Y Combinator Startup Podcast - Setting KPIs and Goals with Divya Bhat | Startup School

Episode Date: July 5, 2023

YC Visiting Group Partner Divya Bhat talks about how to set your KPIs (key metrics) and how to prioritize your time. This talk helps founders launch faster and set goals in order to make real progress. Apply to Y Combinator: https://yc.link/SUS-apply Work at a Startup: https://yc.link/SUS-jobs

Good morning. I'm Divya, and today I'm going to talk a little bit about KPI's and prioritization for an early stage startup. This is my second batch as a visiting group partner here at YC, where I've worked with hundreds of founders on hitting their demo day goals and navigating goal setting and execution as they search for product market fit. I myself am a two-time YC founder and have also held leadership roles at several fast growth startups. Just as a heads up, I'm going to be giving you some homework at the end of this talk. My hope is that today we can improve the way you see. spend your time and expedite your journey to product market fit. So why are we talking about this? Now that you're a startup founder, there is nobody telling you how to spend your time. You might have heard some version of and not or, implying that you have to turn over every rock and optimize

every metric to build a successful startup. While this is true to some extent, you still have to choose how you're going to spend your time each day. Ultimately, as a startup founder, you want to get to product market fit as quickly as possible. Prioritization matters and having clarity your KPI's is crucial for prioritization. Let's start by defining these terms. KPI stands for key performance indicator. These are the metrics that you track and report on, both internally and externally.

These metrics make sure that you're measuring what matters, and they tell you whether what you're doing is working. Prioritization tells you in what order you need to tackle your work each day. There are infinite things you could be doing each day and your work is never done, but time is finite. Prioritization tells you how you spend your time each day, how you direct your team to spend their time each day

when you have one, and most importantly, prioritization helps you decide which super important things on your list you don't get to today. Here's what your task list may look like. Note that the highlighted items in yellow are the ones that I might decide to prioritize. Also note that every item on this list feels important, yet only a few are likely to truly move your business

forward and toward product market fit. In a world where you can't possibly get to everything, you need to prioritize the tasks that'll move you toward your KPI's faster. So why are KPI's and prioritization in one talk? Well, prioritization means that you're working on the things most likely to impact your top KPI's. So it's critical that you choose the right KPIs and then are honest with yourself about which tasks

are most likely to move those KPI's. When you're moving fast, it's extra important to make sure you're running in the right direction. I'll use this analogy a few times today, so look out for it. We come across companies all the time who are working so hard, but optimizing for the wrong thing. We call these vanity metrics, things that make you feel good and things that you can brag about on LinkedIn.

At the end of the day, if you fall into the trap of making these your primary KPIs, you're going to be spending your time on the wrong things. So why are KPIs and prioritization important? Well, as a founder, no one is going to be a problem. going to tell you how to spend your time. It's very easy to feel busy and feel productive and not be moving your business forward. Here are some common examples of things you can be doing to feel busy today. Optimizing paperwork tasks. Maybe we're good enough is all that you needed. Perfectionism and craftsmanship on a feature that nobody's using anyway. Premature optimization

or building for scale that you don't need to yet. Or choosing a more intellectually hard problem to solve rather than building what your users want. I remember in the early days of one of my companies, we were trying to pick a legal firm to work with. Sure, you need a lawyer, and you need to pick a good lawyer. There are so many to interview, and so many of them wanted to take us out to lunch or to drinks, have us visit their offices, the works. You guys, this felt flattering and glamorous. We felt so busy. But at the end of the day, we hadn't even launched. Yeah, choose a good lawyer. No, this is not impacting your KPIs. Do it quickly and move on. Again, it's easy to run fast, but in the wrong direction.

You need to run fast and be running in the right direction. When you're doing a startup, time is at a premium. The faster you get to market, the sooner you earn money. And you can reinvest that money in your business and be less dependent on outside capital. Or, even if you want to keep raising, you'll have more leverage to raise money on better terms. Taking more time to get to market means you burn more money. Lastly, moving slowly means that competitors have more time to copy you and catch up. Time spent without making real progress also has an emotional and mental cost and can raise red flags externally in fundraising and hiring.

