- The speaker discusses the importance of tracking metrics based on the business model.
- There are nine business models, and most companies will fit into one of them.
- For an enterprise business model, the metrics to track are bookings, total number of unique customers, and revenue.
- For a SaaS business model, the metrics to track are MRR (monthly recurring revenue), ARR (annual recurring revenue), churn, and paid CAC (customer acquisition cost).
- For a subscription business model, the metrics to track are monthly growth and unit churn.
- It is important to avoid common mistakes such as confusing bookings and revenue, using ARR without having recurring revenue, and including non-recurring revenue in MRR calculations.
- Paid CAC should be measured for paid marketing efforts.
- Growth may occur in spikes at this stage, and it is important to pay attention to user retention and acquisition.

- It is important for startups to measure compounded monthly growth rate since launch to accurately track growth.
- Founders often make the mistake of using averages to measure growth, which can be misleading.
- Transactional businesses, like fintech companies, should focus on measuring gross transaction volume and net revenue.
- User retention is crucial for transactional businesses, as it indicates the success of the platform.
- Marketplaces, such as Airbnb and eBay, should track GMV, monthly growth rate, and user retention.
- E-commerce businesses should monitor monthly revenue, gross margin, and paid CAC.
- Common mistakes include confusing gross transaction volume with net revenue and not accounting for all costs in gross profit for e-commerce.

- The speaker discusses different business models, including e-commerce, advertising, and hardware.
- They emphasize the importance of including all costs in pricing products, not just the cost of the item itself.
- In the advertising space, the focus should be on daily active users, monthly active users, and percent logged in.
- It is crucial to define what "active" means for your app and to hold yourself to that metric.
- For hardware businesses, monthly revenue, compounded monthly growth rate, gross margin, and paid GAC are important metrics.
- The speaker advises against using cumulative charts and emphasizes the need to label the y-axis and maintain consistent y-axis scales.
- They also stress the importance of being honest, measuring accurately, and fixing problems.
- For community businesses, the focus should be on tracking daily and monthly active users and monitoring their behavior.
- When seeking investment, the most important factors are the founder's unique insight and the potential for the company to become big.
- Founders should track burn (cash flow) and gross margin early on to ensure the health of the business.
- The speaker suggests focusing on getting users and determining how to monetize before worrying about additional revenue.

- The speaker suggests that businesses like Ancestry.com should monitor both customer engagement and revenue.
- They recommend recording revenue as the revenue for that specific month, and analyzing customer behavior to determine if they are returning.
- For user acquisition, the speaker emphasizes the importance of measuring the paid acquisition cost for bringing in suppliers.
- In the early stages of an enterprise business, it is recommended to start with small teams or a pilot before expanding to larger customers.
- The speaker acknowledges that determining a good customer acquisition cost is difficult, but suggests comparing it to the lifetime value of the customer.

The speaker emphasizes the importance of tracking metrics based on the specific business model. They discuss different business models such as enterprise, SaaS, subscription, transactional, marketplaces, e-commerce, advertising, hardware, and community businesses. They provide specific metrics to track for each model and highlight common mistakes to avoid. The speaker also advises on the importance of accurately measuring and fixing problems, as well as tracking burn and gross margin early on. They emphasize the need to focus on user acquisition and engagement before worrying about additional revenue. Additionally, they suggest comparing customer acquisition cost to the lifetime value of the customer.

YC Continuity Partner Anu Hariharan breaks down the important metrics we look for when we’re evaluating a startup’s business model and common mistakes to avoid when measuring them. 

Lecture slides and Transcript can be found here: https://www.startupschool.org/videos/66

Find more Startup School and YC content at https://www.startupschool.org/library.

Thank you all for having me and it's so awesome to see so many of you at 9 a.m.

So let's hope we keep you engaged till the end of the session.

So how do we think about what metrics to track?

And our advice is find out which business model you fit in.

