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Eric Ashman Startup Survival in the Age of COVID-19

Eric Ashman is the founder of Bothered Mind Advisors and a member of the advisory board of EforAll Roxbury. Ashman is widely recognized as an expert on startup success and he has consistently maintained that a company’s KPIs (key performance indicators) have to drive the revenue and cash flow planning, and they have to be actionable, accessible, and auditable. 

As of 2019, startup failure rates are around 90%. 21.5% of startups fail in the first year, 30% in the second year, 50% in the fifth year, and 70% in their 10th year.  Of course, this was before the massive disruption caused by the global pandemic, which hit small businesses and startups especially hard.

We recently had a chance to talk to Eric Ashman and better understand how a startup can succeed during the current crisis and beyond.

From a business perspective, what should a startup focus on during a crisis?

What I want people typically to focus on is your sales focused KPIs, customer behavior, whether it’s retention rate, churn rate, repeat purchase rate, customer growth, metrics like conversion rate, customer acquisition costs and then some of the really important financial metrics that drive your revenue and gross margin model. So average order value, gross profit margin and return rate.

When I sit down with a founder, when we start looking at their financial models, they’re not connected to anything behind it. There’s that first month you hope you can sell $10,000 of whatever you sell, and then it just kind of magically goes up by 5% a month, and then you try to build a P&L off of that. And the problem with that is when things start to go wrong, you can’t get back to the key drivers and understand how you update that forecast and take it forward again.

And so, your KPIs (key performance indicators) have to drive your revenue plan and your cashflow plan, and they have to be actionable, accessible, and auditable.

Can you expand on what you mean by actionable, accessible and auditable?

By actionable, I mean that if your metrics and your KPIs are falling off, what are the changes that you can make within your product or your go-to-market strategy, or your sales strategy that’s ultimately going to try to be able to move those KPIs in the right direction. So they’ve got to be things that you can control and have an effect on.

Accessible means reporting you can actually create in a timely fashion. There may be many metrics you would like to have, but particularly in small startups, you might struggle with implementing the systems and tools you need to access them quickly. That’s fine. Simplify. Find the actionable metrics you can easily access and report on regularly. Particularly in times of rapid disruption, it’s incredibly important that you have reporting on the key drivers of your business that’s daily. If you don’t have a daily sales flash report and you can’t track it that quickly, it’s something that you really need to focus on, so accessible, daily reporting, weekly reporting, monthly reporting.

Finally, your KPIs must also be auditable. You or somebody in your company needs to understand the calculation, the math, the input, so that what you get out can be trusted.

Garbage in, garbage out. It’s really easy these days to create a report that looks amazing, it’s got awesome charts, and graphs, and tables, and growth rates, and yet the data is all fundamentally wrong because it’s pulling from the wrong places. So be really careful about that. We are in a moment in time where it’s very easy to get misled by good looking reports that are built off the wrong sets of data.

A word of caution. When developing your KPIs, be careful of vanity metrics. Vanity metrics will kill your company.  Founders fall into this trap all of the time, and this is a particularly dangerous trap for folks that are in fundraise mode. Fundraise pitch decks are often loaded with vanity metrics.  They’re all of the metrics that go up and to the right, regardless of the fact that your cash balance is going down.

And so it’s things like gross revenue, not net revenue. This is a classic challenge for retail in particular. If you’re in the fashion space, you might have a 35% return rate, and so your gross revenue might be a $100, but your net revenue is only $65. And so gross revenue is a really dangerous metric for a lot of types of businesses that have a pretty big difference between gross and net revenue.

But there’s others such as total number of downloads, total number of historical customers, new customers, social media followers, page views, these are all vanity metrics. You’ll see them in all of the Tech Crunch and Forbes articles, they make great press releases. Again, they tend to flood pitch decks, but you cannot drive your business off of these. And as much as they can give you a little bit of solace in a really difficult time that at least something is moving in the right direction, if you make decisions off of vanity metrics, and these are metrics that are not directly connected to your revenue and financial model, you’re going to get yourself in a world of hurt. So be really careful of this trap.

How do you use your KPIs to get to an estimate of cash runway?

This is easier to show than to just tell but let me try to break this down as simply as possible. If you have customer focused KPIs, you can use those to build your revenue model. You want to visualize the customer journey, from their first interaction with your brand, to conversion to a customer, to the ongoing repeat buyer behavior that builds revenue over time.

Going back to the discussion about KPIs, you want your revenue model connected to KPIs that are actionable, accessible and auditable. In this way, as you see shifts in these KPIs, you can quickly assess the impact on sales, and we’ll take that all the way through to cash flow.

So you’ve got a new customer revenue model, you have an existing customer revenue model, you should have a revenue model for each of your channels in terms of how you acquire customers. I It sounds complicated, but it’s not, because you’re just thinking about the customer journey.

Your new customer revenue model should be connected to your customer acquisition plan. Whether that’s online marketing, or a direct sales team, how much do you need to spend each month to attract new customers.   If you have an assumption around customer acquisition costs, then you can project how many customers you can expect to get in a month. If you then have an estimate of average order value, then you can project how much in sales you expect to deliver in a month. With an assumption on returns, if that’s applicable to your business model, and you can get down to net sales. And then if you understand your gross margin, then you should be able to get down to gross profit. And gross margin is one of the most important metrics on your P&L. You’ve got to understand your gross profit, your gross margin, that represents the variable profit you make on making $1 of sale.

For some folks, these are really basic concepts, And for some, I’m getting out a little bit ahead of where you are. We’re not going to go to deep into this, but ultimately, you need to be able to understand and visualize the customer journey and go all the way through to what that it looks like in terms of a sale, and then take it down to your gross profit. Because when you do that and you add up all your different models, that’s your sales plan. And that allows you to build your P&L all the way down to EBITDA. And EBITDA is a simple way of thinking about it is, it’s operating income.

And the reason that this gets important is because what we’re trying to really get to here is what’s your cash runway. So if you have positive cashflow, you’re great. When you have positive cash flow, then with respect to your cash runway, you’ve got as long as you keep your cash flow positive, because you just building up your bank balance. It’s when you have a burn rate, it’s when you’re burning cash, and that’s what we’re trying to get to.

What you want to know is, “I have this much money in the bank today. How much cash am I burning every month and how long is it going to last me?” And so, when I go through this, the simplest way to connect the two concepts is to think about my EBITDA, which is my operating profit that I’m projecting for the next 12-18 months. And you should have a 12-18 month projection that you’re always kind of staring at and it’s tied back to the sales plan that you’ve built. And then you’ve got to think about all the things that take up cash that are outside of your income statement.

What do you mean by cash flow that is outside of your P&L?

For instance, if you’re a retailer outside of just your operating income, you may have had to order merchandise to sell months in advance of when it will actually land in your warehouse for sale. You might have to pay for some, or all, of that product before you can start marketing it to your customers. The cash impact of inventory for anyone that produces and purchases products for sale is a real challenge.

If you’re a media company in the ad sales business, good luck trying to get an advertising client to pay in faster than 90 days. You might be waiting three or four months just for the cash from that sale to come back into your bank account. There are all of these things that are separate from your sales plan and your profit plan and your EBITDA that represent cash that you have to lay out, or in the case of accounts receivable, cash that you have to wait for. You need to understand the bridge between your revenue, your sales plan, your gross profit, your EBITDA, and then the cashflow, because your success is going to depend on cash flow, and your runway, and your burn.