17 Essential Metrics for Evaluating a Startup: How to Calculate Them ?

Evaluating the potential success of a startup can be a daunting task, but there are key metrics that can help investors make informed decisions. In this blog, we will explore the 17 most important metrics that are commonly used to evaluate startups and how to calculate them.

From revenue growth to customer acquisition costs, these metrics provide valuable insights into a startup's performance and potential for growth. By understanding and tracking these metrics, investors can make data-driven decisions when it comes to funding and supporting startups.

Join us as we dive into the world of startup metrics and discover the key indicators that can make or break a startup's success.

1. Revenue:

Revenue (or Total Revenue) is the total amount of money earned from providing products or services. The formula to calculate Revenue is: Revenue = Quantity of products or services sold x Average selling price.

Example: Company X sells 100 products at an average selling price of $50 per product in Q1. Therefore, the Revenue of Company X in Q1 is: Revenue = 100 x $50 = $5,000.

2. Profit:

Profit (or Net Income) is the amount of money earned after deducting the costs of providing products or services, including labor costs, shipping costs, advertising costs, and other expenses. The formula to calculate Profit is: Profit = Revenue - Total costs.

Example: Company Y has a Revenue of $10,000 in Q1, labor costs of $2,000, shipping costs of $500, advertising costs of $1,000, and other costs of $500. Therefore, the Profit of Company Y in Q1 is: Profit = $10,000 - $4,000 = $6,000.

3. Number of Customers:

Number of Customers is the total number of customers using the products or services of the company.

Example: Company Z has 500 customers using its service in March.

4. Customer Retention Rate:

Customer Retention Rate (or CRR) is the percentage of customers using the products or services of the company over a certain period of time.

The formula to calculate CRR is: CRR = Number of retained customers / Total number of customers.

Example: Company W has 1,000 customers in January, and retains 900 customers in February. Therefore, the CRR of Company W in February is: CRR = 900/1,000 = 90%.

5. Customer Lifetime Value:

Customer Lifetime Value (or LTV) is the average amount of money that a customer spends on the company's products or services over a certain period of time.

The formula to calculate LTV is: LTV = 1 / Churn rate.

Example: Company V sells products at an average price of $100 per product, and the average customer uses the company's product for 5 years before switching to a competitor's product. Therefore, the LTV of Company V's customer is: LTV = 1 / 0.2 = $500.

6. Customer Acquisition Cost:

Customer Acquisition Cost (or CAC) is the total cost of acquiring a new customer.

The formula to calculate CAC is: CAC = Total cost of acquiring customers / Number of new customers.

Example: Company U spent $10,000 on advertising and marketing in March, and acquired 100 new customers. Therefore, the CAC of Company U in March is: CAC = $10,000 / 100 = $100/customer.

7. Conversion Rate:

Conversion Rate (or CR) is the percentage of potential customers who become actual customers of the company.

The formula to calculate CR is: CR = Number of new customers / Total number of potential customers.

Example: Company T attracted 500 potential customers and gained 50 new customers. Therefore, the CR of Company T is: CR = 50 / 500 = 10%.

8. Revenue Growth Rate:

Revenue Growth Rate (or RGR) is the percentage increase in revenue compared to the previous year.

The formula to calculate RGR is: RGR = (Current year Revenue - Previous year Revenue) / Previous year Revenue x 100%.

Example: Company S had a revenue of $100,000 in 2020 and a revenue of $120,000 in 2021. Therefore, the RGR of Company S in 2021 is: RGR = ($120,000 - $100,000) / $100,000 x 100% = 20%.

9. Gross Margin:

Gross Margin is the ratio of Gross Profit to revenue. Gross Profit is the profit earned after deducting the cost of producing goods or services.

The formula for calculating Gross Margin is: Gross Margin = (Revenue - Cost of Goods Sold) / Revenue x 100%.

Example: Company R had revenue of $50,000 and cost of goods sold of $20,000 in the first quarter. Therefore, the Gross Margin of Company R in the first quarter is: Gross Margin = ($50,000 - $20,000) / $50,000 x 100% = 60%.