You know, the most common thing people do is which industry vertical are you in?

But that's not really the best way to think of metrics.

The best way to think of metrics is, how do you plan to charge your users?

And which of these business models do you fit in?

I mean, I would say 99% of you should fit into 1 of these categories.

If you don't, you're probably building something that's incredibly hard, which is what we call moonshot.

So I'll walk you through for the rest of the presentation on each business model and what 3 or 4 metrics you need to track.

Beyond 3 to 4, honestly at this stage is an overkill.

So these are the things that would matter.

This is a company that sells software or services to a large enterprise.

So I would imagine very few of you are planning to launch something from day 1 that sells to say Facebook or Google or Apple or any of them.

But if you are 1 of those companies, examples are like Docker, Cloudera, FireEye, even in the YC portfolio, there are very few that did that from day 1.

But if you're 1 of them that sells to large enterprises, you would characterize yourself in this category.

And the large enterprises tend to work in terms of contracts.

So your business model will come into 3 things, which are the 3 metrics you track, which is bookings.

So if you're working with say, Facebook, they'd say, hey, you're gonna help us hire X engineers, we'd like to sign a $100,000 contract for next year.

So that's why you'd say, what is my booking?

What's the total number of unique customers I have?

The difference between booking and revenue is Facebook might sign a contract ahead of time, would tell you at the start of the year that it's 100,000 Forex hires over the year.

That doesn't mean you recognize revenue straight away.

You recognize revenue only when you've delivered the service.

Either you've placed all the hires that you set in your contract, or if it's an annual contract, you just divide it monthly.

So the common mistakes we see founders do is confusing bookings and revenue.

You know, they would have signed contracts, but they haven't delivered anything, the contract hasn't even kicked in, but they're already reporting it as revenue.

That's not true because you haven't delivered service, so therefore it's not revenue.

And so you should hold yourself accountable for that, like the company is not generating revenue.

The second common mistake, which is probably more relevant at the stage that you're in is, you know, Facebook might have verbally told you, I will consider a 100K contract, you know, for them 100K is not a big deal, for a lot of you it's a really big deal.

That's neither booking nor revenue because it's a verbal offer.

So the other, even if they sign a letter of intent, it means nothing.

So you really have to have the contract written down, signed for it to be bookings, and for revenue only when you start delivering it.

The second business model is SaaS, which is probably where most of you fit in, especially if you're in B2B or servicing to other companies, you're all probably thinking of SaaS model.

You see a number, all these YC startups, Segment, Ironclad, Sandbird, they all started with SaaS model right from day 1.

SaaS is software as a service in terms of business model.

You charge something monthly for a software that you provide.

So what are the 4 key metrics you would want to track?

Well, if it's subscription, by definition, the revenue is recurring, which means if you hopefully have built something that people really like, they'll continue to use it, and they pay you every month.

So that's why you track MRR at the highest level.

How much are you making monthly and what did the customers commit to it?

Because of this phase, you're really growing fast.

You may be growing 30% week over week or 40% week over week.

So it's helpful to track your annual recurring revenue as literally run rate.

So if this month you made 30,000 in MRR and if it's truly recurring you should expect that your annual recurring is 12 times that.

So it's just a good metric to use internally as well, because it helps show the pace rather than just looking at absolute.

The third thing you should pay attention to is chart.

So when you launch, there'll be few users who are early adopters that use it, but you really should be paying attention to if they stop using it, right?

And if you're a subscription business, the chances are you probably make $5,000 to $10,000 a month from 2 or 3 customers or maybe even 10.

So losing a customer means real impact on your revenue.

And so this is why we recommend measuring something called gross MRR churn, which is how, say at the start of the month, you expected your monthly recurring revenue to be $10,000, but 1 customer churned and they were paying $3,000, then that's your gross churn, $3,000 by $10,000.

So don't blend it because you're obviously acquiring new users, And if you measure blended, your numbers still look great, because you're growing a lot.

