Over the last 12 months, there has been a significant shift in the narrative: from growth at all costs to profitability. Within this operating environment the balance of power has shifted, with investors taking more time to conduct due diligence and rewarding efficiency over velocity.
For founders, this means two things.
First, that raise is going to take longer. What may have taken 6 months before will now take 9, and the runway that you had now needs to stretch even further.
Second, the metrics that matter have changed from acquisition and growth at speed, to controlled and sustainable growth with a view to profitability.
Building a sustainable and scalable startup requires a different skillset. It requires a deep understanding of the metrics and levers you have to pull in your business, how you can get more spend for every dollar, and how you can optimise every aspect of your startup, from sales and marketing to operations and product.
So where do you prioritise, compromise and minimise?
Over the last month, we connected with a number of specialists and rounded up the key principles founders should consider when planning for the next 6-12 months – particularly in the lead up to their next raise.
Read the key principles below, or skip to a specific section:
- Know the metrics that demonstrate efficient growth
- Learn about your business and not just your product
- Understand the levers you have to pull
- Focus on retention and reducing churn
- Look for efficiencies in your funnel
- Implement structured experimentation
- Ask for help
Who we spoke to:
- Jerry Stesel, General Partner at OIF Ventures, an early-stage venture capital firm focused on early stage seed to Series A.
- Rajeev Gupta, a Partner at Alium Capital, a cross-over fund that does public and private investments all the way from early stage to late stage or even public companies.
- Leanne Hegarty, a Partner at KPMG Australia who works with startups and scale-ups on their finance and accounting.
- Daniel Lohrmann, the Founder and Managing Director at ikaros, a growth consultancy focused on product-led growth and growth foundations.
Principle 1: Know the metrics that demonstrate efficient growth
If you’ve raised or know a founder who has raised in the last 6 months, you’ll probably have heard them say that investors are taking more time to conduct due diligence – and that means diving into the metrics of your business to see if what you’re doing is sustainable and scalable. However, if you haven’t come across this before, it’s tricky to pin down what this actually means.
The underlying metrics are stage, industry and business model dependent, but Rajeev and Jerry say these are some of the metrics that would constitute a ‘no brainer’:
- A lifetime value (LTV) to customer acquisition cost (CAC) of 3x and above. This means for every dollar spent on the cost of acquisition, you’re generating $3 of lifetime value.
- A burn multiple of two times or less, which means for every $2 of burn, you’re generating at least a dollar of recurring income.
- Less than 12-months payback on your cost of acquisition.
- Net dollar retention of above a hundred percent. 110% to 120% is a very strong metric which shows your net churn on your existing customer base is growing at 10-20% per annum.
- 30-40% revenue growth and a gross margin of 70%, plus an operating margin of 2-3 years at 20-30%.
- Revenue per employee of $150,000. If you can hit this amount, this means you can cover your employee costs.
- 20-30% R&D spend and 15-20% sales and marketing spend.
Of course, a whole lot more goes into the decision-making process, including the quality of the team and founders. But if you’re in the middle of the pack, striving towards these metrics would help you stand out and show that you understand your business and your product.
Principle 2: Learn about your business and not just your product
Product is critical. However, in this environment, it’s equally as important now for founders to demonstrate a strong understanding of their finance function – not just their product.
“Founders understand their product and they're and are intimately in love with the product, which is great. But understanding your product and being able to talk about your product is not the same as being able to talk about the commercials of your business,” says Leanne.
That means it’s not enough to turn up to an investor meeting with your product and CAC in one document, your P&L in another, and your forecast and cash in another.
“How are you showing that you’re making any profit? It’s not showing where your investment spend is. It’s just a line of your outgoing. That’s what this [focus on efficiency] is. It’s eventually saying we have some revenue coming in,” she says.
“When everything is independent of each other, that’s a giveaway straight away that you don’t know what you’re talking about – because they’re all interrelated.”
Rajeev echoes this sentiment with an example of a business that was under 2 years old and doing $70,000 of trailing 12 months revenue. The team was working with an independent small advisor with 17 worksheets within a single Excel file, with cells reaching 4 or 5 different worksheets. Unsurprisingly, they didn’t walk away with a cheque.
“We can’t underemphasise this: it’s got to make sense, and management has got to be actively involved in the finance decisions around the modelling.”
This is the game-changer for investors – when you can do it and show that you actually understand your business.
