More on Handling Optics for Startups:
Measurement and Management
Note: This is a follow-on piece to a blog on the same topic that I published last week. You can access that post here: Managing the Trickiness of Optics for Startups
Shortly after publishing my last blog, I received two very interesting questions separately via email. Both had to do with ways of quantifying or measuring optics in order to make them subject to internal company controls or management oversight. The premise of these questions is that if a company and its leadership can capture and measure optics, they are unfixed, conquerable and changeable.
The premise is by and large correct. Optics can be corralled and then managed. Like everything related to optics, however, measuring and managing them effectively can be tricky business. Why? Let’s dig in a little deeper.
When quantifying optics, a good way to start off is by categorizing them. Generally speaking, there are four different types of optics that startups will encounter. The four types optics are: (1) publicly referenceable; (2) those governed by internal metrics; (3) ‘soft’ optics that aren’t solidly measurable, and (4) ‘big ask’ optics that are measurable but that require prohibitive amounts of money and/or effort to take those measurements. Following are brief descriptions of each type.
Publicly referenceable – Visible and accessible to, and measurable by outside parties, these optics include company KPIs, characteristics and yardsticks such as growth rate, business strategy and strength, market size, competitive position, technology and market leadership, and funding. They are often surfaced in items such as press releases, media interviews, blog posts, the website, social media and other outlets.
Internal metrics – These are the optics that are generally ‘kept within the family’, such as ARR/MRR, financials, customer long term value (CLTV), customer acquisition cost (CAC), unit economics, customer retention rates, network effects, active users, total (SAM) and share of customer wallet. This category also includes assessments of true competitive position, quality of investors, quality of advisors, quality of board of directors and estimates of customer need (Product-Market Fit). All of these metrics are only internally referenceable. Interestingly, some startups do not openly share internally some or most of this information. This holdback strategy can be justified either because most employees would not understand the data, or the data is too sensitive to risk it being leaked externally – even by mistake.
Another non-publicly referenceable optics measurement is funding specifics. For example, while some companies release the high-level use of proceeds (UOP), they never release the actual details. These details, however, are all-important in determining how effective a startup is with its expenditures. They are also key to justifying valuation and how one funding cycle will lead to total capital requirements (TCR). There are good and bad consequences that stem from not being willing or able to share the details on this optics measure, but almost all startups do not delve into the details of funding rounds and UOP.
Some optics can straddle categories 1 and 2 – being both referenceable and non-referenceable depending on what kind of information you release about them. This bucket includes items such as team quality; paying customers; brand; quality of partnerships; ability to build products and quality of the leadership team. For example, a company might issue a partnership announcement and disclose that they have a total of 12 partners from different sectors, or more than 100 partners who resell their products.
Soft optics – This category includes those things that are very difficult – or even impossible – to quantify accurately. Often these optics originate externally, the result of interested outsiders “throwing shade” on a startup in furtherance of their own agendas. For example, it’s not uncommon for a startup to be tagged with negative optics by an outside investor who happens to have a portfolio company in an adjacent space. These optics usually come in the form of comments that are off-the-cuff, but that still impact potential VC investments. Examples might include comments like “I don’t know them that well, but it seems like their TCR is too large relative to return,” or “That company will never go public. It’ll be a one, two or three-bagger at best”.
Big Ask optics -- Finally, there’s the category of optics that, while quantitatively measurable, are actually beyond reach because producing the measurements are far too costly and/or involve far too much effort. For very early-stage companies, proving technology leadership by having the analytical support of one or more research firms (such as Gartner, IDG and others) would be highly desirable but not affordable. That also applies to brand – many worthy startups need rebranding but can’t afford it.
Lastly, although different, there’s another type of tough-to-tackle optics. there are optics measures which are unreachable either because they are baked-in and the company can’t change them – such as unit economics – but can be influenced as a function of time, volume or scale, new materials from R+D, etc. or are non-measurable period – such as strong or weak product-led growth
Measuring, managing – and fixing – optics is a worthwhile endeavor. It translates into increased valuations in funding and bigger exit events. It also improves sales and ARR; improves internal communications, leading to other constructive outcomes, and other positives.
Ultimately, I believe that every company should do an inventory of their optics – the perceptions of them that exist in the marketplace, among VC and among analysts. Optics are unfixed, conquerable and changeable. Marketing, sales, customer support and other departments – and certainly startup leadership – should do everything possible to shape and steer their optics in favorable directions for their companies’ benefit.