inverse of this metric is Customer Retention Rate which focuses on the customers retained over a given period of time.
“One of the top five metrics I look for in startups that are scaling is the retention of users or customers.” - Tom Henriksson, Partner at Open Ocean Capital
“The maximum viable churn for a company depends on the company’s runway and the rate at which the startup can grow accounts through up-sell and cross-sell. It goes without saying that less churn is always better, but estimating an upper-bound for churn can be helpful for financial modeling and internal prioritization of customer success efforts.” - Tom Tunguz, Partner at Redpoint Ventures
How to calculate Customer Churn Rate
[ (#) Total customers churned this time period / (#) Total customers at the start of this time period ] X 100 = (%) Customer Churn Rate
View the pros, cons, visualization examples, benchmarks and more for Customer Churn Rate here.
5. Revenue Growth Rate
Revenue Growth Rate measures the month-over-month percentage increase in revenue. It’s one of the most common and important startup metrics. The Revenue Growth Rate provides a solid indicator of how quickly your startup is growing.
“If a startup has a basic product or is looking for market fit, then one of the top three metrics I always ask for is MoM (Month on Month) Revenue Growth.” - William McQuillan, Partner at Frontline Ventures
“If there’s one number every founder should always know, it’s the company’s growth rate. That’s the measure of a startup. If you don’t know that number, you don’t even know if you’re doing well or badly.” - Paul Graham, VC and Co-Founder of Y Combinator
“The ability to accelerate monthly revenues while decreasing monthly burn is the #1 thing I look for in a growth stage business.” - Steve Schlenker, Managing Partner at DN Capital
How to calculate Revenue Growth Rate
[ ($) Revenue Month B - ($) Revenue Month A ] / ($) Revenue Month A X 100 = (%) Revenue Growth Rate
View the pros, cons, visualization examples, benchmarks and more for the Revenue Growth Rate here.