It’s all about growing… right? Fast enough to please your stakeholders… aren’t these the rules of the game for startups?
Well… for those happy few who don’t need to worry about capital infusions, it seems they are valid rules. I don’t know you reader…. but for the majority of us struggling to show results in order to get capital, growth is NOT the only metric to care about in a startup.
Does a client steps in for free? Usually not. You must add up all costs that you need to inccur in for obtaining that client: many are evident and some other aren’t.
This is the reason why a viable (aka profitable) business model is asked to verify this law:
CAC < LTV
- CAC = Customer Acquisition Costs, the money you need to spend to get a client.
- LTV = Lifetime Value, the money a client spends on your business while remaining a client of yours.
If it all seems reasonable, why investors pour money into a company that actually has higher costs than value generated from its customers?
Here you can have the party started: because investors make these two assumptions:
- Validation: your business proves that in a single transaction, appart of all costs that added up to arrive to this point, you can make money from customers.
- Growth to profitability: your business will cover all these costs that we talked about if it grows enough.
If you are familiar to funding jargon, validation concept equals to seed funding and growing a business to profitability is done with following series-A venture capital funding.