Redefining Risk: Exploring Non-Financial Metrics For Evaluating Startup Viability

Non-financial metrics for evaluating startup viability are fast emerging as crucial criteria for investors and potential acquirers. Experienced investors conducting due diligence now focus on non-financial metrics to get a comprehensive overview of the company’s value.

Experts recognize that financial metrics and numerical indicators alone provide only limited assessment. They must rely on more factors to gauge the startup’s growth potential and stability over an extended time.

When it comes to redefining risks, investors and acquirers must look beyond traditional metrics in P&L statements and balance sheets. Particularly for startups that have impressive prospects but are yet to generate revenues or are still in their early stages.

Conventional metrics may include customer acquisition costs, customer churn rates, overhead costs, burn rates, runway, profit margins, and conversion rates. Then again, recurring revenues, lifetime customer revenues, and month-to-month sales and earnings also factor in investor decisions.

Non-financial metrics laser focus on the other aspects that influence the startup’s growth. Some of these include the founder’s business acumen, successful track record with building and exiting startups, and team-building experience.

From the founder’s perspective, non-financial metrics help ascertain the company’s performance and make informed decisions. These stats draw attention to the areas of improvement and potential for further growth.

Defining Non-Financial Metrics for Evaluating Startup Viability

Non-financial metrics are also called outcome-based measures that are quantifiable but cannot be translated into monetary units or actual figures. These measures include customer satisfaction, rate of innovation, product adoption rates, and more.

Board members, executives, investors, and acquirers view the earnings, profits, revenues, customer acquisition costs, and overheads as trailing performance indicators.

If used as standalone indicators, they cannot accurately assess the company’s health and stability or its strengths and weaknesses.

Trailing or lagging key performance indicators (KPIs) are typically associated with dollar values, but non-financial metrics are leading or forward-looking measures. KPIs indicate how the startup has performed so far, while non-financial metrics indicate how it can perform moving forward.

Non-financial measures can be qualitative and quantitative and may or may not have a dollar value. For instance, soft skills, talent, and innovative capabilities cannot have a fixed metric.

Why Evaluating Startups With Non-Financial Metrics is Crucial

Non-financial metrics for evaluating startup viability are crucial because they are predictive in nature. Here are some reasons why they are essential.

• Financial metrics provide data that the company has collected over a fixed interval. For instance, reports on actual performance, such as the total sales in Q1, Q2, and Q3. You also have revenues generated within these time intervals and the number of customers acquired. However, these numbers don’t specify why sales were lower in Q1 and Q3 but spiked in Q2. Or why revenues plunged even though customer acquisition is rising steadily.
• Checking the non-financial numbers gives a more comprehensive overview and fills in the gaps in the reports. For instance, higher customer acquisition can indicate that revenues and demand could rise in the coming months. This means that the company should ramp up production to fulfill orders. The company can also allocate resources toward R&D since it will have money left over, thanks to higher revenues.
• Expressing non-financial company mission and vision in monetary terms is not possible, and metrics won’t work here. For instance, the mission is to infuse a robust company culture where employees take ownership of the company. The founder may have intentions to allocate stock options that have not yet appeared in the financial statements. The commitment will eventually result in higher employee satisfaction and low attrition rates, adding non-financial value to the company.

Objectives for Measuring Predictive Non-Financial Metrics

Influence on the Company’s Bottom Line

Evaluating a startup on the basis of conventional KPIs is a crucial step for investors and acquirers. However, they should also account for the outcome-based measures because they influence the company’s underperformance and overperformance. That will, in turn, affect the bottom line.

For instance, high customer churn rates indicate customer dissatisfaction with the products in terms of design or performance. Quantifying satisfaction is vital since it will influence the bottom line with lower sales and, ultimately, revenues.

Identifying Areas for Improvement

Non-financial metrics are a valuable tool to identify the areas where the company excels and falls short. To go with the earlier example of customer satisfaction, which is currently translating into higher sales.

A quick analysis of social media trends may indicate that customers are more appreciative of the after-sales service a competitor offers. This metric is non-financial but predicts that sales could fall because of this downside. That’s an area where the company needs to work harder.

Comprehensive View of the Vertical

Predictive metrics include macroeconomic factors that influence business across the vertical. For instance, the Ukraine-Russia war that impacted inventory availability, recession, earthquakes, storms, and other natural disasters. The COVID was another situation that impacted commerce worldwide.

Financial metrics during these times would project that the company was performing poorly. However, when reviewing non-financial metrics, you might note steady customer satisfaction because of the remote services your team was providing.

Or, as in the case of SaaS companies and other cloud computing services, sales may have spiked during the pandemic.

Concrete Plan of Action

Non-financial metrics are performance-based and deliver a concrete plan of action to help the company achieve its goals. Accurately identifying the areas to work on helps outline the next steps.

To expand on the earlier examples, these steps could mean a better product design or improved features.

Dedicated customer service to improve satisfaction, compliance with environmental and social issues, and cost efficiency could improve brand value. Having a strategy in place helps build the connection with actionable decisions.

