Sunday, January 3, 2016

The Secret to Predicting Startup Success in 2016

When it comes to investing in startups, one thing is clear ... nobody knows the outcome. This can change that.



What's the best way to measure a startup?
Profit is non-existent for most startups. Even revenue can be elusive at the early stages. And what's the magic number for users or customers? 100? 10,000? 100,000?
In the book Startup Wealth: How the Best Angel Investors Make Money in Startups, Josh Maher interviews many legendary investors including Brad Feld, Mark Suster, Catherine Mott, Christopher Mirabile, Allan May, Joanne Wilson, and more. What heuristics did they use to know whether or not to invest in a startup?
Right now the answer is all over the board. There are no standards. Some people invest purely based on their relationship with the founders and do little to no due diligence. Others spend months or even years tracking a startup before taking the plunge.
I'd argue that Net Promoter Score (NPS) should be a required foundational metric behind measuring startups of every size. If you are a startup founder, it should be used as a KPI. If you are an angel investor, you should request it for due diligence. And if you are a venture capitalist, you should be requesting your entire portfolio to be reporting NPS figures to you.
Here's why:

Universal Applicability

Whether you are running a consulting company or a high tech mobile app... whether you have just one customer or tens of thousands ... whether you have no revenue or millions in profit ... you can still run NPS campaigns.
That's because fundamentally all businesses have customers. Even if you don't have revenue yet (maybe you are still building out your user base) you still have users. And with users you can have an NPS score.
With NPS, you ask just one question: How likely (from 0 to 10) are you to recommend my product or service to a friend or colleague? As long as you have some kind of product or service, you can measure NPS.
This makes NPS an ideal key performance indicator if you are trying to evaluate a startup.
TIP #1: Don't fret about the exact score.
If your potential investment is running an NPS campaign for the first time, the chances are that their score is not going to be that great. Many products find that their first score is not what they expect. That's what makes NPS such a powerful survey technique. It gives you an honest assessment of how well you are turning users into fans.
You might be hoping that they are in the high +70's like Apple. But as long as they are positive (and not net-negative), it should not be raising any big red flags at this point.
(After all, the real power of NPS is in the follow-up process)
The score is just a starting point on a journey.
So if you aren't overly concerned with the NPS score, how do you use NPS as a metric for evaluating a startup? Good question! That brings us to our second point.
startup

Honest Customer Feedback

Most investors ask for customer references as part of the diligence process before investing. But this has always confused me. Whenever you ask for a reference, the people given as references are intrinsically likely to tell you good things, since they are often friends with the person in the first place.
But ideally, you would want a way to get a more critical eye for some honest customer feedback rather than just talking to the one or two best references that a startup can provide you.
If you have an NPS campaign as part of due diligence, spend most of your time evaluating the individual responses rather than obsessing about the overall score. And if you are not given all the individual responses, insist on seeing them.
The second question in a NPS survey is: What was the biggest reason for having given that score?
This open-ended question lets customers praise and vent about what they care about most. Reading through these responses will give you the most independent and honest feedback you can get when evaluating a startup.
Often, these responses will include the best and worst of a startup. People who love the service will tell you why they love it. People who are having trouble with the service will tell you why they are having trouble. Those problem areas can then be used as starting points for further diligence.
Many people underestimate how powerful NPS is, especially because it is so simple to implement with just two quick questions. But done correctly, these two questions really are the only two questions that need to be asked.

Implicit Accountability

Although I've already said that the first NPS score doesn't matter, I don't want you to come away with the impression that none of the NPS scores matter.
In fact, tracking NPS scores over time is a fantastic way to audit that progress is being made to improve the product or service.
After the first NPS campaign, you will know the top three biggest problem areas. The next time an NPS campaign is sent, if the same problems come up again in the same frequency (or worse), then it is a sign that something is deeply wrong.
Ideally, as an investor in startups, you should be able to keep track of all your portfolio's NPS scores over time. Comparing them to each other is a possible way to keep an eye on the investments that might need more of your attention. However, a better indicator is to make sure that all of your portfolio's NPS scores are steadily improving over time.
No other score that I know of can provide this kind of warning system no matter the underlying business model or source of revenue. NPS gives you a tool that uniquely can predict breakout success or imminent failure for venture capitalists.

 

Implementing NPS as a key performance indicator can easily be done whether you are a startup founder, an angel investor or a venture capitalist. And done properly, the results can be amazing. For example, after we implemented just one sales technique into our NPS process at Promoter.io, we were able to increase MRR by 32%. You can even use NPS to drive a marketing campaign. So add this tool to your diligence worksheet and ensure that all the startups you work with start tracking it today.

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