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Matt Lerner – Finding Focus – Your North Star Metric

November 22, 2021

Talk transcription

Matt Lerner:

Good morning, everybody. I’m really honoured and proud to be on this stage. I don’t know how many of you know Brian, how much history you have, but he doesn’t just throw people up on this stage. This is a very highly curated event, and I’m really proud to be here today. And one of the things Brian makes a point when he talks to each speaker at length, before we write our content, says no sales pitches, no can speeches, create unique original content and make it actionable so that people walk away with something they can do that’s going to help them be successful. So to that point, take out a sheet of paper. There’s going to be some work here. And my goal is in the next 28.5 minutes to make this piece of paper, the most important thing in your business. So help you turn this piece of paper into a really valuable tool.

So while you’re digging through your bags and finding some paper, I’ll tell you a story. January, 2009, I was in sunny San Jose, California working for PayPal. I was running a B2B marketing team at the time, and got called in a very important meeting. January, 2009 is when disorganized companies do their 2009 annual planning. So I went into the annual planning meeting and they said, “Okay, Matt, this year, we need you to come up with a strategy to make money.” Like, that’s it. “Like, well, free cash flow, make profit.” And I’m in my head, I’m thinking like there’s four or five layers of very well paid executives between me and the board of directors. And the best they could come up with was make money. So went back to my desk, talked to my team and we decided the best way to make profit in 2009 was to raise prices.

So we looked down into the fee table and found some little transaction fee use cases where we were priced below market. So we closed those up. We matched market rate. It was a small price increase. It cost the average merchant about $3, but we had 10 million merchants. So $30 million profit straight to the bottom line. It was about 2 cents a share. We were a publicly traded company. And we were selling at 40 times earnings. So 30 million times 40 is about $1.2 billion in shareholder value created as the finance people say. And so we were feeling pretty good about ourselves. Now, I don’t know if anyone realizes this, but 2009 was actually a revolutionary year in the history of payment processing. This was the year where … Does anyone recognize these teenagers?

Yes, this is the year where the Collison brothers founded Stripe and offered simple, direct credit card processing APIs that anyone could copy and paste into an app or a website and start transacting. PayPal customers wanted this. They’d been asking for it for years. We didn’t make that product in 2009. Stripe did. That was $95 billion. I think it’s undervalued, but that was their last private round valuation. $95 billion in shareholder value we didn’t capture. So that’s Stripe, and then this guy, does anyone recognize him? This is before he had the super long beard and the cryptocurrency obsession, but this is Jack Dorsey. And in addition to founding Twitter, he actually founded this other company called Square, which made a magnetic card stripe reader. Now I knew PayPal customers wanted this because they were literally calling us every day in 2008 and saying, “I’m tired of typing credit card numbers into my phone with my thumbs. Can you please invent a magnetic card stripe reader that connects to my smartphone?”

Like Henry Ford said, “Your customers will tell you they want faster horses.” But our customers were like, no, here’s the product, here’s how it works, here’s what it does. Didn’t do that either. So don’t feel too bad for PayPal. When I made these slides a couple weeks ago, they were valued at over $300 billion. But what they did miss was another $210 billion in shareholder value because their strategy wasn’t deliver for your customers, their strategy was go make money in 2009. So I guess you see where I’m going with this. Who am I? Why do I know so much about PayPal? I spent most career in Silicon Valley with a few startups that didn’t do so well. I joined the growth team at PayPal in 2004. I was there for 11 years, moved to the UK in 2012, with PayPal. I was in different marketing and general management roles.

In 2015, I became an early stage VC with the Fund 500 startups in Europe and over almost 4 years as a VC, I probably looked at 1,000 pitches, between pitch contests and decks and meetings and things. And one thing that jumped out to me in that time was that most European startups have no idea how to grow a startup. And so John Collison says that there’s like a secret set of playbooks that go from company to company in Silicon Valley and it’s in everybody’s head. And I felt like I have this knowledge, I have this experience and I can share this. And it’s more valuable than Europe having another VC. So I left the investing world and I founded StartUp Core Strengths, and we run a 10 week virtual accelerator. We take applications, we work with about 50 companies a year and 3 cohorts. And I’m happy to say that we’ve got a 96% founder likely to recommend score. We’ve worked with over 100 companies now, a number of those people are actually here in the audience today. And so welcome.

