I love payback period, it's a great metric. But it's easy to take it too literally. It's meant to be a tool to help you make prioritization decisions ("what if we do this instead of that"), but people often use it as a management report ("we did this; here's the verdict").<p>Here's a SaaS example: if it costs you $1000 to acquire a customer that pays you $100/month, the PBP is 10. That doesn't sound amazing. But you have options! If you give the customer a 20% discount to pay annually, they're now paying you ~$1000 upfront, for a PBP of 0. Tweak the numbers slightly and you can get a negative payback period. Suddenly your "capital inefficient" business has a big flywheel without the need for outside capital.<p>It's easy to think decreasing acquisition costs is what you need to do in the current market (and believe me, that's not a bad idea!), but that's the denominator. There's also a numerator - how much cash you bring in, and how quickly - that matters just as much. It's cash flow that matters, not profit.
This isn't another 2000 crash. The internet is much, much larger today. And the prize you get for being #1 in any market is enormous. It's so large that it pays to gamble with questionable growth strategies in the short term.<p>Reasonable growth that balances LTV and CAC is nice and pragmatic but it's not a winning strategy when your competitors are putting the pedal to the metal.
“This forced other disciplined startups to loosen their ad spend to be competitive in the venture-market industry and created an era of capital-inefficient businesses. With time, this will re-adjust back to historical norms and the process will be painful.”<p>I thought this was a pertinent quote.<p>You’re going to see many companies deciding to become cash flow positive instead of growing. And if the business is stable, the quickest way to get there is to drastically cut operating costs…
So I am a Silicon Valley outsider. I live in the northern EU and work with project management in the construction industry representing the owner. It’s mostly infrastructure, roads, water. Old industry, conservative, we basically hate new things. On my spare time I tinker with my computer, learn assembly or whatever. Hence HN.<p>I have recently started a course in corporate finance at my local uni because my new role requires me to understand accounting, making business decision and so on.<p>I haven’t finished my course, and I have to admit that I skimmed the article. So what I am about to say is probably wrong. It’s a feeling I have.<p>I have the feeling that a lot of theses articles are pretty basic corporate finance. What I mean is that if you study and try to understand basic CF, you will gain the insights that many of these articles talk about.<p>When I then read in the comments that there are cases where tech leads with no business experience get millions in funding and basically are learning by doing. Silicon Valley seems to be on another planet for me. It’s sounds surreal to me.<p>If I was an investor I would never give that person money since projects are so extremely difficult. The wicked problem is a real thing. Or maybe I am just poor and don’t get how people with large amounts of cash think.
I get that it’s a numbers game and you have a portfolio of companies, but still.<p>Guys that are closer to SV, I would love to hear your thoughts on my thoughts.
Remaining profitable is likely even harder, as other people will rush in and start providing similar products or services at competitive prices. In a heavily financialized system, the common solution is monopolization (buying up startup competition using pools of capital) - leading to situations like TicketMaster, which gets away with providing low quality-of-service to artists and their fans because they have no alternative to turn to.<p>Unregulated markets in a finance-centric economy inevitably drift toward the controlled monopolistic model for this reason. Advocates for unregulated free-markets either don't understand this or are simply being deceptive and are really trying to maximize profits by promoting the growth of monopolies.
The number of times I’ve worked at a place where some sales asshole was trying to land $1 of revenue that was going to cost us $2.50 to achieve the deliverables… wtf are they teaching in business school?<p>One place I worked, their strategy was to chase the “whales” first and get them as customers so we could use them to get other customers. So many problems there that only because apparent to these idiots afterward. First, big companies aren’t idiots. If you have next to nothing to offer, they’ll give you next to nothing in return. And once you have an exploitative contract, good luck renegotiating it once your product has improved.<p>In this particular industry it was even worse, as we found out. The big companies felt like they were doing people a favor, the medium sized companies were just cheap. Only the little companies were hungry and humble enough to pay good money for good product, but now you have a product that’s been tilted toward the whims of much larger companies, which adds a lot of friction. Plus you’ve done all of your scalability work at the beginning when you are the least experienced with it.<p>They did end up selling the company at a profit, but they had hoped for early retirement and all they got was comfortable living. I’m not convinced the buyers got a good deal on the terms either.
I would nitpick the title a bit. Revenue is never easy. I think they should rephrase as "Revenue is relatively easier than profit especially if you have PMF". Once you hit PMF (which is where most startups fail), you can just pour money into growth and that's when revenue generation becomes relatively easier.
This reminds me of an exchange I had with someone who wanted to enter into a business deal with me. He bragged about how his company had X millions in revenue. Since revenue was a meaningless figure to me in this context, I asked what their profit margin was. After hemming and hawing about it, he admitted the company was not profitable, and it became clear it was unlikely to become profitable anytime soon.