So don't waste time on things that don't matter. So let's talk about how to prioritize. There are two ways we can talk about prioritization. One is how you spend your time on your startup versus other things in your life. Listen, guys, I can't tell you this. This is a very personal decision. This depends on what else is going on in your life and how you want to spend your time. This is a whole separate topic that we won't spend much.

much time on today. That said, I have two important points. One, remember, speed matters. And two, this is an area where it's really important to align with your co-founder on expectations. When we discuss prioritization, we mean, how do you spend the time you've allocated to working on your startup? Let's make sure that you're doing the most impactful things with your valuable time. Okay, so step one for prioritizing. We're going to talk more about how to set KPIs in the next section, but I want to talk about why this is critical for prioritization. So first, you need to identify your top KPIs. If you've launched, your primary KPI should be revenue growth.

If you don't want to make revenue growth your primary KPI, you need to really push yourself on why. We talk more about this later in this talk, but this is important enough to mention here. A non-revenue KPI is rarely the right one, and we'll talk about a few exceptions later. If you're pre-launch, your KPI's in the short term might be weeks until launch or a number of conversations with users.

But once you do launch, please quickly shift your KPI's to revenue growth. Second, you need to decide what's your KPI goal for this week? We'll talk about goal setting later, but assume that you have some goal. For example, 10 more paying customers by next week. Make sure this ladder's up to any longer-term goals that you have. The reason setting the right KPI goals is critical is that it'll remind you of the urgency of growing fast. Early growth compounds, and tracking goals weekly reminds you of this. Here at YC, we talk a lot about the early days of Airbnb,

where the founding team wrote their weekly KPI goals on their bathroom mirror, so they were facing that reality multiple times a day. In addition to identifying the right KPIs, you also need to identify your biggest bottleneck or problem in moving your top KPI. Here's an example from a YC company called Super Daily, a daily grocery subscription service in India that sold, to Swiggy in 2018. Super Daily faced a scenario early on when they launched V1 of their product. There were a ton of things to be optimized. You guys, picture this business. It's operationally

complex with a mobile app, ops tooling, inventory management, and a whole lot of messy on-the-ground logistics. But their North Star was growth. And they were able to see clearly that their bottleneck was the conversion of users who actually got pretty far down the sign-up flow and then churned. So they asked themselves, why are high-intent users not converting? That was the biggest problem they needed to solve, and the first tasks they prioritized were conversations and experiments to understand this. By focusing on this question, they realized that high-intent users were dropping out because a lot of users wanted a specific milk brand that Super Daily didn't carry. It wasn't a Ux friction issue or an app issue, so they onboarded that milk brand rather than beautifying their sign-up screen.

Once they solved this, then they started looking at how to convert users that were maybe farther up the funnel or lower intent, users that were referred by word of mouth or people that were casually checking out super daily. So by the time those users got farther down the funnel to the high-intent intent phase, they now had that top milk brand on the app and they knew that they weren't optimizing a funnel that would leak farther down. By onboarding this new brand, Super Daily was able to increase their conversion rate by 50%. Here's a simple framework to prioritize aggressively to optimize for that KPI goal. Number one, write down any ideas that you might have to hit your goals. Don't start working on them right away. It's really easy to chase shiny new things. Just write them down.

Next, you want to rank by probability of success and then sub-rank with respect to complexity or how long it's going to take you to do this task. Pick only a couple of things to try. Once you pick a few tasks and start working on them, if your KPI isn't moving, be really honest about why. Ask why several times until you feel like you can actually understand the real reason, even if it's hard to hear. Per the example of Super Daily earlier, it might be something simple like the milk brand. Do retros in your weekly initiatives. Are you predicting impact and complexity well?

Did you complete all the tasks you were expecting to complete in this sprint? If not, next time, break them down more. give yourself time blocks to reduce context switching. Or maybe did you accidentally work on some of those fake progress tasks we talked about? Just do better next time. And then move fast. Learn and then do something differently the next time if what you did didn't work. The definition of insanity is doing the same thing over and over and expecting different results.

Don't let indecisions slow you down. Just pick a path and keep moving. Ideally, you're going to be growing fast. If not, talk to a lot of users fast, churn through your bad ideas fast so that you can get to working on the right good ideas as fast as possible. Don't waste time on indecision. So as a sanity check, here are some things that should and should not end up on your list in most cases. Since we're talking about the 90% case here and specifically talking about early stage startups, here are a list of example tasks that you should see on your task list. talking to users, and then building and iterating based on user feedback.

