Summaries Business and Entrepreneurship Maximizing Business Metrics for Investor Success with Anu Hariharan

This is a summary of a YouTube video "Anu Hariharan - Nine Business Models and the Metrics Investors Want" by Y Combinator!

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The key idea of the video is to identify and track key metrics specific to your business model to measure success, including recurring revenue, user retention, and ROI for user acquisition, while also focusing on product-market fit and profitability.

• 📈
  00:00

  Identify your business model and track 3-4 key metrics, including monthly/annual recurring revenue and churn rate, to measure the success of your enterprise software or service.
• 📈
  06:39

  Measure recurring revenue accurately and track monthly growth and unit churn for high-value subscriptions, while being mindful of spikes and iterating to find what resonates with users.
• 💰
  10:56

  Transactional businesses collect fees based on total payments volume, but it's important to track user retention on a monthly basis and measure it based on consistent usage over 12 months.
• 📈
  14:07

  Airbnb's success is attributed to their focus on user behavior and retention metrics, as well as measuring ROI for both organic and paid user acquisition.
• 💰
  18:29

  Understanding costs and tracking gross margin is crucial for profitable e-commerce, while defining "active" users and focusing on selling devices is key for hardware companies.
• 💼
  22:47

  Avoid common mistakes when presenting charts, focus on important metrics for your business model, and manage revenue recognition with signed contract for future bookings.
• 👀
  26:17

  Define active users and track their activity to find product-market fit, focus on unique insight and potential for growth when talking to investors, analyze user behavior to determine return rate and monetize like ancestry.com, measure paid acquisition cost and experiment with occasional spending for supply side growth, break down small teams for successful go-to-market strategy.
• 💰
  32:17

  During pilot phase, focus on getting 1-2 customers with zero acquisition cost, aiming for huge annual contract value.

Key insights

Financial Metrics and Performance Assessment

• 📊 Tracking three to four metrics for a business at this stage is considered overkill, so focusing on the key metrics that matter is crucial.
• 📊 Understanding the difference between bookings and revenue is crucial for accurately assessing a company's financial performance and holding oneself accountable.
• 📈 Founder should measure compounded monthly growth rate since launch to accurately track the growth of their business.
• 💸 Net revenue is the portion of transaction volume that a company retains after collecting fees, which is the amount that goes into their bank account.
• 📈 Amazon's success lies in its ability to accurately account for all costs, resulting in high-volume net margins that make it an attractive business for future investments.
• 💰 "The two things as founders you should track very early on is burn right because you're spending cash...and you know that there's enough money in the bank to at least operate the company for another six to nine months."
• 💵 When considering acquisition costs, it's important to compare them to the lifetime value of the customer, aiming for a 5x gap between the two.

Business Model and Growth Strategies

• 💻 The SAS (Software as a Service) model is a prominent and popular business model, especially for B2B companies.
• 📈 "For consumer subscription businesses like Netflix, it's important to focus on the growth of the customer base rather than individual revenue, as the volume of customers is crucial for success."
• 📊 "40% of my customers have used it consistently for the 12 months since they joined us well. That's a better metric." - Long-term customer usage can be a more valuable metric for businesses, indicating higher engagement and satisfaction.
• 💡 Startups should get creative in measuring their business's health by reflecting on user behavior and setting retention metrics that align with their desired user actions, rather than solely relying on traditional metrics like revenue or customer visits.

Detailed summary

• 📈
  00:00

  Identify your business model and track 3-4 key metrics, including monthly/annual recurring revenue and churn rate, to measure the success of your enterprise software or service.

  • To determine which metrics to track, it's important to identify your business model and how you plan to charge your users.
  • The presentation discusses the importance of tracking three to four key metrics for enterprise business models that sell software or services to large enterprises.
  • Founders often confuse bookings and revenue, but revenue is only recognized when the service has been delivered, not just when a contract has been signed.
  • Verbal offers for contracts are not considered bookings or revenue, and the SAS model is a prominent business model for many startups.
  • Track monthly recurring revenue, annual recurring revenue, and churn rate to measure the success of a subscription-based business.
  • Measure gross churn to understand the impact of losing customers on revenue and don't blend it with new user acquisition, and if experimenting with paid acquisition, measure the cost to acquire customers through that channel.
• 📈
  06:39

  Measure recurring revenue accurately and track monthly growth and unit churn for high-value subscriptions, while being mindful of spikes and iterating to find what resonates with users.

