
The red flags and magic numbers that investors look for in startup's metrics - prostoalex
https://andrewchen.co/investor-metrics-deck/
======
resters
One way to fake a leading indicator is to increase headcount and cash burn
rapidly. Those increases create a "hockey stick" graph. Just use that graph
when pitching to investors.

You can also time it so that your ad spend doesn't hit until the next
financial period, which makes it look like there is actual growth commensurate
with the headcount increase and disproportionate (in a good way) to cash burn.
After all, what kind of founder would increase headcount unless it was needed
:)

Disclaimer: This works best when pitching a round _after_ you have already got
some early investors to help with the sales pitch to the next round of
investors.

~~~
coenhyde
I can't tell if you are being sarcastic or if this is intended as advice

~~~
freehunter
Lots of what startups do is some kind of fraud. Whether you're defrauding
investors like `resters idea or defrauding users like Reddit's early days
(each employee had multiple accounts to make it seem more active than it was)
the trick is just not to get caught.

Of course, defrauding investors has a far higher likelihood of getting you
into serious legal trouble than defrauding users. And with this one, even if
you don't get caught, if it doesn't work out properly you are _fucked_.

But hey, if it does work, it'll make a great story to tell at your IPO
celebration party over a glass of champagne.

~~~
Wowfunhappy
Curious... _is_ this fraud? It's certainly duplicitous, but are laws being
broken?

~~~
freehunter
It certainly would be fraud [1] the question is, would it be illegal? Not all
fraud is illegal, and not all illegal fraud is prosecuted as such (or at all).
Even if it's not illegal, if the startup owner told the investor that they
were growing rapidly and used these figures to show that, the investor could
sue after the fact for civil fraud and the founder would have a hard time
explaining why it shouldn't be. The only reason to grow headcount and increase
burn rate to unsustainable levels and offset those expenses in the books right
before an investor presentation would be to give the investor a misleading
view of your company.

You'd be at the very least inviting a lawsuit... that is, _if_ you got caught.

[1]

"Fraud involves misrepresenting facts for the specific purpose of gaining
something that may not have been provided without the deception."

[https://www.investopedia.com/terms/f/fraud.asp](https://www.investopedia.com/terms/f/fraud.asp)

~~~
dragonwriter
> Even if it's not illegal, if the startup owner told the investor that they
> were growing rapidly and used these figures to show that, the investor could
> sue after the fact for civil fraud and the founder would have a hard time
> explaining why it shouldn't be.

Civil fraud is illegal, so if it is not illegal, it is not civil fraud.

------
ccantana
Couldn’t agree more regarding his point on landing page optimization.

At TechLoaf, we experimented with a lot of different, elaborate, shiny landing
pages that expounded on how amazing our newsletter was, etc...

And after falling flat on our face for months, we realized that an incredibly
simple, borderline-mysterious landing page converted users far more
effectively.

About 35% of all visitors to our site end up subscribing.

(For the curious, this is the landing page:
[https://techloaf.io](https://techloaf.io))

~~~
athenot
This is intersting. From a UX perspective, you're basically forcing the user
into making a choice on the spot: to subscribe or not. You're in or you're
out. It takes away the non-commital mind wandering, nudges those who are
favorably on the fence to sign up ("why not; I might forget about this site so
let's do it now") and weans out those who don't immediately see the value.

For this use-case, it's probably a good thing.

~~~
ccantana
Exactly. It’s also kind of jarring in a world where content is unlimited,
free, and available on every channel. It piques some people’s curiosity to
land on a site where it’s semi-restricted.

~~~
mkirklions
I run into the issue that I would much rather give away my money and time
saving advice completely free, than charge money.

I started my website to help people, not make a petty few grand in profits or
grow an email list.

However, I know this is bad capitalism. I just don't know if I want to
restrict access.

~~~
graeme
The email list is free though. You just have to take affirmative action to get
it.

OP meant that this "restriction" piques interest instead of merely closing the
tab on ten articles you skimmed the headlines of.

No need to charge for the emails or profit from them. But people will give you
more _attention_ if your writing is in their inbox.

