A common thought process in todays startup world is product now, business model later. Successful startups begin by asking themselves, What’s missing?” or “What can I do to make this better and easier?”. If this is the reality, and startups are not financially driven, how can startups begin to identify where their company stands financially. While from the start a startup may not be in it for the money, business growth is not possible without it, and understanding your position is the first step.
Startups cannot approach analyzing their financial position the same way an established company does. There are just fundamentally too many differences. For a company that has already developed and implemented its business model, they look to their financials; the Income Statement, Balance Sheet, and Statement of Cash Flows. These reports tell how well a company is executing its business model. In the case with most startups, a business model is rarely known from the get go, so why would any of these help? Startups are focusing on their product first and foremost. For a startup without an established a business model, these financial reports would provide little much if any usable information. There are however a series of metrics a startup can utilize to get a better understanding of where it stands financially, and whether or not a business model they are trying to implement is working.
We can break analysis of a startup into five categories: Userbase, Customer Acquisition, Financial, Cash, and Web Metrics
Userbase
Customer Registration
Customer Activity
Active Customers/Registered Customers
Customers Retained 30+ days
Customers Retained 90+ Days
Customer Acquisition
Customer Lifetime Value
Advertising Expense
Viral Coefficient
Financial
Revenue
Contribution Margin
Cash
Cash Burn Rate
Months of Cash Left
Web Metrics
Total Unique Visitors
Total Page Views
Total Visits
Average Page views per visit
Bounce Rate
Traffic Sources
These financial and non-financial metrics will give startups a better understanding of where they are, and whether or not its time to pivot and move in a different direction. Financial Analysis does not have to be intimidating. You just have to know how to approach it.
Of course, this does not go to say financial statements are irrelevant in the startup community. Its more of a question of when do they play a vital role. Commonly they are asked for when seeking VC, or new investors. While the VC industry has come a long way, you must remember a large portion of those in the industry come from the finance industry where they believe the financial statements are the only proper overview of a company.
Lastly, I would like to emphasize that information discovered in these metrics alone is useless unless compared side-by-side with prior months. Startups should be consistently measuring the data they have available to them.