Vladimir Budejicky | Budejicky Management Consultancy
Founders are optimistic by nature. Nothing wrong with that. However, the same optimism is often the reason why founders seem to close their eyes for unfavourable performance indicators or good advice. A recent study shows that some very simple metrics can help to steer clear from disaster.
Chances are, when you ask a start-up founder how his business is doing, his or her response is going to be: “Great!” In fact, you’ll have a hard time finding one who says: “We’re being crushed on [some problem] and frankly, no, things are not great”.
A start-up is the culmination of the dreams and hopes of a founder. It is a baby that has to be nurtured and nursed to the dimensions envisioned by the founder. Founders are optimists, and to make matters worse, quite often they feel compelled to paint a nicer picture than what really is happening. Sugar-coating it. Because nobody wants to be the one founder in trouble. Well, trust me, you are not alone.
The thing is, there is always some minute, unimportant but apparently positive event to report. For example: (a) we have a new door mat, (b) we started ordering lunch from A instead of B, or (c) I stopped by a really cool place to look at new office space.
Next, we have the events that never actually took place, only in the imagination of the founder – or so one would hope. Here goes: (a) we are talking to investors, closing a huge loan, (b) I had a meeting with [important company] and they will implement our platform, (c) blablabla.
Then, of course there are those founders who “partner” a lot. Do yourself and me a favor and run away as fast as you can, even if it means jumping through windows. Simply put, “partnering” is useless 99% of the time. Don’t bet on the 1%. Give me a quick call to find out what really is important; we’ll be done in under a minute. I promise.
All these futilities lure founders in to thinking they are making progress of some sort. As an extra malus, it prohibits you to obtain useful feed-back or advice.
All right, all kidding aside now. We already knew that a successful start-up is a rarity. Most of them fail pretty quickly, despite the positive words of the founders.
A recent cohort analysis among SaaS start-ups revealed that the average MRR (Monthly Recurring Revenue) is USD 19000. It would be easy to be disrespectful of this number. One never knows what the actual situation in the company is. For a founder working alone and part-time, while in a second job, this may be simply great.
Here is the problem: the same cohort analysis also showed that the average team size for the same SaaS start-ups was 12. Nineteen thousand dollar and a head count of 12.
A short word of caution though. Without really knowing the populations that were studied in the analysis, it is still a little tricky what the numbers exactly mean. However, this should hardly be any relief: if you assume you are one of those founders, by statistics, the odds are pretty good that that’s the situation you are in.
Since many start-ups are some kind of SaaS or “something else as a service”, it is safe to say these numbers can be extrapolated to the whole start-up family.
As a bonus, another statistic emerged from the SaaS start-up analysis: the AUC (Average User Churn) per month is 7.7%.
And, again, taken at face value, the percentage actually looks just fine (low). But if you look a little bit better, it means no more and no less than that at the end of the year, you lost all your paying customers.
So, to report some growth to your investors (assuming you have investors) you’ll have to re-acquire ALL of your customers, AND then the ones you will call growth.
Something is really, terribly wrong if those numbers don’t change for the long term. The market is simply not large enough to sustain such churn percentages. In that case, you should take this as proof that you have not reached product-market-fit.
Unfortunately, both phenomena (low revenue/head ratio and high churn) are omnipresent among start-ups.
Back to square #1. Back to product-market-fit. Moreover, stop faking success, start taking advice in to consideration.