And when I ask founders what was the most valuable thing you got out of the program afterwards, they say two things. They say you helped us adopt a metrics driven process of rapid experimentation, and you helped us zoom out and figure out where to focus and align the company around that. I don’t have time to cover the metrics or the experimentation growth process today, but we will help you zoom out and find that focus. So at the beginning of the program, we bring each company in and we just interrogate the key leaders of the company, ask them a bunch of questions so that we can be most helpful to them when they go through the program and we have a sense of where they’re at.

And what we tend to see in these meetings is we call it chaos. Europeans are more polite. They say, “We have no shortage of ideas,” things like that, but your product team wants to do customer interviews and research and build products. The marketing team wants to get budget and buy ads and higher agencies and rebrand. And the lawyers for some crazy reason, they want to like be careful and keep you out of jail and keep you from getting sued. The compliance team wants to comply. The engineering team knows they need to support all this stuff and they’re trying to balance their roadmap, but then they also want to refactor unstable parts of the code base and prepare to scale and make critical updates for iOS 15. So everyone’s got … And then the founder wants to do all these things, because they all sound important. And she doesn’t know how to decide between, how you decide between compliance and refactoring the code base and going and getting more salespeople. But what she really needs to probably do is go fundraise anyway.

So you kind of end up doing a little bit of all those things and that’s the one absolutely wrong answer. So it’s obvious in hindsight, if you take any great startup and like look at where they’re at and look backwards at their history, you’ll see that 90% of their growth ended up coming from like 10% of the stuff they did. For sure, true at PayPal. eBay, web developers in the early days, partnering with shopping carts and hosts, just a few things drove all of PayPal’s growth. It’s the same with Facebook, with Airbnb, with any of these companies. So if you start with the assumption that all of your success is going to come from a small number of things you do, then that means that most of the stuff you’re debating and wanting to do is wrong. And these aren’t opinion questions. There are right answers. So if you start with the assumption that most of these things are going to be a waste of resources, then it leads to the premise that progress is actually deciding what not to do, and making very good decisions every day about deciding what not to do.

So back to our poor founder, how does she decide which of these things do we not do? She’s got to go fundraise and she’s not an expert, hopefully, in all the things that she’s hired all these genius people on her team to do. So instead of making those decisions, what she needs to do is create a system, create a structure in the organization that empowers each person to align and make very good decisions about which work to do. So investment isn’t just budget. It’s every morning when every employee comes in and pulls out their laptop or Zooms in from home or whatever, and starts doing their work, what are they choosing to work on? So how do you get the entire team to align, self organize around the most important work?

Well, this is Charlie Munger. If anyone doesn’t recognize him, he’s Warren Buffet’s partner, they run Berkshire Hathaway, which has been the most successful investment fund probably in history, at least for the last 300 years. He’s 300 years old. And when he’s evaluating teams and deciding which company should we buy $20 billion of their stock, he says, “Show me the incentives and I’ll show you the outcome.” So it really comes down to creating an incentive structure that your entire team understands. And actually, I think we over-complicate this a lot. So I know Scotland has a glorious past in the petrochemical industry. I actually have a little past in the petrochemical industry. I grew up in a place called Cleveland, Ohio. And when I was growing up in Cleveland, there weren’t a lot of jobs. But I was very lucky to get this job at this oil refinery. And that paid $8 an hour, which was at the time a very good job.