  • ARR is a common metric used to measure recurring revenue, but it's important to ensure that the revenue is truly recurring and not just a one-time payment or uncertain commitment.
  • Subscription as a service is becoming popular in consumer businesses, and it is important to measure monthly growth and unit churn instead of revenue churn for companies with high-value subscriptions.
  • Measure revenue churn and paid marketing costs separately, track compounded monthly growth rate since launch, and expect growth to come in spikes while iterating to figure out what resonates with users.
  • Measuring growth through averages can make it look good due to spikes, but it's important to be true to yourself and measure it correctly for future scaling.
• 💰
  10:56

  Transactional businesses collect fees based on total payments volume, but it's important to track user retention on a monthly basis and measure it based on consistent usage over 12 months.

  • Transactional businesses process payments for other companies and collect a fee based on the total payments volume, with net revenue being the portion of transaction volume they make.
  • Track user retention on a monthly basis to ensure they are still using your platform and don't confuse gross transaction volume with net revenue.
  • Retention rate should be measured based on the percentage of customers who consistently use the service for 12 months, rather than a single number.
• 📈
  14:07

  Airbnb's success is attributed to their focus on user behavior and retention metrics, as well as measuring ROI for both organic and paid user acquisition.

  • Marketplace is a platform used by consumer companies like Airbnb and eBay where guests select and book rooms from hosts.
  • Airbnb's key metrics include GMV, net revenue, compounded monthly growth rate, and user retention.
  • To measure the health of a startup, it is important to track user behavior and come up with retention metrics, as waiting 12 months to check customer return is not feasible, and Airbnb studied that users start researching six months before booking.
  • Founders tend to blend organic and paid user acquisition, but it's important to measure ROI and pay attention to where money is going, especially in unusual situations like Airbnb where hosts need to be acquired.
• 💰
  18:29

  Understanding costs and tracking gross margin is crucial for profitable e-commerce, while defining "active" users and focusing on selling devices is key for hardware companies.

  • E-commerce is a consumer business where tracking monthly revenue, monthly growth rate, and gross margin is crucial.
  • Understanding the cost per product and tracking gross margin is crucial for e-commerce businesses to ensure profitability on a per transaction basis, with a common mistake being not accounting for all costs.
  • Include all relevant costs when pricing your product or service, especially in the advertising space where the primary monetization model is through advertisers.
  • Define what "active" means for your users and hold yourself to that metric, and for hardware companies, focus on selling the device.
• 💼
  22:47

  Avoid common mistakes when presenting charts, focus on important metrics for your business model, and manage revenue recognition with signed contract for future bookings.

  • The speaker discussed nine business models and common mistakes to avoid when presenting charts, including not using cumulative charts, labeling the y-axis, and changing the y-axis scale.
  • Be clear about the absolute number and percentage when measuring metrics, focus on the important metrics for your business model, and tracking bookings is for gauging future revenue, not for accounting purposes.
  • Signed a $400k contract for future bookings, but unable to recognize revenue until service is delivered in 2 months, so need to manage business internally and potentially find another customer or accelerate service launch to hit goal of $200k by end of year.
• 👀
  26:17

  Define active users and track their activity to find product-market fit, focus on unique insight and potential for growth when talking to investors, analyze user behavior to determine return rate and monetize like ancestry.com, measure paid acquisition cost and experiment with occasional spending for supply side growth, break down small teams for successful go-to-market strategy.

  • To attract early users for a community business, it is important to define the active user and track their daily, weekly, and monthly activity to find product-market fit in the short-term.
  • As a founder, the most important things to focus on when talking to investors are your unique insight and the potential for your company to be big, while early on you should track your burn and gross margin to ensure your business is healthy.
  • Focus on getting users and figuring out how to monetize, with a business model similar to ancestry.com, recording revenue monthly and analyzing user behavior to determine if they will return.
  • Measure the paid acquisition cost of bringing in suppliers and focus on organic growth for both demand and supply sides, while experimenting with occasional spending on the supply side.
  • Break down small teams in theater and enterprise businesses for a successful go-to-market strategy, starting with a pilot.
• 💰
  32:17

  TLDR: During the pilot phase, customer acquisition cost is zero and the focus is on getting a contract with one or two customers, with the expectation of a huge annual contract value if successful.

Q&A

• How do I determine which metrics to track for my business?

  To determine which metrics to track, you need to identify your business model and how you plan to charge your users.

• What are the key metrics to track for enterprise business models?

  For enterprise business models that sell software or services to large enterprises, it is important to track three to four key metrics, such as recurring revenue, user retention, and ROI for user acquisition.

• What is the difference between bookings and revenue?

  Revenue is only recognized when the service has been delivered, while bookings refer to verbal offers for contracts that are not considered revenue until the service is provided.

• How do I measure the success of a subscription-based business?

  To measure the success of a subscription-based business, track metrics such as monthly recurring revenue, annual recurring revenue, and churn rate.

• What metrics should I focus on for e-commerce businesses?

  For e-commerce businesses, it is crucial to track metrics such as monthly revenue, monthly growth rate, and gross margin to ensure profitability on a per transaction basis.