GROWTH = 2 % ∗ KPIS KNOWN + 3 % ∗ KPIS USED − 17 %
It seems like we’ve found the secret sauce to growth for early-stage startups. The result of our thesis can be seen in the title, and it is supported by a correlation of 80%, so fairly strong!
But let’s take this from the beginning: It all started about a year ago when I read an article on TechCrunch by the investor Phil Nadel, claiming that:
I found that the statement made sense, but I couldn’t find any studies that would support his argument. That gave me the idea for my Master Thesis, where Colombe Godeluck joined me as a partner. We started off researching the subject to look at how KPIs are used, and the role management accounting systems (such as KPIs) play in startups. During our research, we found several other success factors of entrepreneurship:
Experience — Entrepreneurs with previous entrepreneurial experience seem to perform better, also managing and industry experience improve performance.
Social skills — High performing entrepreneurs score better in sociability tests, and they stand out with their high self-confidence.
Financial literacy — Young entrepreneurs with good financial literacy that generate financial statements more frequently have a lower loan default rate.
As a next step, we put together a survey and asked digital early-stage startups all over Europe to respond. We searched for companies who had experienced a constant monthly revenue stream at least a year and a maximum of two years at the time of the study. We finally found 12 fantastic founders who were willing to supply their data to us so we could pursue the study (you know who you are, thanks!!).
The founders were asked multiple questions regarding four areas:
Background, such as studies, entrepreneurial experience, funding etc.
A test to see how many of KPIs relevant for digital startups that they know.
Depending on their revenue model (subscription or commission) they had to report which relevant KPIs they measure regularly. For example Churn, Monthly Recurring Revenue, Conversion Rate, Average Order Value, Gross Merchandise Volume.
Revenue per month for the last 12 months.
According to our study, it seems like key performance indicators influence the growth of startups during the first few years. We discovered that the strongest correlation is found when combining knowledge and use of KPIs as we obtained a correlation of 0.8 and an adjusted R-square of 0.5. Ultimately, it is not only important to know KPIs but also to use them regularly. Our results suggest that understanding an additional KPI increases the average monthly growth by 2 percentage points while systematically analyzing an additional KPI increases it by 3 percentage points.
Though, the study indicates that a sound knowledge can compensate a bit lower use of KPIs and vice versa. It seems like KPIs do not only have to be a part of a startup’s formal process but can be compensated by founders being curious and conscious of them during the decision-making process. In other words, KPIs should rather be a part of both a company’s culture and the formal processes, even though strength in one can to some extent compensate for the other.
Startups that use a data-driven approach when studying customer behavior are rewarded with higher growth rates. Possibly, these companies use their KPIs to understand their customer and therefore develop an exceptional product with improved stickiness compared to their peers.
Our study confirms that management systems have an important role in the survival and development of a startup and that formal procedures achieve efficiency, resulting in higher growth rates. Opposite to what some researchers consider, it seems not to be sufficient to only rely on personal controls even though an organization is small. When innovating markets, models or products, startups appear to profit from an increased knowledge and use of KPIs.
Among the startups, 75 % of the founders had previous experience from a startup. We were, unfortunately, unable to statistically confirm that experienced entrepreneurs overperform, even though all respondents performing above average had previous experience. Another interesting fact is that the experienced entrepreneurs tended to use more KPIs than their peers without experience.
We also asked the founders how many times per year they performed a financial statement. Surprisingly, there was a slight negative correlation between growth and the frequency of financial statements. That brings up the question however traditional accounting is suitable for business models found among innovative startups.
Based on the result, several recommendations can be advanced. Understanding of KPIs should be a priority in the ecosystem, and the knowledge should be passed on to new entrepreneurs, as it today appears to be the serial entrepreneurs that are the best at analyzing KPIs. Implementation of KPIs should be of importance to entrepreneurs and investors; hopefully, this study can lead to that entrepreneurs are motivated to learn more about and measure KPIs regularly. To achieve this, stakeholders within the ecosystem of startups should take responsibility, might it be investors, incubators or governmental organizations, to train and motivate entrepreneurs in performance improvement.
According to the European Startup Monitor, 88 % of startup founders consider revenue growth to be important, but less than one third are happy with their growth. For the remaining startups who want to improve their growth, they might be motivated to overlook their understanding of KPIs and corresponding processes to hopefully enhance their growth to a satisfying level, according to the findings of this study.
The European Investment Fund’s latest report, the average yield on investments in startups was only 1.16x, with a failure rate of 70 %. It should be of interest to investors to learn more about the critical success factors, such as KPIs, of their investments. In 2016, €7.9 billion was invested in venture capital funds, but if it keeps on yielding low returns, investors might start to look elsewhere for investments. That would be hurtful for the financing of future venture capital and startups, including the innovation that they yield. Knowledge about the critical success factors of startups, as KPIs in this study, could potentially improve the returns on the venture capital investment market which in turn would benefit innovation and entrepreneurship.
“We find there is a direct correlation between the depth of a founder’s knowledge of the company’s KPIs and the company’s success. First, founders must demonstrate they understand which metrics are important to their business. Second, they must demonstrate they are properly measuring and calculating those metrics. Finally, they must know which levers to pull to affect each KPI and which KPIs need to be tweaked for the business to succeed.”
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