A thumb rule to tell if a startup is failing
It’s a pretty good thumb rule to understand if a company is going to fail if you’re coming back to it majorly when there’s an offer. We tend not to notice, but here's why we should.
A company can only engage customers through products or services and not through offers in the long run. In the startup (or at least the VC) ecosystem the two have direct parallels to two key terms:
- LTV (Customer Life Time Value) : This is how much a customer will contribute to the gross margin or conversely a proxy measure for how much a customer values your services
- CAC (Customer Acquisition Cost) : This is how much is spent to acquire a customer or a measure of how much spent on offers/discounts/advertising and the like
For a company to survive in the long run, the LTV has to be great than the CAC because if on average, the customer is not more valuable than what you have to spend to acquire her/him it’s fairly obvious what that means.
This implies that if a company is unable to engage a customer through services (i.e. low LTV) and has to resort to offers (high CAC) then it’s going to fail.
This is a pretty incredible heurestic to tell a faulty business. One should either focus on pushing up LTV (reducing churn, increasing margin or the like) or push down CAC if you're looking at improving a startup's health.
I blog about venture investing in India at Life of a Junior VC
IIM-A||Core team-World's first Smart Policing Robot|ISB( Research Fellow)|Airbag jackets for motorcycles
4 年As I reflect I could remember so many startups from Phonepe, Snapdeal (prior) to Uber eats! This Seems to be a very good criteria to filter ??
Infrastructure Project Manager | Nurtured and grown in Infrastructure Projects (Views expressed are personal)
6 年Does this apply to MSME Construction startup’s too?
Passionate about sustainability
8 年Very helpful...Thank you for sharing it.