Anyway, so an oil refinery I learned is actually a very simple business. You pay your employees and your rent and everything, you pay out by the hour, but you get paid by the gallon, your fine oil, you sell clean oil by the gallon or the barrel. So the way you make a refinery profitable is purely a function of how quickly you can get oil through that system and refine it. And we all understood that. And by the way, this was not like your typical University of Edinburgh engineering grads. Like Cleveland had some of the worst public schools in America. A lot of the people there never went to uni. Some of them didn’t graduate high school. Some of them were dumb as paint. Some of them were extremely intelligent and just had never been given opportunities. My point is, this is not like your typical tech startup. But everyone came in and knew exactly what their job was. It was to make the oil go faster through the system and create as many gallons of clean oil as you could in a 12 hour shift.

So that made everything very simple. If we had gone to those employees and said, okay, your job is to figure out how to make money, it would’ve been chaos because they don’t know how to run an oil refinery, and they shouldn’t be asked to. So what you need to do, unfortunately, tech startups, aren’t quite as simple as oil refineries. So what you need to do is move from a model that says, do work, make money, to a model that says, do work, deliver customer value and make money. And you’ve got to get everyone in your team, not focused on the money, but focused on creating customer value in the first instance.

Now the reason I’m emphasizing this point is because if you deliver customer value, if you have a software product with a million weekly active users, it is piss easy to make money. What is really, really hard is to go from zero, to having a product with a million weekly active users. It is very hard to build a product that delivers customer value and acquire lots of customers and keep them engaged with your product. So focus everybody around that and let a few clever finance people figure out how to turn that into money. So how do you measure customer value? Well, I’m sure you’ve heard this term. A lot of companies use something called a North Star metric, which is a number that increments when you deliver value to customers. So what I’m going to do with you now, and this is a good time to dig out that piece of paper is help you figure out your North Star metric.

So this sits on a question, which is how do you measure value delivered? We’ll answer that from first principles. So the foundational principle, I’m taking from Clay Christensen, may he rest in peace. The author of Innovator’s Dilemma, Innovator’s Solution, Luminary, Harvard Business School professor and popularizer of the Jobs To Be Done Theory. Now, Jobs To Be Done tells us that you deliver value to customers when you help them make progress in their lives. So that’s our first principle. You deliver value to customers when you help them make progress in their lives. And after that, everything flows nicely.

What measurable behavior is the closest proxy for that value delivery. So you’re running TikTok. You can’t actually measure the dopamine release in your customer’s heads. So the measurable behavior is you keep scrolling.

So another way to put it is if customers absolutely loved our product or service, how would they naturally behave? And then what you want to do is measure how many of them are behaving like this. Track it in cohorts, improve it over time. So I’ll give you a few examples and then you can start to think about what is your North Star metric?

So at PayPal, when we were behaving ourselves, our North Star metric was total payment volume. And the key drivers that moved that, the two first order inputs that drove that were ubiquity and preference. Ubiquity means was every merchant in the world accepting PayPal? If not, go get more merchants. And preference was, does every buyer want to pay with PayPal if given the choice? And if you just focus on those two things, you will increase total payment volume. At Amazon, Jeff Bezos set out in his 1997 letter to shareholders and this hasn’t changed for their core eCommerce business, repeat purchases. And the three levers that drove that, drive that are price, selection, and convenience. And that’s all they do. Website doesn’t look very good. Like their delivery vehicles are often random people’s cars. Like they don’t do stuff that isn’t … You don’t see a lot of brand work. They don’t do stuff that isn’t price, selection or convenience. They’re laser focused.

Facebook, daily active users driven by a number of products and engagement and active users per product. So take a minute and think about your North Star metric. This should be a number that increments when you deliver value to customers, it should be simple and memorable. Remember you want everyone in your company to understand this. So it shouldn’t be the second derivative of the growth rate of new signups minus churn over the size of the customer base. Like come up with a simple thing that everyone in your company can understand. It should represent the entire funnel and it should not change. That’s why it’s called the North Star. That’s the one star that doesn’t actually move. So as long as the way you deliver value to customers doesn’t change, the core of what your business does, the North Star metric doesn’t change. Now the key drivers, the focus to move that metric, I’ll talk about those in a minute. Those do change.