We’ve created a generation of leadership people who never learned how to make a profit. Until last year, if you were focusing on unit economics, you were laughed out of the room. Fast growth and market share at all cost…
Almost unrelated, but I also learned what was capital efficiency and payback period after playing Monopoly for the first time in years.<p>Long story short, when the properties were eventually sold out, I burned my cash flow to buy more of them to other players, at a high price, when they needed money (it would also allow them to play longer)<p>My logic was that by owning the most properties and by building houses and hotels, I would have the most revenue on the long run. And had the game been endless, I would have won.<p>However, the chances of someone going on your property isn't even high in this game ! You can sometimes wait for several rounds before this happens.<p>Unluckily, I stumbled on a rent I couldn't pay, mortgaged some properties. It happened again, and other players would only buy my properties at a price to cover the rent.<p>And my empire (i had the most properties by far) was on the verge of collapse when I had to run to go to the station.<p>So yeah, consider the payback period, even in the simplest models of the economy. Monopoly is economy taught to children, yet we adults can overlook its lessons.
Revenue is easy only if you ignore survivorship bias. Organizations without revenue perish. Organizations with revenue whose balance sheets don't show a profit don't necessarily perish.
Pretty much.<p>I have seen so many startups over the past few years, with A rounds up to $25 even $50 million where the CEO has zero business experience, they are literally learning by the seat of their pants.. They have gone from some experience as a tech lead for a small team, to the next day to running a large company. Obviously, there will be the odd outlier Zuckerberg type, but many of them are going to be totally out of their depth when the burn rate and path to profit (or even revenue in some cases) start to close in.<p>2024 will be a bloodbath in the startup world.
I might be off, but why are you adding CAC back into Contribution Margin to determine LTV? This seems like more of a sunk cost that would imply 1x LTV/CAC than the 2x that you show?<p>Other than that, nice article!
I am an amazing "2nd in command" employee. I struggle taking nothing to something and the dedication required to get market fit to build revenue.<p>On the other hand I find building profit one of the most enjoyable and fun things! I've now successfully more than 3 times in a row taken ~$100M revenue and grown it via new top/bottom around 10-15%.<p>I think it takes a different kind of person to optimize for income than just purely growing revenue.
This is an accounting method that's different from the traditional ones. That's not to say it's wrong. It's just interesting.<p>However, "customer acquisition cost" seems to imply that that customer is now "yours" and he'll keep buying without any more spending from you. That assumption is questionable. Maybe he's just on loan to you, and fickle as all hell. Did Uber "acquire" me just because I used them a few times?<p>Traditional accounting is "fixed cost" plus "variable cost." You build your factory (fixed cost), and then produce widgets (variable cost). For a long time, you're amortizing the fixed costs, and eventually the price of the widgets is all profit, assuming the factory still runs.<p>In that method, every customer is a random draw from a raffle, and you have no guarantees that the customer will keep buying. They may, but they may not. You have to keep getting new ones to even keep your base stable.
Is this true?<p>> I have observed that few people understand these nuances and the significant role they play<p>I've been out of the venture-backed world for a while, so it's an honest question. Few people understanding business basics would certainly explain a lot of recent behavior, but there are other possibilities too.
GAAP accounting is for stable cash flows in well understood businesses.<p>Bootstrapping (funding growth with revenue) isn't the silicon valley way; the silicon valley method is as follows:
1. get funding<p>2. grow team/build product<p>3. raise more funding and find product market fit<p>4. seize control of market / make large top line moneys<p>5. repeat 3/4 a as necessary.<p>6. acquisition/IPO, shareholders payout.
I disagree wholly with the “revenue is easy, profit is harder” idea. I suppose it is tautologically true since profitable ventures are a subset of ones which generate revenue, so more businesses generate revenue than generate profits, thus it is is “easier”. However, that is only at the present instant. That statement does not factor in all the companies that generated only revenue and no profit and are now extinct. When considering these, it is vastly easier to be profitable than to have revenue.<p>Without infusions of external capital it is literally impossible to generate revenue without profit for any period longer than one can sustain their losses. Isn’t it way easier to focus on businesses that do this, that meet a demand people have, and are thus profitable? Instead, investments are made in areas where demand has to be induced via advertising spend, expenses have to be reduced by relying on the ability to “rapidly scale”, and the business has to sap round after round of investor capital at increasingly higher and increasingly more ridiculous valuations with the hopes that it can weather that storm.<p>When considering the above, it seems to me that we are systematically mis-allocating capital to bad investments. As the saying goes, a bird in the hand is worth two in the bush. You can see people behaving in accordance with this during high-risk periods, e.g. COVID, when capital shifted toward durable goods and physical assets (pre QE infinity). But for some reason, when the risk is not literally right in front of investors, they do not see it. That risk, the integral of which increases over larger periods of time, eats away at the growth rates of companies. I suspect risk would spoil the math that makes a lot of the high-growth companies worth anything, if it were properly accounted for. Not to mention, negative externalities are unknown and thus largely ignored in startups, and thus cannot be accounted for.