How to choose a metric and set your KPI

One of the first things that YC companies do when they join the batch is they set their KPI, their key performance indicator, the one metric or stat that they judge the success of their business by. For most companies, it's gonna be one of four things. Either revenue, whether that's monthly revenue, monthly recurring revenue, annual revenue, etcetera.

Usage, typically for advertising based companies or social companies. So DAUs, WAUs, MAUs. That's daily, weekly, or monthly active users. The next one's going to be for enterprise companies that do YC. Typically, they're going to be looking at LOIs or letters of intent, free pilots, paid pilots, or signed contracts. That's gonna be their KPI.

And then finally, for moonshot companies, science companies, biology companies, typically, there's gonna be some technical milestone. They ran an experiment and got positive data. They manufactured some part, some technical accomplishment. So if you're thinking about your KPI, you should probably think about one of those four primary metrics.

Now the problem is is that it's really hard to brainstorm how to move your primary network. Oftentimes, talk to founders. If you just ask them, how do you increase revenue? That's pretty hard. So all good companies have a set of secondary metrics. I almost like to think of metrics as a pyramid. So you've got that one metric up the top that lets you know how you're doing.

And then you have three to four metrics below it that you believe greatly impact that top metric. And, usually, it's those metrics that you brainstorm features on, and it's those metrics that you try to optimize every week. So let's give an example of Airbnb. Airbnb's metric is going to be revenue, of course. And as a start up, their primary goal was actually reaching breakeven.

The contributing metrics to that first would have been the amount of inventory on Airbnb. That's an extremely important metric. If there's low inventory, hard to make the revenue go up. The second metric is gonna be the average price of the inventory on Airbnb. If the price is incorrect, people aren't willing to buy, the revenue can't go up. The third might be the responsiveness of hosts.

So when someone tries to book a home, how fast does it take for the host to get back? If that number is too high, revenue won't go up. The next might be some metric around search or how the website works, how fast the search results come back. And then you can imagine many more metrics that would contribute to does revenue go up.

So when you're thinking about planning metrics in your business, don't get creative about that top KPI. Stick to one of the four that I mentioned before, whether that's revenue, usage, contract signed for enterprise companies, or milestones for science or moonshine companies.

It's really important you choose one of them because, honestly, KPI is how a lot of investors will basically measure you versus other similar companies. So if you choose some creative KPI that no one else is using, it's really hard to do a comparative.

But for those secondary metrics, for the kind of base of the pyramid, those really should be the three to five metrics that might be custom to your product or custom to your business. The three to five most important things that contribute to the top metric moving. And those you can be a little bit more creative about. Those are a little bit more unique per company.

So that is how you set your KPI and how you think about your other metrics. Good luck.