This week's discussion...
There's One Metric Which Could Determine The Fate of Your Startup
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THE COMMONS SPOTLIGHT
There's One Metric That Could Determine The Fate of Your Startup
In the past decade, there has been no shortage of mega fundraising rounds financed by behemoth investors such as Softbank and Tiger. The right product can change the world, and those savvy enough to recognize the next big thing will reap enormous rewards for years to come. That being said, as Bob Dylan once said, the times they are a-changin’.
The VC gravy train is slowing down. Growth at all costs is no longer an option. Promising young startups are being told to grow up. And growing up means discovering a viable pathway to profitability.
Don’t panic! The winners… and there are many of them, will still emerge victorious, but this will rely on more than product-market fit. Strategic Finance has never been more important for ensuring the future success of a company. And we have one weapon in our arsenal that is more valuable than all the rest: LTV/CAC.
What is LTV/CAC?
LTV stands for Lifetime Value. This is the total dollars brought in by an average customer over a lifetime. How companies influence LTV may look very different depending on the industry. On one hand you have SaaS companies such as Hulu. The goal is to upsell users to premium subscriptions while avoiding churn at all costs. On the other hand are marketplaces such as DoorDash. In a given period there can be one, several, or many transactions per user.
CAC stands for Customer Acquisition Cost. Typically a customer is acquired through one of four categories:
- Sales Programs
- Marketing Programs
- Organic (this one technically has a CAC of $0, but it’s very rare for a company to depend on organic acquisition for rapid growth)
In addition to the direct costs associated with the above programs, it’s up to you as the finance expert to think through the salaries, overhead costs, and support that ought to be interwoven into each program. For example, let’s say a five person team launches subway ads in NYC. If each person spends roughly 20% of their time on this campaign over 6 months then costs should include 5 x Fully Loaded Headcount x 50% (for 6 months) x 20% (time spent). The cost associated with buying the space should also be included.
What is a Good LTV/CAC Ratio?
By definition, a ratio below 1.0 loses more money as it grows, so it’s fair to say that is the bare minimum. Typically 3.0 to 5.0 is considered the sweet spot that investors want to see from a healthy business. If a ratio goes much higher than 5.0, the company may be leaving too much growth on the table, and profits should be reinvested in sales people or marketing.
Why is LTV/CAC So Important?
LTV/CAC is the middle ground between growth at all costs and the fabled EBITDA profitability. It shows that a company makes money on each transaction instead of losing money. In theory, all other costs can be diluted through economies of scale. Typically LTV/CAC has most value for two types of audiences:
- Investors. During a fundraising round it is always a good idea to sell your company to VCs through favorable LTV/CAC ratios.
- Company Leaders. It’s in the best interest of your Founder, CEO, and StratFin Director to explore the brutally honest facts of your current ratio. What follows is a discussion on levers and ultimately plans for product and biz ops related decision making. Perhaps retention is uniquely low for one type of customer and a change in the app experience will improve this. Or CAC is more favorable in a specific line of business. It makes sense to grow your salesforce there. This can be reviewed quarterly and steer the decision making of the company.
If your company is not taking a look at LTV/CAC, perhaps you should be the person to change that. The strategic insights it offers are game-changing. We here at The Commons are big fans of LTV/CAC. In fact, we discuss it plenty in our Strategic Finance Sprint. ⬇️
If you're interested in learning more about LTV/CAC and building additional hard and soft skills to explore or accelerate a Strategic Finance career in tech, apply to join our last cohort of the year. More on it below...
The Strategic Finance Sprint is a 5-week interactive program led by mentors from tech companies disrupting their respective industries. The Sprint takes multiple approaches towards practical learning, through:
- Workshops: Mentor-led, on topics such as Demystifying Strategic Finance, Modeling 101, and LTV/CAC Analysis
- Case Studies: Small groups will design their own business plan for a streaming service hoping to attract new users. The final project is pitched out on presentation day.
- Mentor Office Hours & 1x1s: Opportunities for candid conversations on topics such as negotiating salaries, which level to apply at, and how to pursue warm leads on job opportunities.
Who Are Your Mentors
We hand select mentors who are rising leaders in the tech industry. They’ve worked on projects essential to their companies such as fundraising, annual planning, and external partnerships. Perhaps most importantly, they’ve experienced the challenges of breaking into a competitive industry, and scaling their careers once inside.
Along with hard skills such as modeling and unit economics, your mentors are here to help build your confidence and give you an executive-level presence.
What You'll Learn
Our mentors believe that both hard and soft skills are essential to rise to the top. After the 5-weeks, here are just a few skills you'll walk away with:
- Forecasting… building a believable top line, variable cost, and fixed cost structure using external and internal signals
- LTV/CAC… sowing the seeds of profitability by ensuring each customer brings in value outweighing their cost of acquisition
- Unit Economics… understanding the revenue and cost of a business on an individual unit basis
- Storytelling… determining the right level of detail for your audience. A CFO, Strategic Finance Director, and a Chief Product Officer all have different priorities and require different types of messaging.
- Having an opinion… during a pitch, you know more about a topic than anyone else, but without an opinion, this won’t go very far. Building confidence and selling an idea separates the good from great in this industry.
- Teamwork… you'll leverage the unique strengths of a diverse team to create a finished product greater than the sum of its parts
Want in? APPLY HERE. The cohort is extremely limited (< 20 seats) so that you get the best access to mentors and the community. It's the last opportunity to join in 2022.
