purity of heart is to will one thing

The job of entrepreneurs is to lead change. We build high-performing companies that bring valuable innovations into the world. This job starts the moment an entrepreneur decides that the way something is, is not the way that he or she would like it to be. Innovation starts with the faint sense of opportunity and ends when the vision has reached full fruition and has created wealth for everyone involved.

How do we know when we've won this game or are even in the process of winning it? How do we measure success? Certainly there are many intangible definitions of success (which are really definitions of happiness) but these are internal and not that useful to marshall a team around a vision for something new. Business is a commercial enterprise and so the tangible measure of success will ultimately be economic.

The philosopher Sören Kierkegaard said: "purity of heart is to will one thing". To me this statement underscores the need to focus on a single external, tangible, measurable definition of success. Innovation is a challenging and risky enterprise. A single number focuses an entire team on applying its creative resources on cracking the problem.

From the entrepreneur's perspective, and this includes all owners of the business, the ultimate financial number is personal networth: a portfolio of financial assets that generate residual income outside of the efforts of the entrepreneur. This definition of financial independence is the ultimate entrepreneurial success. It does not mean the entrepreneur is happy by any means–that is a different issue altogether–it only means that the entrepreneur is successful in classic terms.

Networth is the ultimate lagging indicator of the financial success of an entrepreneur. It's the number leftover after every other business and personal deduction. It means that the entrepreneur has created a business that generates net earnings and that the entrepreneur has learned to live below this means, paying off personal debt and saving the leftover money to invest in income-generating assets outside the main business. A high, diversified networth is less useful as a team performance metric because it is personal to the entrepreneur and less relevant to the rest of the team who may not care if the owner gets rich off their efforts.

The bottom line in business is either net income (earnings after business taxes and all other expenses) or ebitda (earnings before interest, taxes, depreciation and amortization). The first is essentially the personal income of the owners which they either take as personal income or retain in the company to fuel growth. The second is essentially the net cashflow from business operations. Personal income and cashflow are also somewhat lagging indicators as they occur somewhat after the successful operation of the business.

Gross profit occurs after the effective and efficient production of the products and services (revenue minus the cost of good sold) but before the effective and efficient administration of the business (general and adminstrative costs). Thus a focus on net income/net profit forces good management of the entire business, while gross profit places more emphasis on the creation of the service itself. If the team has some influence on total operations, an earnings target may be effective; if they don't, then a gross profit or gross margin (gross profit expressed as a percentage of sales) target may form a better metric.

Further up the income statement is the top line (revenue/receipts and sales, depending on whether they've been collected or merely billed.) Focus on a top line team goal can result in cash in the door, but may not place any attention on the cash going out of the door and therefore whether there is any left at the end. There are several interesting ways to present a top-line metric. One is in absolute terms: total revenue for the company; or it can be revenue per store or revenue per employee or revenue per customer.

Participation volume is a number that appears off sheet but is more leading than revenue. Revenue is made up of two main numbers: the number of customers (participation) times the price each is paying. Revenue increase as either of those numbers increase but there is not necessarily a linear correlation between price and volume. Sometimes as price goes down, volume goes up and somewhere in there is an optimal amount of revenue relative to the cost of servicing the revenue.

Participation volume is a leading indicator but it is not at the front. Other metrics such as new sales leads, advertising impressions and outgoing cold-calls are further out but are also most relevant to the members of the team working on sales and marketing. The ultimate leading indicator is the number of new opportunities that the team identifies as possible future value propositions. Some of these opportunities trigger major research and development efforts to create new products, services and entirely new lines of business for new customers.

What separates the truly successful entrepreneurs from the less successful ones is leadership. Innovation is not a solo activity. It's teams of people who create the really magnificent contributions to humanity. Teams win together when they work together and what brings a team together is a common focal point: a shared goal.

Somewhere in the value creating chain from opportunity identification to networth building is the best way for a team to target its immediate (leading) and ultimate (lagging) definitions of success: The best metric for immediate individual success is the leading indicator that tends to focus a team member on making a great contribution and performing at his or her best. The best goal for the team is the lagging indicator that tends to focus each team member on working together. One number for the team and one number for the person creates focus. One leads into the other as the two numbers are separate only in timing.