When you're spending time talking to your customers and responding to support emails, there is a direct path to revenue growth. The only way you know what your customers want is by talking to them all the time. And the only way to grow is by building something people want. Not much else is going to help you at this stage. Here are some things that should not end up on your task list, aka fake progress. Passive fundraising conversations or coffees when you aren't actively raising. When you do decide to raise, it should be deliberate, focused, and time-boxed.

Conference attendances. Other than a few select industries, this generally won't move your needle in an early stage. Third, arbitrary technical milestones. Spending time, optimizing technical benchmarks, launching an Android app. Unless you're hearing clearly from your users that this is a burning pain point, this is probably fake progress at this point. You guys, this fake progress list, it's not anything to be ashamed about. Smart people put these things on their list all the time.

We've all done it. These are all tasks that can make you feel good. They boost your ego. They're metrics that you can brag about on LinkedIn. They might make your mom proud. They might make your ex-boyfriend jealous. But what they don't do is they don't necessarily get you closer to product market fit. Here are some common tricks your brain plays on you when you're trying to prioritize.

These are tricks and traps that your mind. has to help you avoid negative feelings like shame, despair, embarrassment, self-doubt. Many people are drawn to low-leverage tasks. Why? They provide a sense of accomplishment. They allow you to check things off your list and it's so tangible. At a time when your startup's future is uncertain, there can be so much satisfaction in checking tasks off a list. Don't fall into this trap. Here are some examples of this. Spending too much time, optimizing paperwork, around licensing, incorporation, equity. This is not an area where you need to optimize or innovate.

Just follow the standard advice to stay legal and compliant. Slightly cheaper workers' comp insurance or a slightly better equity structure is not going to make or break your business. Taking meetings with potential investors, advisors, partners, or building cool, hard features that you don't know people want yet. Again, these things can make you feel really good and really smart. Solving hard problems is awesome. Unfortunately, it's not going to help you find product market fit sooner.

It's just going to be things you're checking off a list. The second mental trap I want to talk about is that sometimes you can fool yourself into thinking something is working when it's really not. Be honest with yourself. It doesn't feel good to admit to yourself or your teammates or your investors or your mom that things aren't going well. But you're not doing yourself any favors by not diagnosing problems early and often. Slow growth can be deceptive. it's easy to mistake slow growth for product market fit. As someone that's worked at both kind of slow, steady growth companies, my own startups,

and companies with clear product market fit, like DoorDash, trust me, you guys, these types of growth feel fundamentally different. Third trap I want to talk about is perfectionism or indecision blocking progress. When nothing seems to be working, it's really easy to make every decision feel like it's going to make or break your company. In reality, most decisions don't. don't matter. And for the ones that do, it's okay to decide wrong first and then fix it later. Just keep moving. So the best case scenario, you know, the one you can put on a pedestal, is a scenario where you make the right decision quickly every time. This is completely impossible.

No one's going to achieve this. I recommend the second best option, which is to make pretty good decisions quickly. And then if they turn out to be wrong, fail, learn, and switch to what's working quickly. As a startup founder, you have dozens of decisions to make every day. Don't waste time on the ones that won't help you get to product market fit. Remember, if it's a tough call, it actually probably means you can't go wrong. So pick one, keep moving. The fourth mental trap I want to talk about is spending too much time on downside protection instead of chasing upside. Downside protection is straightforward and satisfying, fixing little problems is very easy, but rarely where the innovation happens. Chasing upside requires risk-taking, creativity,

a lot of false starts. So get in as many iterations as you can. For example, we hear a lot of ops teams talking about getting themselves out of spreadsheets. Y'all, at this stage, spreadsheets are fine until they're not. If they're working, stick with them. It's good to do things that don't scale as long as they're not breaking. Instead, spend your time finding out what your users need in order to use your product every day instead of once a week. That's the upside chasing that we're talking about. The last trap I want to call out today is chipping away at small problems when there's a big existential one looming that maybe you don't want to face. For example, you may tell yourself, hey, my 150 users are asking for one-click ordering. Let me go build it.

