In previous posts, we discussed the most important features of a startup key performance indicator. This article will deeply define one of the key performance indicators for startups: “growth”. Although “growth” and “conversation rate” both are defined and understood as key performance indicators, they can also complement the definition and monitoring of other KPIs. Here we discuss growth KPI, and In the next article, we will define conversation rate definition and formula.
Growth; The Most Important Key Performance Indicator for a Startup
Growth is the rate at which a value changes at a specific time in the past. According to this simple definition, we can draw two important and primary conclusions:
- First one:
It is best to choose the most appropriate variable to measure its growth.
The first step in monitoring how a startup performs and how successful it is is to select the relevant key performance index and then calculate the growth of that index. However, estimating the growth of a poor KPI can lead to the loss of all capital. That’s because any index growth does not necessarily lead to startup growth.
- Second one:
Growth calculates the ratio of variable change. When we talk about growth, we mean the ratio of index change, regardless of its volume and size. This feature makes it possible to identify and be aware of the startup’s trends without affecting the current situation.
Why Is Growth the Most Important KPI for a Startup?
The answer is that the most critical difference between a startup and a traditional company is its “rapid growth and scalability.” Although this feature is not a universally accepted definition, growth is undoubtedly one of the most critical parameters in the startup’s valuation by venture capitalists.
All companies can repeat their activities on a large scale. Still, due to their technology-based model, innovation and low dependence on physical assets, startups increase the plate at a much lower cost and capital and in a faster time.
Why Is Growth the Most Important KPI for a Startup?
The answer is that the most critical difference between a startup and a traditional company is its “rapid growth and scalability.” Although this feature is not a universally accepted definition, growth is undoubtedly one of the most critical parameters in the startup’s valuation by venture capitalists.
All companies can repeat their activities on a large scale. Still, due to their technology-based model, innovation and low dependence on physical assets, startups increase the plate at a much lower cost and capital and in a faster time.
Comparing a Car Manufacturer with a Startup
Suppose the cars demand from a car company suddenly doubles. To meet the needs of the market on a larger scale, the automaker must attract new employees and build a new production line, develop a warehouse, and so on. Obviously, these processes require a lot of capital and a long time.
On the other hand, consider a startup like Facebook. As users double, in the worst-case scenario, Facebook will have to make minor improvements to its processing infrastructure, such as servers, and optimize its processing and storage applications.
Technology-based operations allow startups to grow and scale up their operations faster and expand their operations accordingly.
Growth and Scalability; The Central Identity of a Startup
Scalability means the possibility of the rapid growth of a business model, as well as capacity to provide market demand is part of the core identity of a startup.
It takes big automakers decades to reach high value, while the USSD market has gained even more value in just a few years. Also, mobile payment startups that started with the USSD could grow rapidly due to their technology.
So the word startup is another definition of a scalable business (the ability to grow rapidly in supply and demand). Otherwise, even if there is a high demand in the market, but the business model can not quickly gain an acceptable share of it and grow, it can not be considered a startup.
When it comes to growth and scalability, the question arises as to what key performance indicator is growth. The growth of a startup can have different meanings depending on what key performance indicator is calculated.
Positive Growth Does Not Always Mean Improving the Startup Situation, and Vice Versa.
Positive growth does not always mean improving the startup situation. On the other hand, negative growth does not always mean the condition is getting worse.
Any growth is not favourable depending on the KPIs and startup development strategies, or any reduction is not undesirable. For example, a negative increase in the number of calls to the customer support centre (CRM,) which occurs due to automation and self-service in sales channels, means that the startup situation is improving.
At different stages of a startup’s development, the concept of growth changes. In the early stages, growth is defined with qualitative KPIs. However, over time, the quantitative KPIs, such as revenue, market share, and so on, become more critical. Therefore, we cannot say that growth always means growth in users, revenue, profit or market share. The key performance indicator on which the startup growth is measured should be defined based on the startup development stage. For example, it may be necessary to use a KPI of monthly active users growth in the early stages. But after a while, the growth will be equivalent to an index growth, such as the conversion rate of monthly active users to paid users.
On the other hand, growth has a non-cumulative approach. It prevents misguidance based on the accumulation of past achievements. Instead, it draws attention to the trend of present and future achievements. For example, the number of orders registered in the last six months for an online food delivery platform is misleading. In contrast, the increase in the number of orders in these six months compared to the previous six months provides a correct measure for the startup’s performance.
Growth as an Actionable and Leading Parameter
Growth is an actionable parameter because it provides the fastest possible feedback on a startup’s performance and efficiency. If you are looking to attract users and have designed and implemented all your marketing plans based on it, the key performance indicator of “New User Growth” shows you how effective each of the different channels and campaigns have been. You can quickly use this feedback in decisions and optimizing funds to various channels and user engagement campaigns.
Growth is a leading parameter and helps you predict the future. By knowing the growth rate of a KPI in a given period of time and the current value of the same key performance indicator, it is possible to make a prediction for the future.
You can use this forecast in planning, targeting and evaluating future performance. For example, suppose the average seasonal growth of your startup revenue in the last two years is equal to 20%. On the other hand, the startup revenue in the previous season is $ 1 million. Consequently, we can say that the revenue for the next season will be about $ 1.2 million. For this reason, in the startup valuation process, specialists first validate the founders’ financial forecasts based on growth metrics.
In some types of business models, such as platforms, you should define growth in terms of the correlation of several key performance indicators. In this case, focusing on one KPI can be misleading or pointless.
Multi-Sided Platforms and Startups Growth
In multi-sided platforms and startups, the growth of one side must be evaluated in relation to the other sides. For example, in an online taxi service, the increase in the number of drivers can be correctly interpreted just if it has a significant relationship with the increase in the number of travel requests. Otherwise, this startup will have disproportionate and unstable growth.
Finally, you can define growth on all the key performance indicators of a startup, from indicators in internal operations, marketing, human resources, finance, product, production, and logistics to the field of valuation, investment, and commercial contracts.