But you're not paying attention to users that you're losing.

And it's really important to learn from users you're losing, which is why we ask you to measure the churn.

Hopefully, almost all of you are acquiring users organically.

I wouldn't recommend doing any paid acquisition at this stage.

But if you do start doing some experiments where you say, hey, I'm going to do a little bit of paid marketing or advertising to get a few customers, then you should measure what was the cost to get that user through paid mechanism, which is literally saying, if I spent $10,000 on Facebook or any other channel that you used and you got 5 customers from that channel, how much did you pay for that?

2 really common mistakes and this happens again and again even spite of like highlighting it which is ARR literally stands for annual recurring.

If you don't have a recurring business, which is you don't charge subscription, your customers are not committing to 12 months of payment, you don't have a recurring revenue business.

So internally, if you start calling it ARR, everyone thinks, oh, it's repeat business.

It's not, because you have to go back and acquire them each month or you have to have you know you have to work with your customers to make sure they pay every month.

So the most common mistake is people, instead of saying annual run rate, which actually is not very useful even to gauge your business, if you use ARR, be absolutely sure you have recurring revenue.

And the second mistake people make is when they would say, oh yeah, it's recurring revenue, but actually the customer would have committed to only 1 time payment.

Or you know, you may have done a consulting project and It's not really clear whether they're going to pay second month or third month, but they would still include it as MRR You know, it's not make sure you're including only what's truly recurring where the customer has said I'm signed up for a 12 month or a 6 month annual plan and this is what I'm paying.

This is probably more relevant for consumer businesses.

So if you Dollar Shave Club, Blue Apron, Athletic, there are lots of companies, especially subscription as a service is becoming so popular in consumer right now.

It's very similar to SaaS, but it has a slight nuance.

So similar to SaaS because you have MRR, which is recurring, right?

You may have signed up a Netflix annual subscription.

The 2 differences is instead of looking at ARR or any of that, we actually say, measure your monthly growth and unit churn, not dollar churn, why is that?

Because if you're selling to companies, usually your subscription has more value, right?

So there if you lose a customer, the impact on revenue is a lot.

So you should really look at revenue churn.

If you Look at Netflix, everybody pays $7 or $10 per month.

So it's about volume of customers, which is why we say pay attention to growth, because you need to make sure that the number of users using Netflix continues to increase.

And you measure unit churn, because if you lost a customer who's paying $10, it's $10.

But if you lost 1,000 customers paying $10 each, that's significant, right?

So which is why we say measure gross unit churn, versus if you're a SaaS business selling to companies, measure revenue churn.

And paid GAC is very similar, like the last time, which is make sure if you're spending paid marketing, measure the cost associated with acquiring those users.

So when you are at this stage, you will tend to grow in spikes.

Next month, you may grow another 90%, right?

That's natural, because you're learning, you're iterating, and you're trying to figure out what really resonates with the user.

So what's really important is to make sure that since launch, since the month you started acquiring users, you measure compounded monthly growth rate, so which is the current month divided by the first month and decrease that growth rate proportionately for the number of months since launch.

What founders often do as mistake is they would just do the average.

So they would do 90% this month plus 10% second month plus 80% third month.

It makes your growth look good because you had some spikes.

Because these won't be problems when you are 2 or 3 people team, you know, but hopefully you all will scale and we'll start hitting 10 people team.

And then when you set goals, someone will be very happy that it's 50% growth rate, but that's because you're measuring growth wrong.

This is probably more new, new in the sense that's happened in the last 8 to 10 years.

And again, you see that with Stripe, PayPal, Coinbase, Brex, a lot of fintech companies, especially fall in this category.

Which is, if you're in the, say, fintech or payment space, you probably process a lot of payments volume, right?

They power the payments for most startups and so every startup's payment volume goes through Stripe.

But Stripe collects a fee for the transaction.