10. Churn Rate:

Churn Rate (or CR) is the percentage of customers who stop using a company's products or services within a certain period of time.

The formula for calculating CR is: CR = Number of Customers Who Churned / Total Number of Customers.

Example: Company Q had 1,000 customers in January, and 50 customers stopped using its products or services in February. Therefore, the CR of Company Q in February is: CR = 50/1,000 = 5%.

11. Average Order Value:

Average Order Value (or AOV) is the average value of an order.

The formula for calculating AOV is: AOV = Revenue / Number of Orders.

Example: Company P had revenue of $10,000 in March and 200 orders. Therefore, the AOV of Company P in March is: AOV = $10,000 / 200 = $50.

12. Inventory Turnover:

Inventory Turnover is the number of times the inventory is sold during a certain period of time.

The formula for calculating Inventory Turnover is: Inventory Turnover = Revenue / Total Inventory Value.

Example: Company O had revenue of $100,000 in the first quarter and inventory value of $20,000. Therefore, the Inventory Turnover of Company O in the first quarter is: Inventory Turnover = $100,000 / $20,000 = 5.

13. Return on Investment:

Return on Investment (or ROI) is the ratio of profit to the initial investment.

The formula for calculating ROI is: ROI = (Profit - Initial Investment) / Initial Investment x 100%.

Example: Company N invested $10,000 in an advertising campaign and earned a profit of $15,000. Therefore, the ROI of Company N is: ROI = ($15,000 - $10,000) / $10,000 x 100% = 50%.

14. Customer Satisfaction:

Customer Satisfaction (or CSAT) is the level of satisfaction that customers have with a company's products or services.

The formula for calculating CSAT is: CSAT = (Number of Satisfied Customers / Total Number of Customers) x 100%.

Example: Company M had 500 customers and 400 of them were satisfied with its products or services. Therefore, the CSAT of Company M is: CSAT = (400/500) x 100% = 80%.

15. Employee Turnover:

Employee Turnover is the percentage of employees who leave a company within a certain period of time.

The formula for calculating Employee Turnover is: Employee Turnover = (Number of Employees Who Left / Total Number of Employees) x 100%.

Example: Company L had 50 employees and 10 of them left in 2022. Therefore, the Employee Turnover of Company L in 2022 is: Employee Turnover = (10/50) x 100% = 20%.

16. Burn Rate:

Burn Rate is the rate at which a company is spending money each month to maintain its operations.

Example: Company R spends $50,000 per month to maintain its operations. Therefore, the Burn Rate of Company R is $50,000 per month.

17. Runway:

Runway is the amount of time a company can continue to operate with its current funds without seeking new funding.

The formula for calculating Runway is: Runway = Current Funds / Burn Rate.

Example: You are the owner of a startup company and you have $100,000 in your bank account. The Burn Rate of your company is $10,000 per month, including office rent, employee salaries, advertising, and equipment rental.

Applying the formula for calculating Runway:

Runway = Current Funds / Burn Rate

Runway = $100,000 / $10,000

Runway = 10

Therefore, with the current funds of $100,000 and Burn Rate of $10,000 per month, your company can continue to operate for 10 months without seeking new funding. After that, you will need to seek new funding to maintain the operations of your company.

In conclusion,

Evaluating a startup requires careful analysis of a variety of metrics. The 17 essential metrics we have discussed in this blog provide valuable insights into a startup's performance and potential for growth. By understanding and tracking these metrics, investors can make informed decisions when it comes to funding and supporting startups.

However, it is important to note that these metrics are not the only factors to consider when evaluating a startup. Other aspects, such as the team's experience and market fit, are also critical to a startup's success.

As a potential investor or entrepreneur, it is crucial to do your due diligence and thoroughly evaluate a startup before making any decisions. By taking the time to understand and analyze the metrics we have discussed, you can make informed decisions and increase your chances of success in the startup world.