“When you go and say, “this is my CAC, so if I invest this, you can see this is the investment dollars that we've made here and that's in your balance sheet, it generates X amount of revenue and that revenue generates this amount of profit, then that profit then generates this amount of cash, and then this cash can then be invested to then accelerate growth – it shows that everything is interrelated and it’s thought through and they’re the commercials,” says Leanne.
Principle 3: Understand the levers you can pull
The same goes for understanding what elements you can influence to move the needle for your business. When a founder knows exactly what levers to pull to generate profit, and where to dial down or scale up, that’s when they truly shine.
“If you turn up to an investor meeting and you don’t understand the sensitivity of when you move one of those levers and drivers, you don’t understand. You understand your product, but you don’t understand how to run a business. And if you don’t know and you can’t demonstrate that you don’t know how to run a business, these guys are going to say “nice idea, but…”, she says.
Even if you aren’t generating any revenue, Leanne says it’s important to set up the right foundations from the get-go – rather than put it in the too hard basket for later.
“You start from day one, because all that happens as you go through pre-seed to series A, B and IPO is that you have more transactions and you’ve got more zeroes at the end of your numbers. That’s all it is – it’s just growing. If you nail it in the beginning and you put the right governance, the right processes and the right KPI reporting in it initially, it grows with you. You grow with it, you learn it, so when you get down to that final state, it’s just more of the same – and you get it.”
Principle 4: Focus on retention and reducing churn
All our panellists agree: in a world where resources are limited and hard to come by, reorienting your sales and marketing team towards cross-sell, upsell and retention is a key opportunity to grow efficiently.
”In the short term, in the three to six months where net new customers will be harder and sales cycles will be longer, you might find that your limited resources are better spent on expanding existing customers and reducing your churn,” says Jerry.
Having said that, that’s very time-bound advice for the short-term and you want to be reassessing that every three months or so. You don’t want to be completely focused internally and not growing net new customers, then have a massive hole in your pipeline in 6 to 12 months because you haven’t done any outbound prospecting.
Principle 5: Look for efficiencies in your funnel
Often when costs get cut, sales and marketing are the first to go. However, this becomes a vicious cycle – and the panellists warned that’s not the best way to go.
“It’s not about not spending money,” Leanne stresses. “Right at the get-go, you might have to have a higher cash burn rate to get you more cash flow tomorrow. But it's understanding the levers and drivers of your business. If we do accelerate that, is that going to accelerate the revenue or am I just throwing cash against the wall and hoping that it sticks?”
This is where having a clear understanding of where you can get efficiencies in your funnel helps, says Daniel.
“Capital efficiency can take different shapes and forms. And what we are seeing is at the top of the funnel, it’s about looking at cheaper channels, a reduction of ad spend, and much tighter criteria around return on ad spend and payback periods,” says Daniel.
That means looking at aspects of your sales and marketing like:
- the ROI you’re getting out of each channel,
- how effectively you’re converting across the funnel, such as from free users to paid users,
- automating as much of the customer journey as possible,
- increasing average order value or frequency,
- minimising churn.
Principle 6: Implement structured experimentation
Daniel also says that structured experimentation is key when you’re trying to grow on limited resources.
“Really think about your learning velocity – especially if you're early stage, and not only from like a product market fit perspective and developing the product, but also from a growth perspective,” he says.
Have a process for ideation, prioritisation and for defining the metrics. Once that’s in place, set a regular cadence for experiments – for example, a weekly sprint where you run a set number of experiments. From here, you can iterate and improve over time without radically investing time and resources.
“Whether it’s incremental experiments or radical “big bang” experiments, you can set yourself that goal. You can say, this week I wat to launch 5, 10 or 20 experiments. It can be as easy as sending out a survey as a low-friction experiment to validate certain product features or ideas. But now you’ve got that initial response and you can go into stage 2.”
Principle 7: Ask for help
Founders can’t wear all the hats in their business, which is why it’s critical to ask for help, says Leanne.
Asking for help will help you get up the learning curve of financial competency and allow you to spend your limited time and resources on other areas, like product development or building relationships with your customers.
“Invest in yourself and give yourself time to get up the curve. It will serve you well today and more so, you’ll get it paid back to you 10 times over down the track.”
We’re here to support you to understand your business and the levers you can pull to optimise spending and chart a pathway to profitability. If you’d like to learn more, get in touch with us to speak with one of our startup specialists.