2025.01.19

LXXXIII

How do you measure the success of a bootstrapped startup?

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Bootstrapping

Jack and I have been “bootstrapping” BirdDog for the last 6 months. This means that we have not raised outside capital for the project. 

We haven’t altogether eschewed the idea of raising capital in the future, but are cautious. We’ve seen (and are seeing) other companies in our space raise money and keep growing “vanity” metrics like employee count. 

The playbook for a Venture backed startup is quite different from that for a bootstrapped one. As the latter, I think it’s interesting to speculate on what some of the metrics we might focus on going forwards are.

Right now, the three that make the most sense to me are:

1. High Profit Margin

2. Low Churn

3. High Revenue Per Employee

A Caution On Optimization

Before we jump into the measurements proper, it's important to note the “dangers” of over indexing on any one single measurement. A warning I often bring up is Goodhart’s Law:

Sacrificing some nuance for clarity: 

Think about standardized tests for college admissions–you observe a correlation between “intelligence” and the ability to perform well on the SAT. Then, you use the SAT to measure how intelligent students are. Now, the SAT is less good of a measure for intelligence because students optimize for scoring high on the test, not for “becoming more intelligent.”

Likewise, perhaps you see that companies that “succeed” grow their revenue and headcount very quickly. Then, if you try to copy them by growing your revenue very quickly, and that is all you focus on, you may think you will succeed even if you are burning money and need to keep raising additional capital to stay afloat. The companies that succeeded that also had growing headcount and revenue did not necessarily succeed because they had growing headcount and revenue. 

So the trick, then, becomes to try to find measures that have the strongest causal relationship with long term success rather than simply being correlated with them. 

This is hard. Still, I’m playing around with the below metrics and will point out how I think they could go wrong.

What is Success?

Another big word of caution: I am talking about measurements that one would want to optimize for to maximize the chances that their business “succeeds.” 

The word success is incredibly broad and is very difficult to nail down. We’ll descope it by defining success as “A business that makes you wealthy.” This is not the only reason to start a business, and it is not the only reason I or Jack started a business.

Caption: Success when bow fish hunting is quite self evident

That being said, the point of this post is more to identify metrics to estimate the “health” of a bootstrapped business. This says nothing about the success of a venture backed drug discovery startup, for instance.

Without further ado, the measures.

Profit Margin

Why it’s Good:

Profit margin is self-evidently important for any business.*

More-so, if you are bootstrapping a B2B SaaS, this is one of the most critical things to be focused on right away–you don’t have money to spend to reach “economies of scale,” your service needs to be making money early on, or at the least, breaking even.

You don’t have unlimited money to burn on non profitable growth.

Where it could be Bad: 

A trap here is associated with making decisions that increase profit margin at the cost of lowering the quality of the product and, resultantly, user satisfaction. 

That could be something that juices numbers for a short period of time but would likely result in an increase in churn and damage to your reputation that will make it harder to sell your product in the future.

*If you are trying to change the world and that requires losing money to make money, then perhaps this measure is less immediately important. Eventually, though, it does become important, or you are a non profit or charity.

Low Churn

Why it’s Good:

Churn is a measure of how many users who pay for your product or service end up leaving later. For obvious reasons, if somebody buys your product, you don’t want them to stop paying you in two months because they no longer like it or need it or see value in it.

It might be one of the better proxies for how important your product is to your users. If you have low churn, then your user’s like your product, feel like they can’t get the same value elsewhere, or maybe the cost of switching is high.

Something interesting here–one of my mentors who's approaching $500K in ARR told me that he has had only one customer who is paying more than $300 a month churn; everyone else who churned was paying him $150 a month or less.

Where it could be Bad:

I’m actually not so sure how this one could go wrong… maybe if you spent a prohibitive amount of time with one or two customers to make sure they never left at the expense of not adding new customers because you don’t have the bandwidth to do so, that would be bad.

Revenue Per Employee

Why it’s Good:

I think revenue per employee is probably the least discussed metric for a company’s success but very succinctly captures the leverage an operation has. 

In a sense, Revenue Per Employee is an “Anti VanityMetric” Metric. It puts a nice little asterisk next to any number like headcount growth or revenue growth–if you have 25 employees but are only doing $2M in revenue, you’re likely underwater on people costs alone. And, if you add another $1M in revenue but had to hire 12 people to get there, again, that’s likely a losing proposition (at least for now!).

Among big tech companies in 2022, Netflix was the winner, at $2.46M per employee. Palantir is also a really interesting one in my mind, seeing as it is to some extent productized tech enabled consulting–with $708K per employee, it almost doubles each of the Big Three consultancies in terms of revenue per employee. 

Another way to put it–revenue per employee is a measure of how reliably the business is able to support the people who are counting on it

Why it could be Bad:

If you’re afraid to hire and grow because you don’t want to drop your revenue per employee, at least for a little bit, you might be shooting yourself in the foot. 

Also, there is a similar trap to the profit margin trap here–if you ignore something like customer service or product quality because you refuse to hire an employee who will not directly contribute to revenue, you will be hurting yourself in the long term.

The Perfect Measure

In short, there is no theoretically perfect measurement for anything. The “best measure” I can think of would be “Value Surplus”, how much value you create less how much value you capture, but it is very theoretical and the difficulty of getting that metric right would be immense.

In practice, there exists some mix of measurements that is likely sufficient for your purpose, with caution. And, I think for a bootstrapped B2B SaaS company, maintaining a high profit margin, minimizing churn, and increasing revenue per employee is one such mix.

But, who knows. I’ll keep you posted on it as we go along. 

Live Deeply,