You guys, you only have 150 users. This is a problem. Maybe you've only had 150 users for the past three months and they're starting to churn and no one knew is signing up. That's your biggest problem. Go solve that. So here's a quick recap on prioritization. You'll never get to everything on your task list. You have to use KPIs to prioritize your work and only work on the biggest blocker to your primary KPI and be honest with yourself and fail fast. So now let's talk about how to choose the right KPIs. Remember, we can't afford to waste time running fast in the wrong direction. Let's define primary and secondary KPIs. Your primary KPI or primary metric is the main metric you use to measure whether your business is on track. For the vast majority of startups,

your primary KPI should be growth and ideally revenue growth. This indicates that you've built something people want and you're on track to building a huge business. As we've mentioned, there are a few exceptions to this. For example, maybe a marketplace business might choose signups or GMV as their primary KPI or an early enterprise business with a long sales cycle might choose letters of intent. Secondary KPI are things that need to be tracked and moving in the right direction to make sure you're not cheating on your primary KPI or to give you an early signal when your primary KPI is very lagging. Here's some examples of secondary KPI's.

Retention and churn. These are going to actually contribute to your revenue growth, so they're very important to track. Unit economics. You need to make sure you're making money on each user and not giving away free money and calling it growth. Customer acquisition cost. Depending on your stage, you may not need to optimize this right now.

Just have a sense for your payback period and whether you'll make or lose money per customer acquired. Keep this list small and relevant. Three to five secondary KPIs is reasonable. I've also included a short list here of vanity metrics. As we discussed earlier, it is very easy, even for good founders, to fall into the trap of prioritizing for these metrics. They feel good and they provide external validation.

If you find these creeping into your task list, just ask yourself, is this directly on my path to revenue growth? Is this my biggest blocker? To illustrate what a laser focus on growth looks like, I dug up some examples. Here's a side-by-side comparison of DoorDash on Demo Day, which everyone knows, and my own startup, Rikshaw, which was also a delivery platform. We went through YC right after DoorDash did. And DoorDash eventually acquired Rickshaw in 2017.

Both companies had a laser focus on order volume as a top line metric. This allowed for clear focused execution and resulted in strong and very similar early traction. However, post-demo day, the Pats diverged a little bit. Rikshah had a bit of trouble fundraising despite comparable early traction to DoorDash. This caused us to make a decision out of fear. And instead of continuing to have a clear focus on top line growth as a new time, we're as Dordash did, we tried to optimize for both growth and unit economics.

We tried to hedge, and this was very dangerous. This split focus put us in a weird no-man's land of slow growth, which, as we described before, can kill startups. There is a lot more nuance about profitability versus growth that I won't get into here. The main message today is to choose your primary KPIs and don't try to get smart and optimize for two or more hard things at once. So now that we've talked about how to define primary and secondary KPIs, how do we set targets? Assuming growth is your primary KPI, how much growth is enough?

This depends on your business and your stage. But in Paul Graham's classic essay about growth, he notes that for a company going through YC, 5 to 7% week-over-week growth is good, and a 10% week-over-week growth is exceptional. As I've said a few times now, small changes in weekly or monthly growth rate really compound and make a difference in the long run. So early growth is better than late growth if you can choose. That number on your bathroom mirror, per the Airbnb story, reminds you to focus on this early. Here are a few factors that might impact your growth rate that you might want to keep in mind.

First, latent demand might boost early growth. Perhaps some early users will be willing to put up with an inferior product experience because you're solving an urgent. need. But that growth rate might be tougher to sustain later. For enterprise businesses, the length of your sales cycle might be long. This should go up down over time, but it might impact early KPI and goal setting. In these cases, you can set goals around other process metrics, for example, leads in different stages of your funnel. Another thing that might be impacting your growth rate is whether you're doing organic or paid user acquisition. Early on, organic is ideal. You should know where to find your first few passionate users and talk to them directly,

and ideally have them spread the word. You can also run paid acquisition tests so that once you have a product that's growing organically and a sense for payback period, you can crank up the ad spend to drive growth. But please don't do this too early and don't leak money on this strategy accidentally. The last thing I want to talk about on this slide is retention and engagement. We get a common question. Should we focus on getting new users or focus on retaining our existing users? The short answer to this is you have to do both.

The slightly longer, nuanced answer is that both will impact your revenue growth. So get a sense for which one's going to have more impact. First, make sure you don't have a problem with churn and that your users are sticking around long enough to pay back their acquisition cost and to tell their friends. You don't want to bring new customers into a substandard product. But beyond that, of course, focus on bringing in new users. Ultimately, both these metrics will need to be strong to sustain a healthy revenue growth.

