The startup world is full of crazy metrics, monolithic frameworks and over-engineered tools — all claiming to measure the impact of everything. It’s getting tiring; and frankly, a lot of these theories are too far from reality to be useful.
As a founder or someone working in a startup, the main priority is always staying alive. Every ounce of your budget needs to be spent efficiently. Should you invest in paid advertising? Hire an intern? Take that trip to San Francisco that could make or break the business?
It’s all about difficult decisions, and some of them can be messy and complex. With options coming from every angle, you need to find ways to make them as simple as possible. This is the only way you can bring your focus back to how they will impact the business. That’s the most important thing. How do you prioritize? How do you say no?
This is where our good friend Drake comes in.
Started from the bottom
I’ve got to admit, I’m actually talking about Frank Drake, the man who came up with the Drake equation in 1961. He hosted what was essentially a meetup for astrophysicists and, as you would, started asking people how great it would be to estimate how much life there was in the galaxy.
Obviously an insanely complex thing to be discussing in a meetup. But that didn’t stop him.
Drake started writing an agenda listing all the variables and topics they needed to discuss to try to approach this question logically.
Eventually, he got every variable he could think of down. Using it, he created a complex equation on a single piece of paper able to estimate how much life there was in the universe:
Drake took something incredibly complex and broke it down into something easy to understand. This got me thinking — could you apply Drake’s teachings to the messy and complex startup world?
I thought I’d give it a go.
Thank me later
Let’s take something like e-commerce as a simple example. Think about how you define growth in an e-commerce business. Which different variables do you have? Here’s the list I came up with:
- Page views
- Conversion rate
- Average value of a basket
- Recurring customers
Bring these variables together in a logical way and you get something like this:
Growth = Product Inventory x Traffic x Conversion x Average Basket Size x Repeat Purchases
There you have it. Now if you want to explain an e-commerce business to your mother, you could. Obviously she probably wouldn’t be interested, but the same applies for investors.
You’ve probably experienced quirky questions like “What’s your quick ratio?” or “What’s your SaaS Magic number?” These are all stats that inform VCs’ own equations that help them uncover the diamonds in the rough.
Talking to investors in this way helps them see that you understand what level you need to work at to build a successful business. The same applies when hiring staff; these equations help you bring clarity to the business and ensure everyone understands their roles and how it makes everything simple.
If you’re reading this, it’s not too late
Let’s take another example, like sales, which I had no idea about six months ago (so if you’re in the same boat, don’t despair). Someone came up with this direct equation called sales velocity:
Sales Velocity = Work In Progress x Win Rate x Avg. Deal Size ÷ Time Taken To Close
Suddenly, knowing nothing about sales, but still managing salespeople, doesn’t seem like such a daunting task. You can understand how well they are doing and where they need to focus by asking three simple questions:
- How many deals are you working on?
- What’s your average deal size?
- How long does it take to close a sale?
Instantly you can see how this equation helps you identify top performers; but it also helps individuals see where they can incrementally improve — whether they need to focus on closing more quickly, finding better qualified leads or targeting higher-value leads.
Break it down now
Drake’s teachings are incredibly useful when you need to bring order to chaos. And the applications go far further than the examples I’ve shared here.
Using this theory, you can track performance of your business and rationalize decisions; it’s even a great way to explain your business internally and externally — use it to show you’re in full control without overwhelming anyone.
In a world full of Kissmetrics, Mixpanel, Moz and Mint, we often suffer from information overload, which leads to action paralysis. What’s important about Drake’s approach is it allows you to only track what matters. And as you see what doesn’t work, or isn’t impacting your business, you can stop measuring it.
Now that you know about the original Drake, you’ll start seeing yourself applying these equations everywhere, from informing teams to giving investors an overview of your business.
So what are you waiting for? Put on your headphones, get out a notepad, play this and start simplifying.
Featured Image: Ramin Rahimian/The Washington Post/Getty Images