In the modern digital age, a founder is never starved for data. You can track page views, button clicks, email open rates, and server load times. You are drowning in numbers. The problem is that most of these numbers do not actually matter. To navigate the noise, you need to filter for the Key Performance Indicator.
A Key Performance Indicator (KPI) is a measurable value that demonstrates how effectively a company is achieving key business objectives. It is the compass that tells you if you are moving toward your goal or just spinning in circles.
For a startup, a KPI is not just a reporting tool. It is a focus tool. It aligns the entire organization around the specific outcome that defines survival and growth for that specific stage of the business.
Vanity vs. Actionable Metrics
#The most common trap for new founders is the allure of vanity metrics. These are numbers that go up and to the right and make you feel successful but do not correlate to business health.
Examples of vanity metrics include:
- Total registered users (including those who never logged in)
- Social media likes
- Page views
Actionable metrics are different. They reveal the truth, even when it is painful. They cause you to make a decision.
Examples of actionable metrics include:
- Daily Active Users (DAU)
- Customer Acquisition Cost (CAC)
- Monthly Recurring Revenue (MRR)
If a metric does not change how you behave, it is not a KPI. It is just a statistic.
Leading vs. Lagging Indicators
#To effectively steer a company, you must understand the difference in timing. KPIs generally fall into two categories: leading and lagging.
Lagging Indicators tell you what has already happened. Revenue is a lagging indicator. Churn is a lagging indicator. By the time you see the number, the event is over. You cannot change the past.
Leading Indicators predict the future. They measure the input activities that are likely to produce the desired output.
For a sales team, the revenue number is the lag. The number of product demos booked this week is the lead. If demos drop today, revenue will drop next month. Founders need to obsess over leading indicators because those are the levers you can actually pull in real time.
The Danger of Goodhart’s Law
#There is a famous concept in economics called Goodhart’s Law. It states that when a measure becomes a target, it ceases to be a good measure.
If you make “lines of code written” a KPI for developers, they will write bloated, inefficient code just to hit the number. If you make “average call time” a KPI for support agents, they will hang up on customers to keep the time down.
Founders must be careful. When you set a KPI, you are incentivizing behavior. You must ask yourself how that incentive could be gamed or how it might accidentally damage the customer experience.
The Rule of Three
#You cannot focus on everything. If you have twenty KPIs, you have zero KPIs.
A good practice is to limit the company to three primary KPIs at any given time. This forces you to prioritize. It ensures that every employee, from the intern to the CTO, knows exactly what defines winning for the quarter.