And most importantly, everyone can connect their work to this number. And I don’t mean just sales and marketing and product. I mean the people in your fulfillment center. I mean, if you go to a compliance person and say your job is to comply while increasing daily active users on the platform, they’re going to do their job very differently than if you say your job is to follow all these compliance laws and regulations. They’re going to think about their work differently if they’re connecting it to your North Star metric. So everyone in your company, and don’t just tell them, follow the North Star metric. Ask them, “How does your work every day impact our North Star metric?” Because when you ask them that question, you force them to think through it themselves. And that’s the act of thinking you need. And hopefully they have an answer that you didn’t even think of. Hopefully they understand their job better than you do and they can really align their work around it. So that’s an important conversation to have with everybody. As you’re thinking, here’s a few famous North Star metrics just to give you ideas.

Typically, it’s going to be some active or engaged user type thing. For a marketplace, often it’s going to be a transaction metric and then you’ll have like a supply side and a demand side, levers that feed into that, making that happen. I’m around for the next two days, by the way. So if you’ve got ideas for your North Star metric and you want me to help you stress test them, let’s just chat.

Okay. So once you’ve got an idea for your North Star metric, go back to your office, debate this with your team, take some time, put some thought into this and come up with what you think is a North Star metric for your company. The next thing to do is to map the equation that moves that. Remember the key drivers. So what are the first order inputs that move your North Star metric. These are your key drivers. And then what is the work that drives those? So this keeps nesting down. So even a company as big as Amazon still has three key drivers: price, selection, and convenience.

Selection is going to be number of categories, number of SKUs per category, number of SKUs per category that people are actually looking at and purchasing, quality of the inventory. There’s all these levers and drivers under there that move this. Am I … Okay, cool. So think about what are your key drivers, map those out. You can nest those down as many layers as you have in your organization. Everyone should be able to attach their work to some kind of driver. Now, once you map these out and put them in a dashboard and start putting numbers behind them and look at that data, what you’re going to see is that somewhere in there, there’s a rate limiting step.

So back to the refinery, it’s a basic flow based system. If you studied system theory, there’s inputs, throughputs, stocks, outputs, and constraints. Somewhere in that refinery at any given time, there was a bottleneck, it was literally a bottleneck. It was like the narrowest point through which the oil could not flow faster. And it moved around. Sometimes a couple centrifuges were offline. Sometimes we got a glut of dirty oil delivery and we couldn’t offload the oil into the system fast enough. Sometimes a furnace was working at half power and so distillation towers had to be recirculated. It doesn’t matter. Every two hours we’d go check, where’s the rate limiting step? And if you apply resources to the rate limiting step, it makes the entire system go faster. Chemists will also recognize the rate limiting reagent. And if you apply resources anywhere else in the business, it is wasteful and inefficient. So you can see where it’s very important once you’ve got these metrics mapped out at any given time to be mindful of where is your rate limiting step?

So you want to identify your rate limiting step, make sure everyone in the company knows it and prioritize that. So that if the person who’s in charge of dealing with the rate limiting step says “Engineering, I need this help.” Engineering knows to bubble that to the top. If they say, “I need money to do this” then they know bubble the budget to the top. So everyone focuses first on the rate limiting step to keep the business moving efficiently.

So that’s the theory. That’s basically the whole idea. So write these down. What’s your North Star? What are your key drivers? And then you might know your rate limiting step now, maybe not. Some examples of a rate limiting step would be if you have a new business and your churn rate is really high, you have poor retention. It doesn’t make sense to hire sales people or focus on marketing. If you have a very young business, you don’t have enough users to know if you have good retention or not, you’re getting a lot of traffic, and your website’s only converting at 1%. Well then that’s your rate limiting step. It doesn’t make sense to buy more traffic. It makes sense to improve the conversion rate in your website so you can get enough new users to figure out if you even have a retention problem and give the product back manager’s data to work with. So just sort of think through where’s our rate limiting step once you’ve got the numbers in there? And that’s the whole theory. So North Star metric, key drivers, everyone aligns their work with it and your rate limiting step.