~~~
ccantana
Exactly. And if somebody subscribes, you have the chance to reach (and thereby
help) them many more times in the future than a fairweather fan who forgets
you as quickly as their feeds refresh.

------
WalterBright
I remember in the 1990s when Bill Gates was asked about how he crafted his
decisions to maximize the stock price. He replied that he paid no attention to
the stock price - he concentrated on running the company well and the stock
price took care of itself.

Investing in MSFT during his reign was a spectacular investment.

A CEO of another company told me he adjusted the accounting to give the
metrics that Wall Street was looking for. The stock tanked (the company has
since disappeared). Apparently, investors are not so easily fooled.

~~~
rjvs
So the accounting practices that MSFT got in trouble for (as I recall, pulling
and pushing sales into different quarters to smooth growth and suit
projections) was the stock price taking care of itself?

~~~
WalterBright
Can you provide a year for that?

~~~
rjvs
1999-2002 • [https://www.nytimes.com/1999/07/01/business/microsoft-s-
acco...](https://www.nytimes.com/1999/07/01/business/microsoft-s-accounting-
under-scrutiny.html) •
[https://www.sec.gov/news/press/2002-80.htm](https://www.sec.gov/news/press/2002-80.htm)

~~~
WalterBright
Thanks for posting that. Wish I had a reference to when Gates made that
statement.

------
jacquesm
You can't really focus on a broad spectrum of anything. Broad is broad, focus
is narrow.

It's also ironic that many failed start-up founders end up on the investment
side, I'd love to see more successful people in charge of who gets funded and
who does not.

~~~
nostrademons
Outside of the angel ecosystem, there's likely a reason for that: being a
_successful_ founder is more profitable than being a VC, so people whose
startups took off have every incentive to keep managing them, while successful
startup founders who exited aren't exactly in need of money or further
success. There's also a bunch of bullshit that goes with the VC world
(managing LPs, constantly searching for dealflow, taking board seats on the
companies that are failing or going sideways) that you don't have in the angel
world.

~~~
Alex3917
It's also _much_ harder to be a successful VC than it is to be a successful
founder, so if you're at all successful there isn't much reason to switch
sides unless you're just interested in corporate finance or something. Being a
VC is like running a restaurant in NYC, where you're literally competing
against people who are fine with losing money, and in some cases are even
purposely trying to lose money.

~~~
Novashi
>It's also much harder to be a successful VC than it is to be a successful
founder

How?

Investing in 10 companies where 1 wins seems much easier than building 10
companies where 1 wins.

~~~
edoceo
Rob Wiltbank (Williamatte Uni) has a bunch of investment research that
basically says what you did. He goes so far as to say you __must __invest in
at least ten to get one home run.

------
olliej
I’d think revenue would have been important - I read the entire article
expecting something in that (which is what would have been interesting).

Instead it’s just a variation of “how many email addresses do they have”

~~~
DevX101
The point of his presentation was how to identify real, sustainable growth
before the point where it is self-evident that the company is a winner. To do
that you have to go upstream of revenue.

Also, you can hack revenue in the short term by spending $1.20 to get $1.

------
bogomipz
The article states:

>1) First, we seek to understand the existing state of customer growth –
including growth loops, the quality of acquisition, engagement, churn, and
monetization. 2) Then, to identify potential upside based learnings from
within the company as well as across benchmarks from across industry.

Cold someone say what a "growth loop" is? And also what "upside based
learnings" are?

------
top256
I really like this article! Thanks for posting it

------
arminiusreturns
Does anybody have any insight on the things investors are looking for _after_
the series C?

------
buf
Disclaimer: I work at Reforge.

Also: It feels like I should be paying Reforge to work there.

The incredible depth of the material has helped me personally:

\- articulate ideas in a common vocabulary that were difficult to explain
prior

\- identify loops within my own side projects which has led to explosive
growth (even though the material is designed for larger companies)

\- understand how to derive important metrics for many different types of
companies

\- connect with some of the most influential leaders in the growth space

