One of the biggest mistakes you can make as a startup founder is to not define your key performance indicators (KPI) from an early start. For most people business success is some vague notion of generating an impressive amount of money, but this is not nearly concrete enough to give you any meaningful answer to the question of whether your business is doing well or not, and whether it is moving in the right direction defined by your values and goals.
Money, of course, is crucial, so some of your KPIs need to be related to the financial performance of your project. However, choosing what exact financial measures to keep your eye on and what to complement them with depends on your goals.
For example, if you are running a lifestyle business, then profitability should be your first concern. However, measuring how much time you spend working could be of equal importance.
Putting the two against each other could give you a very good north star for success to measure if you are moving your lifestyle business in the right direction. Any decision that increases profitability and decreases the amount of time and effort you need to put in is progress. At the same time, increasing the profitability slightly while dramatically increasing the amount of time you need to put in is most likely counterproductive based on the usual goals of a lifestyle business.
A tech startup is very different from a lifestyle business, so it makes sense to choose different measures of success.
In the early stages, your main concern as a startup founder is if your project solves a real market problem. While you are looking for product-market fit, some form of usability metric should be your north star. Financial metrics come second. If people are using your product increasingly, then you are moving in the right direction.
Once you find product-market fit and move onto the efficiency phase, then unit economics should be your main concern. Gross profit (income minus COGS) should be the thing that occupies your mind the most, as a healthy gross profit margin is required before you can start scaling operations.
Once your business has good unit economics it’s time to enter the growth phase. During this phase, your main concern is revenue and revenue growth. Focusing on profitability too much might be a mistake because it could slow down your growth. In the realm of innovative tech startups, this might allow other more aggressive projects to overtake you and win a bigger share of your market niche. For scalable tech solutions, this is very dangerous because they often exist in winner-takes-all markets.
Finally, once you take a comfortable position as a market leader in your niche, you can start thinking about profitability once again. That said, ignoring user behavior metrics would be a mistake. A fall in usage might mean that further innovation is required in order to remain the market leader.
In summary, choosing the right KPIs based on your business goals is the best way to make sure you are investing time and resources in your startup project wisely.