So if you're a type of business that processes someone else payments volume, then you should put yourself in the transactional bucket.

So the gross transaction volume is the TPV or the total payments volume that flows through the platform.

So if Stripe had 30 customers at your stage and all 30 customers were processing say 100 million in TPV but it all went through Stripe, that's TPV.

Revenue is what goes to your bank account.

So that's your cut, which is why it's called net revenue.

So the portion of transaction volume that you make, so Stripe would say, hey, I charged 2.5% for the payment volume that flows through my platform.

The 2.5% is the net revenue that they take.

If you're in the transactional business, it's very common that you'll have lots of customers.

So within a year of launch, you could even have 2,000 customers.

Then the important metric to track is user retention, because you want to make sure that 6 months after they're using you or 12 months after they've started using you hopefully they're still using you.

Unless you've gone out of business, there should be no reason they're not using your platform.

Like, imagine if someone stopped using Stripe.

So that's why it's really important to measure your cohort retention on a monthly basis if you're a transaction business.

And paid CAC is very similar to what, in all cases it's the same thing, just measure from paid channels.

But again, as I said, hopefully none of you are doing paid marketing.

Confusing gross transaction volume to net revenue.

As I said, if you are processing 100 million in transaction volume, that's not net revenue, that's not the cash that hits your bank.

2 and a half percent of the 100 million hits your bank, that's a much smaller number.

So you should really make sure what you call revenue is this transaction volume.

And I've often seen founders here sometimes come up with like, oh, but I process the volume.

Net revenue is literally the cash you make in the bank.

And then user retention is a cohort metric.

It's not like, oh I retain 30% of my users.

Even for you it should not because if you're powering payments you should say, well 40% of my customers have used it consistently for the 12 months since they joined us.

It looks like transaction, but it's different.

It's typically used by consumer companies.

So Airbnb, eBay are all good examples of marketplace.

Guests go to the platform, select a room, book it, the host is happy.

So what are the 3 or 4 metrics that matter here?

So when the guest books the room, you know, the host might say it's $100 per night and so the $100 per night say they say 2 nights, it's $200.

But that's not net revenue, because Airbnb doesn't make the full $200.

Airbnb probably makes 12% of that, right?

So 12% of that $200 is what you'd classify as net revenue.

2 other metrics, again, similar to the other models that we talked about you want to track here is compounded monthly growth rate.

If you see this is a more important metric for consumer businesses right because volume of consumers matter and therefore it's really important to track your monthly growth rate in a compounded way so you can keep yourself honest how you're growing.

And similarly, when it comes to consumer businesses, you should pay attention to user retention, not necessarily dollar retention, because the volume of users matter.

So here, you would say, what percentage of customers came back to Airbnb or Airbnb retained 6 months or 12 months from now.

Now in Airbnb's case, how often do people travel?

So how should they track, when should they be happy, when should they be sad?

Yes, so if you imagine when Airbnb was going through YC and they could see their cohort repetition once a year, how are you gonna know you're doing a good, building a good business?

Will you wait 12 months to check whether your customers are coming back?

No, so this is where you have to get creative.

And the way to get creative is reflect on your user behavior.

So if you're going to book something, hopefully someone who's traveling is not booking the day before they're traveling.

They start doing research 6 months before.

And so what they would track is if you, as users, came back to at least search for a city or a booking 6 months.

So in this stage of your startup, what's most important is to really be truthful and honest about how you want the users to behave and come up with those retention metrics to measure if your business is really healthy?

And are you seeing what you want to see from your users?

This was especially acute for Airbnb, because they didn't pay anything for demand side, right?

They were really good designers, very good storytellers.

But they had to pay to acquire a host, because guess what?

No 1 was ready to let their homes to strangers.

So they had to work hard, which was advertising around events.

So they had to spend few dollars on acquiring hosts pretty much very early on.

