Startups throw out bogus metrics all the time when talking to investors and the press. Prominent Silicon Valley venture capital firm Andreessen Horowitz wants them to stop.
Last night, the firm, which was cofounded by Netscape inventor Marc Andreessen and has invested in big names like Airbnb, Buzzfeed, Facebook, and Twitter, put up an excellent list of 16 metrics that every startup — and would-be startup investor — should understand.
- Have you ever been confused by a company talking about bookings as if its revenue?
- Have you ever wondered about the difference between recurring revenue and plain old revenue?
- Do you know how to evaluate a cloud computing company that takes money as subscriptions rather than up-front payments?
- How do you calculate lifetime value of a customer? (Hint: You can’t just make up a number.)
- What are “churn” and “burn rate” and how are they related?
It also exposes some of the common tricks startups use to try and fool outsiders, like presenting cumulative charts — where each quarter includes all the previous quarters’ numbers so the chart is always going up and to the right even if the metric in question is declining quarter to quarter — or presenting percentage gains without a base number to go from. And signed letters of intent should never be presented as bookings or revenue.
Also, startups should never talk about the number of downloads they have gotten. They can buy those. They should present statistics that show users are actually using the product after they download it, like monthly average users.
It’s important not only for investors thinking about putting money into these companies, but also for founders themselves, who could be accused of fraud if they confuse terms.
Disclosure: Marc Andreessen, co-founder of Andreessen Horowitz, is an investor in Business Insider.