One surefire way to scare off investors and make a strategic blunder that could result in an unnecessary crash and burn is to be overly ambitious (or, likewise, too conservative) when modeling your company’s growth rate.
Investors want to see a revenue model that, at scale, demonstrates you’ve covered your fixed costs with enough margin that it makes it worth their while to invest in your company. You must show that the long term value (LTV) from a customer is greater than your costs to acquire them. And even if you can demonstrate this, your growth might still be too anemic to make investment worthwhile.
Stanley Park Ventures’ current batch of companies are mostly B2C recurring-revenue businesses, so I’ve been spending a lot of time trying to help our companies model their growth. But since in the past I’ve mostly been a B2B guy, I’ve been relying on friends in the B2C industry to help me navigate.
There are three types of growth: Anemic, Win, and Amazing
One of my sage advisors is Gil Penchina. When I asked him how fast my early-stage B2C companies should grow, he identified three basic types of growth; Anemic, Win, and Amazing. Here’s what they look like over a four year period:
Notice how, in year 1, revenue is not $0.
In the past it was ok to have a few years with no revenue as you “built out” the product. For most ventures in the B2C space, this is no longer acceptable. We expect to see revenue in the first year and are open to seeing creative solutions for making it happen.
Check out the rapid acceleration expected in year 2.
I have seen many companies who think they are on the “win” or “amazing” paths when they’re actually starting to fizzle down the “anemic” path. By the start of year 2 you should be hitting these seemingly lofty figures if you’re achieving virality. And more importantly, you had better not wait for the end of year 2 to start investing in growth.
This advice comes with an important caveat.
Balancing CAC/LTV matters in all three of these scenarios. If you spend $50M on CAC to get that $7M of revenue in year 2 of the “amazing” scenario, and that group of customers has a lifetime value of $14M, then this isn’t really so amazing.