So the number 1 mistake founders tend to do here is, you know, you're acquiring a bunch of users organically and some users through paid, and you'll blend everything.

You'll say, I acquired 100 users this month, and so my CAC was 12.

But what had happened was if you truly measured who you acquired from paid advertising channel It could be as high as 70 And so you have to ask yourself, is it sustainable?

Are you really seeing the ROI in paid channels?

So if you are in an unusual situation like Airbnb, where your business frequency is not very high because people use once a year, and you have to pay to acquire a host, it's really important to pay attention to where your money is going and whether you're getting a good ROI from that.

E-commerce is, you know, literally you have certain goods to sell, you're selling them online, people are ordering it.

Wabi Parker, Bonobos, Mimibox, a lot of them, that's what we would characterize as e-commerce, which is you make the products or source the products, but ultimately it's your brand, and someone's coming to the brand to purchase it.

So here again, it's a consumer business, you track monthly revenue.

Notice there's no recurring, no subscription, it's just revenue because people might buy a product this month, they may not buy it next month, right?

Because it's consumer business again, very important to track your compounded monthly growth rate.

For e-commerce, even from day 1, it's important to track your gross margin.

Because you either make the good or you're sourcing it and branding it under your name.

So it's important to understand what it takes, what is your cost to get the good, so that you're making some profit on a per product basis.

And it's more important for e-commerce because it's not a recurring business, right?

So you have to make sure that you're able to make money on a per transaction basis.

So which is why gross margin is important to track.

Paid CAC very similar to all the other examples.

Common mistake, gross profit for e-commerce is not accounting for all costs.

Now, Amazon does a great job of this, and people often say, oh yeah, they have very thin margins.

But actually, it's net margin of all costs.

And so if there's high volume, net margin times high volume is a pretty good EBITDA business which you can use to funnel for future investments.

So the common mistake we see here is in e-commerce as people would say, oh say I bought you know a clip and we know the cost of the clip is $10.

They wouldn't include shipping costs, they wouldn't include customer processing costs, they wouldn't include payment processing costs.

All that is important because if you don't include those costs, you're probably pricing it wrong.

And so it's so important that you're pricing it wrong pretty much from first transaction.

We see far fewer companies in the advertising space these days.

But if you happen to be in that space, then you know the common companies that are analogs for you are Snapchat, Twitter, Reddit.

They all have a huge social network that come to their site for different reasons, but the primary monetization model is advertisers advertise there, and companies make money from advertisers.

So at this stage, because you probably will never be monetizing if you're in the advertising business, it's all about the users.

And so when it comes to users, there are really only 3 things that matter.

Daily active, monthly active, percent logged in.

So who are the users who use your app daily, monthly active, who use it monthly, and then percent logged in as actively logged in using a username and password.

The common mistake, and I'll give many examples of this.

So there was a company I think 3 or 4 years ago that reported a daily active usometric and I remember asking them what is active?

And you know I had some sense of like maybe it was somebody who read, engaged, whatever.

And this founder answered, well, those are the emails I sent.

Active, again, It goes back to the Airbnb example.

You should define what you want your users to behave like when using your app.

So if you're building a news app, does it mean reading counts as active?

Does it mean commenting counts as active?

And so if you don't define that, you could be building something that has no stickiness and probably you're going to have users that are winding down pretty quickly, and it's not worth it.

So make sure you really define what active is and hold yourselves to that metric.

It's again very similar to e-commerce because at the end of the day they're selling a device.

So if you're Fitbit, GoPro, Xiaomi, you know we'd say you're in the hardware bucket.

As you can see it's very similar to e-commerce where you look at monthly revenue, compounded monthly growth rate, you look at gross margin really carefully, hopefully you're making profit from day 1, and then paid GAC.

Okay, so those are the 9 business models.

And 1 last thing I'd leave you with before I open it up to questions is common mistakes.

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Anu Hariharan - Nine Business Models and the Metrics Investors Want