Recently, Cornell ranked 9th in universities with the most founders of unicorn startups. There are numerous resources available to Cornellians – including classes, eHub, Blackstone LaunchPad, and various competitions – to inculcate the fiery passion of hustling their way to the next billion dollar startup. Still, with all these resources available at hand, what should the founder of a new, high-growth company focus on when starting out?
Around 9 out of 10 startups fail, and despite some brilliant ideas, it might be simple things like cash-crunches that lead to the failure of startups. A quick binge-watch of Shark Tank will reveal some terms that the Sharks will always ask the entrepreneur, and for good reason. Let’s dig into some of the terms that are crucial to the healthy well-being of any company.
Beyond the regular profits, sales, revenue, and growth numbers, there are some metrics that are more common for startups than they are for bigger businesses. For example, one of the most common terms entrepreneurs are asked about is “burn rate”. Burn rate refers to the amount of cash a company is spending or ‘burning’ in a given period of time. With limited sources of funding for many startups, a burn rate determines how much money is being spent, what it’s being spent on, and for how long it will last. The time that a startup can last with its current cash is called ‘runway’. Runway and burn rate are important for investors because they dictate how efficient the company is at using the given capital. Ask any entrepreneur, and they will all tell you, “Cash is King.” Cash runs the day-to-day of the business and establishes a supply or a proper mechanism to run it.
Entrepreneurs also often get asked about MRR (Monthly Recurring Revenue). MRR is usually used for companies which have a subscription model; think Spotify, Salesforce or Dollar Shave Club. Since monthly subscribers are extremely important to the revenue models for such companies, knowing how much is being made each month and the growth of that number is important to keep track of.
Churn rate, another key startup metric, identifies the number of customers or revenue dollars that the company is losing per month on average. If this rate is increasing, the company needs to focus on improving products or understanding why the loss is happening. This directly affects the MRR as well.
Lastly, customer acquisition cost (CAC) pinpoints how much each customer costs to acquire through marketing, referrals, free promotions and trials so that a startup can track how much money is being spent on each customer. Once calculated, customer acquisition costs gets compared to the lifetime value of the customer (LTV), or the total amount of earnings that a company can expect from a given customer. Comparing the CAC with the LTV can help a company establish whether their current revenue model is sufficient for the marketing expenditure that the company has.
While this list is not exhaustive, it’s a quick start for startups to understand the financial health of their business. Great areas to learn about this would VC blogs, some of my favorites are Andreessen Horowitz, Ithaca VC by Zach Shulman, and CB Insights blogs of all kinds. There are also some great newsletters such as Term Sheet by Fortune and the CB Insights Newsletter, which can keep you up to date with trends.