Startup Stress Signs #2...look inside!

My last post on startup stresses seen from "outside" the enterprise brought lots of comments and discussion. So I dusted off my other list--things you can see from "inside" the startup--as further food for thought and introspection. Too many startups inhabit the "land of the living dead," and your job when involved is to shake that tree, consider a pivot, or ACT to do something to restore the momentum and stoke the growth engine...the principal focus of follow-on investors, not to mention the revenue line of any startup.

I still have painful memories of the hot market research startup I invested in more than a decade ago. Revenues grew from a few million to $80MM+ as profits went from negative to substantial. Years later, after three years of flat-lined revenue(albeit $80million), the startup was valued at mere pennies above its initial investment value. Why? Investors buy growth, which the most investable startups deliver consistently.

Some of my favorite "internal" signs of startup stress can be seen in the company's performance data. Others are a little more subtle. Of course the most obvious of all is seen with a simple look at the topline revenue. When that line is consistently flat or growing only nominally, the typical culprit is what's known as "product/market fit..." a solid match between the startup's value proposition and the customers it's targeting (more on that in another post). Shifts in the competitive landscape can also play a key role, as can shifts in exogenous factors including regulatory, taxation, and other oft-uncontrollable changes. In the startup itself, here are six signals to watch for:

1. Changes in Pipeline Performance: Close monitoring of pipeline movement is instructive about future revenue direction. What's the time from the first inquiry or click to a signed contract or sale, and is it increasing or decreasing? Same questions apply to average order size, repeat order rate, and similar factors that can often be intuited from solid pipeline data sets and tools like Salesforce.
2. Returns, Complaints, Terminations all offer important early warning signs of potential product dissatisfaction. Step one is to simply watch the data for shifts. Step two--which should start quickly--is proactive outreach to the disaffected customers. This is not a "winback" call, it's a customer discovery call, and it's important to make that clear in the first moments of a call or voicemail to the disaffected customer. "I am just calling to understand what happened, and not to sell you anything. I am sorry that we failed you somehow, and would appreciate five minutes of your time to understand why..." helps get you to the bottom of this potentially toxic issue.

3. Frequency of Use: Most startups can decipher and closely monitor how frequently and intensely customers use the product. While easiest for software and SAAS companies, a laundry detergent startup can also measure reorder frequency vs. household size to estimate whether they're still #1 in a customer household(as long as they have direct customer interaction). Are people spending more time or less using your software? Are they logging on with greater frequency or less often? Is the number of users at an enterprise increasing or declining?

4. Flat or Increasing CAQ’s: If every new deal is the result of unsustainable customer acquisition costs or heroic sales to friends, cousins or others, finding and closing its customers is not getting easier, as it should over time. If you're making more sales calls to get an order, or the Adwords budget-per-sale is increasing steadily, be worried. Consider a/b testing some alternate messaging or pricing strategies, as well as testing some new and different marketing channels. Be sure you're measuring carefully, as too many startups fail to focus on each step in the pipeline process. Where do customers "fall out" of the pipeline, and why, and how can the pipeline efficiency be improved?

5. Pipeline Innacuracy: Estimates of revenue and other key metrics suffer from continuous hyperoptimism. But the rubber meets the road when comparing, say, the June forecast made in March with the June revenue actually delivered. It's easy to spreadsheet consistent month-over-month growth, but far harder to deliver. Watch the percentage "misses" from one month to the next. Clear danger sign is an increase in the spread between forecast and actual.

6. Key people departing earlier or dressing better: (A strange one I've always kept a close eye on myself.) The troops often have a keener sense of a stalled-out company than its leaders do, in part because they have less reason or less need to believe in the company the way founders must. Are people leaving closer to "quitting hour" or not regularly working as late as they did only a few months ago? When an employee known for tee-shirts and jeans switches to a regular diet of skirts or khakis and button-down shirts, there's a good chance they've "voted" on the company's future and are heading for a job interview or two or a networking event

Got any signs of your own? There are lots to look for...so please comment with your favorite startup stress signal.