Why it's important to benchmark your startup
What is benchmarking good for?
To benchmark your startup means comparing and evaluating its performance against successful startups and industry leaders. It involves analyzing key metrics such as financial metrics (revenue, profitability), operational metrics (customer acquisition cost, conversion rates), or market metrics (market share, growth rate). Benchmarking can also involve the analysis of operational processes and strategies.
By benchmarking your startup against successful startups or industry leaders, you can ideally identify and learn from the best practices that make them successful. To understand how other companies have achieved their success and adapt those strategies to your own operations can help you to stay updated on the latest trends, innovative approaches, and efficient processes that are driving success in your startups industry be it in e-commerce, financial services or manufacturing.
You should benchmark your startup for several reasons. But foremost to increase the chances of startup success. This is for the reason that a proper benchmarking analysis will help you to identify the areas of strength and the areas that need improvement in your organization in order to increase the performance of your startup. The goal of benchmarking is to provide you with an objective assessment of how well your startup is doing. This will help you to set realistic goals for your startup and track their progress over time.
In a nutshell you should understand benchmarking as a continuous process that encourages your startup to constantly strive for improvement. By doing this your startup might become an industry leader one day as well.
Now that you understand what benchmarking is all about, let's focus on what I believe is important to focus on in practice when benchmarking your startup.
How do I benchmark my startup?
You should start with setting the objectives of your benchmarking analysis. Some guiding questions you could ask yourself in order to kick-off your benchmarking process are: Am I looking to compare my startup's performance against industry averages or against specific competitors? Am I focusing on specific metrics or overall operational efficiency?
Let's assume that you decided to benchmark your startup against specific competitors and to focus on specific metrics. What would the next steps in your benchmarking process look like? In this case the next step I suggest is to first conduct a market research in order to identify other best in class companies that are operating in the same industry and with a similar business model as you do. You could for example focus on startups that have already disrupted a market or introduced innovative products or services successfully. Once you identified the competition that you want to benchmark your startup against you will continue the benchmarking process with gathering information about their performance and their key performance indicators (“KPIs”). You must understand the KPIs that your competition uses for measuring performance. Following those steps will establish the benchmarks for the comparison of your startup against your competition. Let's assume that as part of your analysis, you found that the best-in-class competitors in your industry use the following KPIs to measure and track their performance.
- Financial metrics (revenue, revenue growth, profitability)
- Operational metrics (customer acquisition cost, conversion rates), and
- Market metrics (market share, growth rate).
Now that you have clarity on the KPIs you can start to gather and analyze equal metrics of your own startup. By now it also becomes clear how important it is for your startup to have a well functioning finance department set up that records metrics like e. g. revenue, cost of sales, revenue growth and the like reliably. You must also have measures in place that enable you to collect data about your customers in order to be able to calculate metrics like customer acquisition cost („CAC“), customer lifetime value („CLTV“), customer growth, customer churn etc. in order to compare the metrics against the established benchmarks.
Once you have determined all the internal KPIs of your startup and backed them up with clear figures, you can compare them with the KPIs of your competitors. By comparing the KPIs you will identify areas where the company excels and areas where it falls short, and determine the underlying factors contributing to these outcomes. Maybe you will see that the competition has lower CAC and at the same time a higher CLTV. Hence the competition is ahead of your startup in investing each marketing Euro more wisely and profitable than your startup. This would certainly be a weakness in your startup‘s performance. You must go into deeper analysis at this point to understand the underlying factors in order to be able to take the appropriate actions that would result in improvement of CAC and CLTV. Make sure that you implement an improvement plan and to track your progress against the established benchmarks.
Another result of your KPI analysis might be that your startup actually outperforms the benchmarks. In case this is the result of your benchmarking analysis it should be the starting point to determine which practices have contributed to the success of your startup. Use this information to develop a strategy that will sustain this advantage and for further improvement in order to stay ahead of the competition.
Leverage benchmarking as a tool for growth and success.
And keep doing it. Do not stop to track the KPIs regularly to ensure your startup is on track to achieving its goals. Especially as it evolves and the market changes. I highly recommend using benchmarking analysis as a tool for continuous improvement and adaptation. Please understand that besides focusing on enhancing specific metrics benchmarking your startup could also involve adapting strategies and optimizing processes.
Investors like startups that actively benchmark
If you are a startup founder seeking for funding be aware that investors assess your startup based on criteria like i. e. founder team, management skills, growth potential, market positioning, and performance compared to industry standards. A top notch benchmarking analysis will demonstrate your understanding of your startups industry, and its ability to adapt to emerging industry trends. Moreover, you will prove that you understand your startup's strengths and weaknesses and your commitment to continuous improvement.
Investors feel definitively more confident in investing into startups that are able to provide data-driven insights through benchmarking analysis in order to inform their decision-making processes. The reduction of guesswork and assumptions by providing concrete metrics and benchmarks to assess potential opportunities and risks will help you to make more informed decisions regarding e. g. product development, marketing strategies, resource allocation, and operational improvements, thereby increasing your startup's attractiveness to potential investors.
Which data sources shall I use for benchmarking ?
When conducting a benchmarking analysis for your startup you can make use of many different data sources. When choosing the data sources you have to make sure that the data that you will gather is first of all reliable and second of all up to date.
There is a broad variety of sources you can utilize for benchmarking your startup. The following list will focus on the three sources that are most commonly used:
- Look for financial information that is publicly available. Especially for startups that are publicly traded, you can access their financial statements, annual reports, and the like to gather data on their financial performance, revenue growth, profitability, and other relevant metrics. Watch out for investor relations information on the companies websites. When benchmarking your startup against industry leaders in the US, you can also search for respective SEC filings that will provide you with data relevant for benchmarking your startup.
- Another very good source are industry reports and research studies that are published by many industry associations, consulting firms, and research organizations. Those provide usually valuable insights into the performance and trends within specific industries and often include benchmarking data, market analysis, and key performance indicators relevant to your startup.
- The last data sources that I believe are really useful and easily accessible are online listings like e. g AngelList or Startup Genome and some venture capital data bases like i. e. PitchBook, CB Insights, and Crunchbase that provide information about startups, including funding rounds, valuations, and other financial metrics.
In a nutshell all the sources mentioned can offer insights into the profiles and performance of startups in various industries. They can help you benchmark your startup against similar companies in terms of performance, best practices, funding raised, investor profiles, industry trends and so forth.
Summary
Conducting benchmarking is important for your startup success. It will help you to understand the performance of your startup, and make clear areas of improvement in order to not fall short behind the competition. Benchmarking will also boost investor confidence in your startup and might increase your chances of raising venture capital investment. I highly recommend you start benchmarking your startup today. It’s really crucial for increasing the chances of becoming successful.