PS thanks to Sean Newman, one of our incredible Strategic Finance mentors at The Commons, for putting together this piece on LTV/CAC 🙏🏻. There's so much more to learn in the Sprint 💡.
What’s happening at The Commons
Mentor Office Hours
Join two of our mentors, Eileen (Business Development at GIgs | ex-Instacart) and Julie-Anne (Product Ops at DoorDash | ex-Ritual) to learn about their career trajectories, how they broke into tech and an open Q&A.
Thursday, October 27 6-7PM ET
📣 Bet on Canada Summit
Presented by our partners & friends, The Peak.
The Peak has brought together our country’s top business leaders, investors, and innovators for a one-day-only business event in the heart of Toronto.
You’ll hear from a powerhouse line-up of speakers that will explore the challenges and opportunities of building a business in Canada and spotlight strategies for how to navigate them.
November 8th | IRL Toronto
Open to all!
Register here (save 15% with code Commons15)
The Commons X The Peak IRL Social
We're co-hosting a social with The Peak, taking place after the Bet on Canada Summit. You can attend the Summit, the Social, or both!
If you're looking to make new connections across business & tech, this one's for you. We promise candid connections with ambitious professionals, because that's what we're all about.
Free to join us, with some drinks and food provided.
November 8th 5:30 - 9PM | IRL Toronto
Open to all, but limited spots!
ICYMI we recently hosted these events. Members, you can find relevant recordings on our platform.
- Pitch Yourself | There was no better time or place to meet community members AND level up by refining your answer to the age old question: "So tell me about yourself".
- Virtual Community Hang | A virtual gathering to catch up and play casual icebreaker games to build new connections in the community!
- Mini Interview Case Workshop | Hands-on interview case prep with The Commons mentor, Rohan (ex-Sonder, ex-Lifehouse).
Application Alert: Final Sprint of 2022!
Looking to join The Commons?
Your way in is through a Sprint. Apply to secure your seat below - there's only one Sprint left in 2022.
Strategic Finance Sprint
Our November Strategic Finance Sprint is the last opportunity for you to level up with us through a Sprint for 2022. It'll kick off next Tuesday, Nov 1st and wrap before the holidays. This is an extremely curated cohort of <20 seats.
💥 LAST CALL FOR 2022 💥
Learn more // Apply now
SOLD OUT SPRINTS
Our final Strategy + Operations, Product and Revenue Growth Sprints of the year have kicked off. Email me back if you want to secure a spot for January. You'll have the added benefit of being able to join the community two months ahead of your Sprint kickoff.
View all Sprints
HOT TOPIC - 1:1 Coaching with a Mentor
Our newest product launch was the hot topic yesterday! The Commons community members now have access to personalized 1:1 coaching with a curated group of mentors like Kaiz (PM, Google), Aarti (Sr. PM, Uber), Stanley (Growth Strategy, 2K) and 25+ others.
Over the past two years, our Sprints have connected almost 1,000+ members to mentors, to learn and get advice from. Think of 1:1 coaching as an extension of that! We built it because our community asked for more ways to connect with mentors right as they need them, to tackle personal career challenges like prepping for a job interview, tackling a project at work or negotiating a year-end promotion.
Community members: we'd love to hear what you think of this new product! DM us on Slack or reply to this email. But first, check out the platform and sign up - the first 3 people to book time get an additional hour on us, for themselves or a friend!
Coaching is only open to community members. You can join The Commons community by applying today to join the community-only or a Sprint plus the community. Be sure to chat with one of our current members to get a 10% off referral code and to bump your application to the top of our pile.
Book a Coach
Your weekly level up
Where to source startup roles?
A recent community Q&A thread
Here's what the community had to say (thanks Ryan, Jason, Kim and Aya for the suggestions!):
- The Commons job-openings Slack channel
- Crunchbase for new funding announcements
- Twitter if you're following the right folks -- suggest finding a VC you like and see who they follow. From there, the platform will give you plenty of suggestions on who else to follow
- Newsletters, like Exec Sum, to see which companies receive funding
- Job boards like YC, Otta and AngelList
- BuiltIn, based on your region (eg. BuiltInLA / BuiltInSF / BuiltInChicago) - they post announcements of new funding rounds
- Follow companies you're particularly interested in on LinkedIn
Team-Building Offsite Ideas
Community Question: "Recos requested!! Any team bonding / offsite activities you'd recommend? 😃"
- Axe Throwing
- Archery Tag
- Arcade Bar
- Escape Room
- Virtual or IRL cocktail making classes
- Virtual or IRL cooking classes (check out Eataly if you're in a major city)
- Sporting event (eg. baseball)
- Mini putt
- Lawn bowling
Have more suggestions? Add them to this thread.
Our community has been buzzing with interest in tech companies thatfocus on sustainability and the environment. But you don't necessarilyhave to work at in GreenTech to have a positive impact.
Hop into this tread to reply to Ali's question and share your suggestions!
You have an 8 X 8 X 8 cube made up of 1 X 1 X 1 cubes. If you fully dip the cube in paint, how many 1 X 1 X 1 cubes are coated on 3/2/1/0 sides?
Check out the answer here.
A community-driven IRL coffee hang in Toronto that melted our souls 🥺