What Does Good Look Like?

In early 2022, when we began transforming Albert, the banking app I run, from burning cash to profitable growth, we started by defining metrics that make a great software business. For the prior five years, we hadn't built a great business; we had only built a fast growing one.

Cheap capital clouded judgement, convincing operators and investors that companies could be worth 30 times revenue, that gross profit margin and cash flow margin should not affect valuation, that it's sensible to spend 40% of revenue on people, and more.

To build a great business, we had to forget lessons learned. We had to channel our inner Charlie Munger.

This post is the third in a series of posts on how to transform a fast-growing, money-losing company into a profitable one, without sacrificing growth.

Five metrics

When interest rates were low, growth came at the expense of sound business.

For the first six years at Albert, we ran a business solely optimized for growth. Our peers followed a similar path: grow, raise money, repeat. When interest rates rose, the model broke because capital was no longer willing to fund expensive, unsustainable growth.

The first step to transforming Albert was defining the most important financial metrics to optimize for. We agreed on five:

• Revenue growth
• Retention
• Free cash flow
• Gross margin
• Fixed costs / revenue

Then we assessed our current state: revenue growth and retention were good, gross margin weak, and fixed costs and free cash flow awful. The second step was deciding on what good looks like—specifically, what number to target for each metric. To do this, we searched for a company to model Albert after. This would be our north star.

Stock price performance of Albert’s north star

North star

To model Albert's future, we looked for a consumer company with a great product and great metrics.