Non-Financial Metrics for Evaluating Startup Viability – Core Product

Product manufacturing costs, inventory, operations, and labor are some of the basic financial metrics you might add up. These costs help calculate the final pricing structure after considering the profit the company should make.

However, several other metrics also influence how the product performs and how customers perceive it. For instance, the effectiveness of solving the customer’s problem, comparing it with competing brands, and features that will improve acceptance.

You’ll also factor in metrics like abandoned carts, customers not following through on an inquiry with an actual purchase, and feedback. Measuring customer engagement with the website, like taking actions, click-through rates, activating freebies, and browsing through products, is also crucial.

Another non-financial metric is return customers and brand loyalty. Tracking customer behavior and analyzing retention rates helps identify buying trends and behavior across seasons, locations, and age demographics.

Designing products and advertising strategies, along with launch timings, can influence sales success rates.

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Brand Value and Reputation

Brand value and customer loyalty is another of the crucial non-financial metrics for evaluating startup viability. Investors, founders, and acquirers cannot assign a dollar value to brand awareness and customers’ perceptions of the brand.

However, this metric can make or break the company’s success.

Brand recognition and loyalty are about whether the company is easy to discern among competing brands. And if customers would prefer it above its competitors. Even if other options have better features and pricing structure. In other words, the brand’s USP that sets it apart.

Founders should be aware that investors are likely to conduct extensive research into how well the brand stacks up against the competition. And if it can retain the market share it has captured over an extended time.

Their study will also indicate the market share that the brand can snag with new products.

This metric will influence whether or not the company is a good candidate for investing. Or for buying with an M&A deal.

Customer Experience (CX) or User Experience (UX)

Expressing customer churn rate and retention rate in numbers is easily done because research can indicate returning customers. However, measuring customer satisfaction and experience with the company’s products and services is a whole different ball game.

Founders must dig deeper to understand these metrics since they directly influence repeat sales. Ensuring exceptional User Experience (UX) with the brand’s digital storefront is also crucial when dealing with cutthroat competition.

Leveraging website analytics, potential investors gauge bounce rates, click-through rates, time spent on the site, and more. These numbers will give an overview of how website visitors are interacting with the site. To learn more about their experience with the product, rely on customer feedback.

Use social media platforms to stay on top of reviews and surveys to understand how customers think and feel. Providing after-sales service and maintaining detailed records of the complaints registered on customer care are also valuable.

These approaches help company owners identify areas where they can improve customer experience for higher sales. From the investors’ perspective, poor customer interaction will indicate that the brand may be unable to maintain its market presence.

Innovations in the Pipeline

The human resources and talent aspect is the most dynamic for any startup. Potential investors pay careful attention to this slide since it predicts the company’s viability. A great team with a successful track record can drive the company forward with innovative ideas.

However, the pipeline innovations and ongoing research and development activities cannot have a definite value. Verticals like life sciences, drug testing and formulation, and software development have time-consuming and capital-intensive R&D processes.

Investors must be prepared to wait years before the startup can convert ideas into market-ready products. Further, there’s never any surety that the R&D will yield results. Levying a monetary value on the different stages of development is impossible.

For this reason, investors and acquirers must rely on evaluating the startup’s core talent. They also focus on employee efficiency, productivity, and dedication to the company’s mission. All of these are, again, non-financial metrics for evaluating startup viability.

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Market Response Rate

The market response rate is also expressed as the take rate or the product adoption rate. The market response is how quickly customers respond to a new advertising campaign or product launch—for instance, a customer feedback survey accompanied by freebies.

Quick response rates indicate a high brand awareness and customer engagement. Strategies like email blasts with offers for free downloads or early bird discounts should have high responses. A high number of subscribers snapping up the offers points to the startup’s viability.

Similarly, quick response to a new product and increasing sales indicate effective market penetration and the startup’s brand value. Investing capital in the company or purchasing it is a profitable option for potential acquirers.

Compliance

Certain verticals operate under extensive federal, state, and local regulations. Companies must abide by legal guidelines and industry standards. While not exactly a financial metric, startups complying with the rules and having the necessary permits and licensing are viable.

Then again, companies that include ESG or environment, social, and governance compliance in their mission statement are more consumer-friendly.

Moving forward, customers are more likely to support brands that demonstrate their commitment to protecting the environment. Or support community welfare and development.

Startups built by underrepresented and diverse founders attract attention not just from consumers but also from government agencies. They may enjoy incentives and find it easier to get funding and support. Investors are also open to funding them since they have customer confidence.

Identifying Appropriate Non-Financial Metrics for Evaluating Startup Viability

The valuation process could become more complicated even as investors, potential acquirers, and founders focus on taking a comprehensive overview of a startup’s health.

Picking out appropriate benchmarks for evaluating a startup can become more complex because of the sheer number of valuation metrics.

More so, most of these benchmarks cannot be expressed in dollar value or concrete statistics. Even if the data is available, getting expert analysts to study that information and draw conclusive results can be more challenging.

To counter these problems, selecting metrics relevant to the startup under consideration is advisable. Or the specific vertical where it operates. Founders should also focus on high-impact metrics that deliver actionable results they can use to make data-driven decisions.

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