In the startup world, you have to be very careful with metrics. Vanity metrics are everywhere. Everyone seems to be doing brilliantly on LinkedIn, every number is growing, and it looks as though they will never stop growing.
However, when we dig a little deeper, we see that this is not always the case. And that is normal: in many cases, we are measuring the wrong things or measuring them in the wrong way.
First of all, you need to report the most important figure correctly: revenue. Very often, we see startups boasting about recurring revenue that actually comes from a one-off project or a pilot.
Related to this, there are also many services disguised as software, as well as founder-led sales that will be impossible to scale in the future. In some cases, we have even seen startups count the public grants they receive as revenue, when they clearly are not.
Even when there is growth, you still need to be careful. A company can die from success by growing in a way that destroys cash and is not sustainable.
If the unit economics do not work, as we have insisted many times, that growth can be absolutely destructive for the company. This may happen because the payback period is too long, the gross margin is too low, or suppliers need to be paid before customers pay us.
That is why it is not enough to look at growth alone. You always need to look at the second-order effects and understand the impact that growth has on cash and on the sustainability of the business.
Finally, another classic mistake is to focus on a large number of metrics that may indicate growth but, if they do not ultimately lead to paying customers, may be meaningless.
We see many companies only considering a user to have churned after several months, or treating app downloads as victories, when what really matters is revenue.
In B2B, something similar happens with pilots that drag on indefinitely, proofs of concept and “contracted ARR” that never materialises into an invoice and, more importantly, into cash received.
You should never fool yourself.
It is extremely tempting when you are working on such a major project, have such a clear vision for the future and, on top of that, the project is growing.
But failing to call things by their name always ends badly.
CFOs are pessimists by definition and, in many companies, we are “Dr. NO”. But when we combine that role effectively with the vision of entrepreneurs, that is when truly lasting and scalable businesses can be built.