To share another example from Super Daily, early on, they realized that the acquisition numbers they were tracking were not reflecting a healthy growing business and could be artificially boosted due to paid promos. To protect against this, they switched their track metric from signups, which was too easy to game to tracking customers who'd placed five or more orders since they saw this as a leading indicator to customers that were very likely to become long-term revenue-generating customers. This helped the Super Daily teams align their marketing and their overall revenue goals to chase top-line revenue growth. When setting targets, there are two possible approaches, and you can

and actually should do both. Your first option is a top-down approach. Set a goal or a milestone that you need to reach sometime in the future. For example, $5,000 in MRR by the end of startup school. Back into that weekly growth rate that you need to achieve to achieve that longer-term goal. The Airbnb Demo Day example is a great example of this. Set a target and obsess over it. Compounding matters, so getting an early start helps a lot.

Your second option is a bottoms-up approach. Ask yourself, what do you think is realistic for you to get done in the next week? Then you can project out from there. As a thought exercise, when doing a bottoms up goal setting, you can ask yourself, what could we achieve with unlimited funding? A lot of people in their heads think that funding is a bottleneck, so let's remove that. What could we do in the next week with unlimited money or resources?

Then ask yourself, what creative ways can we still achieve that even with limited funding? Set your goal. Between top down and bottom up, either is actually fine. I recommend periodically doing both to see whether what you're doing is realistic, achievable, and ambitious at the same time. Just make sure that you're checking to make sure that you're always on track to build a big business and aren't accidentally ending up in that no man's land of underwhelming but consistent growth. Let's talk a little bit more about some non-revenue KPIs that may be tempting, but not always right. First, KAC to LTV ratio.

You might hear these buzzwords together. These are generally concerns kind of later in your business, but they usually come post-product market fit once you have a fundamental business that you know people want, and then you need to reliably scale your user base. So for now, we recommend you only worry about payback period. Ideally, your payback period is zero, as in zero dollars spent on CAQ, so customers are profitable on day one. If you do need to spend on CAQ or on paid acquisition,

get a sense for how quickly users pay back that cac and whether you're reliably hitting it. Does your retention rate make this work? LTV can really be a rabbit hole for early stage companies and it's really hard to calculate. So just make sure your payback period is reasonable and you're making money per user. A second tempting KPI I want to talk about is free signups or daily active users. I'll start by saying this. Paying customers will have very different expectations. different expectations for a product than free customers will. So if you plan to charge for your

product eventually, don't mess around getting feedback from free customers. It'll likely be the wrong feedback. Get paid from day one, or at least don't count those users as part of your growth. The main exception here is from marketplaces, or products that have a strong network effect and need volume in order to have utility. Uber is a great example of this. Without enough drivers on the platform, the user experience was not good enough for riders to pay a premium for. In these cases, signups or GMV can sometimes suffice if no revenue is being generated yet. I have a couple of stories of startup spending too much time on signups and shifting to revenue too late in the game. Scribd was an early YC company that went through in summer 2006.

They spent their first four years primarily growing a free product, and they were afraid of losing their millions of customers if they started charging. As you can see in this graph, in year five, so remember they started in 2006. In mid-2010, they started charging. And while they did lose over 90% of their customers, their revenue grew by infinity percent. They finally had a business. And while Scribd already had millions of users, it wasn't until they started charging that they started to really learn what their paying users wanted. I want to quickly talk about a few exceptions, other exceptions to revenue KPI's, and this is hardware companies, biotech companies, enterprise businesses with a long, long sales cycle. In these businesses, it can be more challenging

to measure growth. And in these cases, something like letters of intent, contracts, maybe even technical milestones, might be reasonable metrics. But please, keep yourself honest and make sure that these are actually indicators of actual progress and growth and audit them frequently. Now, I challenge each of you. At the end of this talk, you should each write down your primary and secondary KPIs and set ambitious targets. Next, audit your task list for the week and make sure you're laser focused on hitting those goals. I know a lot of you are in Slack and WhatsApp groups for startup school. I encourage you to share your KPIs and your goals with your community and get feedback and hold yourselves accountable. I hope this talk helps at least one of you get to product market fit faster. Thank you.