February 14, 2022
Finding the right North Star metric as an early startup is one of the most pivotal — and difficult — moves a team must make. And while the right metric depends on your business, the wrong metric is almost universally clear: revenue.
Over the years I’ve seen 3 perverse incentives develop when revenue is prioritized too soon. Today I’m sharing what those are:
1. Customer satisfaction declines, leading to higher churn
Customer satisfaction is more important than customer growth early-on. But if revenue is your North Star metric, you are prioritizing customer growth and likely growing your sales team ahead of your customer success and support teams. Aside from the fact that your early customers are going to need a lot more hand holding, it’s also your early customers whose testimonials and retention will give you the highest leverage. Future customers will want to talk to your early customers for references, as will future investors. Even just one negative reference from an early customer can be crippling. What’s worse, getting a customer back is 100x harder (if not impossible) versus closing them the first time. Revenue as a North Star metric more often than not creates a leaky bucket scenario where you continue to feed high quality leads, prospects and customers into the top of the funnel, only to have them churn out because you don’t have the processes in place to support them.
2. High acquisition rate = increased technical debt
At the early stages you should be laying the foundation on which you can rapidly scale — this means balancing short-term needs inherent in startups with long-term planning evident in the strongest ones. If revenue is your North Star metric, however, you will be focused on getting your product in the hands of more users more quickly rather than building that foundation. When I’ve seen companies do this, it usually plays out the same way: they are initially able to get away with it and grow fast. But eventually it manifests as poor performance for users, security issues, inability to support integrations, etc. And the time it takes to dig out of technical debt is always more costly than if the company had just prioritized its tech stack in the first place.
Side note: Cutting corners isn’t always a bad thing when it comes to product and engineering. But be very clear about when you’re doing it and why. For example, when launching a new product or feature, ask, “what is the minimum scope of the product that can validate the feature and deliver a great experience?” Think big, but deliver on small functionally viable increments. Then once you validate the product or feature, invest in building a strong tech stack that can support long-term growth.
3. Employees lose morale, culture suffers
Most importantly, early-stage companies that prioritize revenue often struggle to retain employees and maintain a positive culture. At the seed stage, closing new customers is usually inconsistent — there will be months when the team is “killing it” and others when customer acquisition is zero. If every employee at your company is dialed into revenue as the most important metric, the months when you don’t close any customers will be demoralizing. Your employees are working as hard as they can and if they begin to feel their hard work isn’t paying off, it spurs a “cultural landslide”. Strong employees find the exit doors quickly, making it harder to attract A+ recruits. No one wants to join a sinking ship and if your team thinks revenue is the most important metric at the seed stage, you’re almost certainly setting them up for a Titanic-like experience. And, more often than not, a Titanic-like outcome.
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The exception to all of this is about 3–6 months before your next fundraiser. Ideally you will be fundraising off at least a few months of sustained revenue growth. Investors will want to see you’ve started to nail PMF and now need more capital to scale. However, they will care about a lot of your metrics, not just revenue. By not having solely optimized revenue for the last 12–18 months, you’ll be in a good position with happy customers who can give glowing references, a strong technical foundation and a growing team of all-stars.
My advice for choosing your North Star metric in the early days is to find a metric that captures user experience. What makes a customer happy? What makes a customer love your product? How do your customers get value from your product? Measure that metric to start. It will likely change and evolve over time but by placing a stake in the ground, you will learn and get closer to finding and measuring the right metrics.