Metric Stack - Hype Factor and more!
Third edition: driving revenue or raising hype?
Welcome back to Metric Stack. I’m Priyaanka Arora, your personal metric assistant and Content Researcher & Writer at Klipfolio. Are you enjoying your Metric Stack journey so far? I know I am; writing this newsletter is the highlight of my workday! Last week, we asked ourselves if it’s possible to measure hope. This week, I’d like to continue our discussion of measuring concepts that are hard to quantify.
Metrics let you measure humanity
You might currently think of metrics the way I used to: a measurement of tangible value, be it revenue, conversion rates, or churn. There’s this idea that metrics exist to measure the health and performance of your business, and that’s mostly true.
Still, there is a class of metrics that measures the human being behind the business decision. These metrics of humanity capture what makes us different from our computer overlords: the ability to hope and dream, a company’s impact on its employees... or perhaps something not so nice, like the tendency to hype up an idea’s worth. It’s this third example I want to talk about today:
What is Hype Factor?
Hype Factor is the ratio between capital raised and recurring revenue. This metric is the product of Dave Kellogg’s analysis on the bubble surrounding today’s startup unicorns. Dave, a SaaS expert we’re proud to have as a contributor on MetricHQ, devised Hype Factor in his search to quantify what he calls “hype”. In other words, raised capital is burned to generate recurring revenue or to build a bubble of hype around a company. Whether this is good or bad depends on a few factors, which I discuss further below. For now, let’s start with the formula for Hype Factor, which is represented as a number greater than zero.
Hype Factor = Capital Raised / Annual Recurring Revenue (ARR)
Use Bessemer Efficiency Score (we learned about this metric in the previous edition of Metric Stack) to determine how efficient your earnings to burn ratio is, and pair it with Hype Factor to measure the extent of capital you have converted to earnings. With five key metrics: ARR, Net Burn, Raised Capital, Hype Factor, and Bessemer Efficiency Score, you can easily put together a dashboard to measure your capital efficiency metrics over time. I recommend this starter guide to dashboards by Emily Hayward to get you started on building your dashboard.
What’s a good Hype Factor benchmark?
Dave Kellogg estimates that a hype factor between 1-2 should be your target, although a Hype Factor of 2-3 can be considered normal for early stage startups. A score between 3-5 is worrisome, and a Hype Factor that exceeds 5 generally indicates that your capital is directed towards building hype rather than revenue.
This is where you might wonder how to interpret this metric. After all, we’re dealing with a metric of humanity. It’s fair to question what it even means to say that your business is generating hype. The nature of the word makes it sounds like a negative trait, and begs the question:
Is hype bad?
Not all hype is bad. The characteristic of “good” hype is that the increased attention ultimately converts into a loyal, paying customer base. In general, if you find yourself raising funds and then investing in huge marketing gimmicks that further raise funds but with little to no sign of ARR, you’re suffering from “bad” hype syndrome. This is why tracking Hype Factor can serve as a timely reality check.
As a founder or leader, does it matter if the hype surrounding your business is perceived as good or bad? Especially for a B2B business, we can argue that the end goal of outlandish marketing spend is to attract paying customers.
When you have concrete earnings to show as the fruits of your brilliant strategy, then you can say you’ve generated good hype.
As is the case with other metrics that measure the intangible, conditions apply. Hype Factor applies to subscription-based pricing businesses only, because of the way the formula is structured. Another factor to keep in mind is that capital expenditure varies across industries, so context matters when calculating this number.
Finally, hype can trigger a cognitive bias that skews the perception of your company in a positive light, even if your revenue is poor. While that’s initially good, the crash from perceived height is greater than taking a more humble approach.
What’s new on MetricHQ?
Metric Stack is powered by MetricHQ, a massive collection of expert-curated metric definitions, benchmarks, formulas, and more. We’re always adding new metrics such as Sales Cycle Length, reviewed by Amplify Capital analyst Qhalisa Khan. Make sure to bookmark MetricHQ as your online reference for everything metrics!
Stay tuned for the next edition of Metric Stack Newsletter to get the latest scoop on all things metrics! Send feedback, comments, questions here: parora@klipfolio.com