One of the most important improvements growth companies can make as they scale is to learn how to run their businesss by the numbers. Nearly every bootstrapped company eventually runs into scalability problems because it does not have an analytical understanding of what it does every day.
As investors in these types of businesses we love the scrappy, intuitive nature of bootstrapped entrepreneurs. They tend to be customer-responsive, capital-efficient, creative and hungry -- all great qualities for getting a business off the ground. But eventually 'gut feel' can no longer help you decide among several dozen potential ways to invest in growth.
This is where introducing metrics comes in. Scott Maxwell, who recently left Insight Venture Partners to form OpenView Partners in Boston, recently wrote a great post about metrics-based management for young companies -- a must read for entrepreneurs. My take on this follows:
Metrics are necessary to understand two primary relationships: how good you are compared to the market / the competition, and how good you are compared to how good you were before. If you can't get an objective measure of your sales productivity, or your marketing effectiveness, or the efficiency of your support organisation, you won't know whether they are improving or why. If you don't know this, you can't prioritise your investments or your time where they will drive the most growth.
Getting the right metrics -- while initially difficult -- can liberate managers to focus on the biggest bang for the buck. Good metrics also make it much easier to manage people, because you finally have an objective way of measuring performance, a baseline for establishing incentive plans, and a way to hold managers accountable.
Young companies usually find it difficult to establish the right operational metrics for two reasons:
- They are continually tweaking their operating models so pinning down a process long enough to measure it is hard; and,
- They often don't have the spare resources (COO, CFO, business analysts) to establish and track metrics.
But the benefit of starting early with a simple set of metrics which can be tracked over time (be it lead conversion, cost of customer acquisition, development productivity or -- one of our favourites -- gross profit per cost of sales person) is so huge that it is worth making the extra effort.
With metrics-based management, business improvements can be targeted where they will be most cost-effective. Investments in new people or projects can be compared to one another and prioritised. Looming trouble may be identified early, enabling corrective action. And a set of understood industry metrics (showing the right trend of course) can be shown to potential acquirers to quickly demonstrate fit with their business.
I'd love to hear from entrepreneurs who have successfully introduced metrics and to understand which ones they find most valuable. This is one are where a lot of good learning out to be shared.