So take this piece of paper and don’t just stuff it into your backpack or whatever, under your laptop and forget out about it. Like this is a very important piece of paper. This is valuable if you take it home. I feel like the coin toss scene in No Country For Old Men, like don’t put that quarter in your pocket. That’s your lucky quarter. That’s such a creepy movie. Anyways, my point is take the piece of paper home, action these metrics. So first have a conversation with your team and agree if these really are the North Star metrics, if this really is the key drivers and what is your rate limiting step? Explain your North Star metric to everybody.

Ask, don’t tell. Ask each employee, how does your work every day drive our North Star metric? Can they connect your work to the North Star metric? Each key driver gets assigned to a single individual, a single name next to it. In the Valley, CEOs would say, “I want one throat to choke for each of these key drivers.” I’m sure Europeans would have a more polite way of putting it. But a single point of accountability.

Prioritize resourcing your rate limiting step across the entire organization. Remember the goal of this is to not have to make all these trade off decisions, but to have your team come to you and say, “Hey, I was talking to the head of engineering and the head of product. And we all agree that the rate limiting step is this. So we need to do this.” And you’re like, “Great, go do it.”

You use this as the inputs. The R or KR in OKRs is key results. So those are the metrics, the drivers, that drive your key drivers, that are driving North Star become the key results in everybody’s OKRs. And then the thinking, the hard work becomes which work do we do to move this. Your startup has 20 employees, 50 employees, 100 employees. You’re not going to outwork Barclays. You’re not going to outwork the hospitality industry. They have more people, they have more brand recognition, they have more budget, they have more everything, a million times more than a startup. The way you’re going to beat them is to outthink them. And to outthink them, it means you are making better decisions than anyone else about which work you choose to do. So the conversation is given this key result, which work should we be doing to achieve that goal?

Pursue your North Star relentlessly using a metrics driven process of rapid experimentation. You don’t know how to move that North Star. Nobody does. You’ve just embedded this startup. This is a new thing. So the faster you experiment, the faster you learn. The faster you learn, the faster you get that traction and make progress.

And then the last thing is to just revisit this quarterly. The North Star metrics shouldn’t change, but your key drivers might, your rate limiting step might. So just have a look. Are we making progress on these metrics? Are these still the right metrics? Is this still the rate limiting step in the system? And I say quarterly, that’s sort of a slow cadence, but I find startups tend to be a little too ADHD. And there’s always like a flavor of the week and there’s a little too much churn. So put some real thought into it and try to pick an area of focus that you can focus on for a quarter. But if you’re changing these things more than once a month, that’s a symptom of a more fundamental problem in your organization.

All right. Final warning. I got my vintage movie references from Morpheus in The matrix. “There’s a difference between knowing the path and walking the path.” Hopefully now you all know the path. I encourage you to walk the path. You won’t be the first. Darina, I don’t know if you’re out there now, but Darina Garland runs Ooni Pizza Ovens. She’s speaking later today. She came through my program, actually just in the beginning of lockdown. I’ve got to tell you, it was a crazy time for them. So when you have a lockdown, suddenly everybody needs a pizza oven in their backyard. So they were going crazy as they came through our program and they still have a North Star metric and they implemented this process. And Darina told me afterwards, now we have almost 100 people singing from the same hymn sheet. And as a founder, that is priceless. So you won’t be you the first to do this. I wish you God speed. I hope it goes well.

And if you found this lesson helpful, I do publish a two minute per week email. I send it every Tuesday morning, where I try to give a simple, actionable tip for early stage startup founders and their teams, just to help them have a good perspective about growth, startupcorestrengths.com if you’d like more of this stuff. And if you do subscribe, you’ll get an automatic welcome email. That reply comes directly from my actual work email address. So if you reply to that email, you’re talking to me. If you have a question, if you want a copy of my slides or something like that, just reply and we can start a conversation that way. And like I said, I’m going to be here for the next two days. So I’m also happy to chat there. So I’ll just leave you with final thoughts back to Charlie Munger. You get what you measure. So choose wisely. Measure twice, cut once. Thank you.

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