Vanity Metrics vs. Proxy Metrics: Necessary Evil or Necessity?

According to some, there is too much attention in the press, blogs and columns for 'vanity metrics'. However, in the absence of hard data, they are often the only criteria stakeholders can rely on.

Instead of talking about how well a company is doing based on traditional criteria such as turnover and profit growth, entrepreneurs in the startup world like to talk about how many active users their platform, app, or service has. Certainly, in the early days of social networks such as Facebook, Twitter, and LinkedIn, these figures were readily used.  Founders tried to express the company's valuation as amount x times y users. It is an example of a 'vanity metric', which could be translated as 'vanity figure'. It is therefore a criterion that flatters the ego of the entrepreneur, but it is not a hard economic number.

The term 'unicorn' has been around for a few years now, meaning a non-listed company with a valuation of more than 1 billion dollars. But a company like Uber, an example of such a 'unicorn', is after years of no profit for the first time on the verge of profitability. Enthusiastic founders of tech companies talk about how much funding their company has raised, preferably from an international venture capitalist - or they are proud of an office that opens in a new country and how great the team is there. These are also vanity metrics because they do not immediately translate into concrete EBITDA or cash flow figures. That only happens later in the development of the company, if at all. 

However, the extremes of the dot-com bubble of 1999-2000 are not visible today. E-commerce companies and portals were the order of the day. There was hardly any turnover and the majority was not equipped to become a successful profitable company. It was not even a priority, a lot of people measured the success of a company by the number of eyeballs. That's the number of daily or monthly visitors to a site. Not buyers, but visitors, counted.  Quite a few companies made a mess of things back then. On average, classic companies saw their ratings increase by 60 to 70 percent simply by adding .com to their name. The height of vanity at the time. 

Fortunately, we are far from that now. But what should you do as a start-up that is certainly not turning a profit, and is still making little or no turnover? This is a big challenge for any startup. Nobody knows you and on top of that, the numbers are not overwhelming. What can you do? You can talk about the size of the market, successes in your previous company, the quality of the team, proof of concepts, the large number of free users, or partnerships with international system integrators or consulting firms.

Rather than vanity metrics, we should speak of 'proxy metrics'. Alternative indicators that - temporarily - replace something else. This data helps to seduce an investor, as they like to see more meat on the bone before they take a chance with a small company that might not be around anymore next year if you look purely at the profitability. VCs like to hear that startups double or multiply their turnover. Even if that revenue is still low for an early-stage startup, it makes investors dream of more.

As a startup, you have to make do with such alternative criteria, otherwise, you might never get the job done. For young companies that still have to prove everything, this is not only interesting to give potential prospects some extra comfort, they are also very important for visibility and to ensure that the fast-growing startup can attract talented employees. 

Proxy metrics are therefore not a goal in themselves, but an inevitable intermediate step in anticipation of the moment when a young tech company will be able to present hard figures. When the classic figures are not there yet, you have to make do with a number of alternative successes. It will be beneficial to the early-stage startup to give as much comfort as possible to its stakeholders. In the absence of profit and high turnover, they can partially make do with other figures. Most investors or stakeholders should be knowledgeable enough to interpret these numbers correctly.

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