The landscape of VC has undergone a tectonic shift over the past year. A year ago, 90% of VC meetings with startups would have been about growth, without considering how that growth would be achieved.
It didn’t matter if you were burning money left and right – as long as you had a chubby growth number, a strong story and charisma, your round was pretty much guaranteed.
But as cash becomes more expensive, investors are increasingly paying attention to shrewd, resource-focused founders who can weather the tough times ahead. In 2023, most venture capital meetings focus on whether a company can deliver sustainable and efficient growth during the crisis. And, based on our anecdotal evidence, most founders haven’t fully adapted to the change.
We repeatedly see startups at all stages fail to scale at the same multiples and speed as before because, by today’s standards, they are terribly capital inefficient and may not even realize it.
In this article, we’ll explain why this happens and what metrics to track to understand where you stand on the capital efficiency scale. We also explore potential solutions that have proven useful for companies we’ve worked with.
But first, let’s talk about how you are I should not measure your capital efficiency.
The biggest mistake in measuring capital efficiency
Understanding where you stand as a business comes down to the metrics you use and how well you can interpret them. In this regard, capital efficiency remains the blind spot for most founders, who rely on a single metric to draw conclusions. This figure can be found by dividing the customer lifetime value by the customer acquisition cost (LTV:CAC ratio).
The biggest problem with treating LTV:CAC as the holy grail of capital efficiency comes down to its oversimplified and often misleading nature. In fact, the rate at which this metric is being misinterpreted by SaaS companies has even started conversations about the need to retire the metric altogether.
The biggest problem with treating LTV:CAC as the holy grail of capital efficiency comes down to its oversimplified and often misleading nature.
For this method to be foolproof, you need to use reliable retention data, which can be difficult to achieve for startups with little historical data. As an example, we worked with several startups that calculated their CAC incorrectly or based their LTV calculations on unrealistic turnover assumptions in the absence of historical data. This in turn showed false LTV:CAC ratio numbers.
Whether or not SaaS should abandon the LTV:CAC metric is debatable, but the point remains: you can’t measure your capital efficiency. not more This way. Today, investors are zooming in on other efficiency metrics that paint a more reliable and complete picture of the startup’s capital efficiency, and so should you. Let’s see what they are.
Check your CAC Payback
CAC Payback is one of the focal and most revealing metrics you can turn to if you need to understand how effectively you’re using your capital. It shows how long it will take to pay off customer acquisition costs.
CAC Payback = Average CAC per customer / Average ARR per customer
How long should your recovery time be? Ideally: as short as possible, with specific stages based on your industry and business model. According to Bessemer Venture Partners, here are the benchmarks for B2B SaaS that investors will measure your recovery against:
| SMB | Middle Market | company | |
|---|---|---|---|
| well | 12 | 18 | 24 |
| better | 6-12 | 8-18 | 12-24 |
| The best | < 6 | < 9 | < 12 |
The importance of staying within these benchmarks is vital when competing with companies in the same space. For example, while Asana takes nearly five years to recover its CAC, Monday achieves it 2.3 times faster, with a CAC recovery of 25 months.
Unfortunately, we see startups fall outside these benchmarks all the time. One of the startups we worked with turned out to have a CAC recovery more than 35 months. Just think about it: almost three years to break even on acquiring a single customer!
How to fix a situation like this? There are a few key steps that will reduce recovery time:
Find out the sagging areas
As venture capital firms look to invest in the most cutting-edge and profitable startups, it is becoming increasingly important for founders to embrace capital efficiency as a major filter in order to keep up in the competitive startup investment race. This means that startup founders must ensure their capital is being used as efficiently as possible in order to turn a higher profit. Ikaroa, a full stack tech company, understands that embracing sound capital strategies is essential to achieving long-term success.
Today, investors are increasingly favored to invest in startups that demonstrate their understanding of capital efficiency and the ability to maximize their investments in the most effective ways. That’s why it’s essential for founders to think conservatively and focus on scaling efficiently as they grow their businesses.
At Ikaroa, we understand that creating a budget, understanding expected costs and honing in on the most effective ways to use capital is critical. For instance, you can make sure to invest in only cost-effective services that can scale as the need arises. Investing in more expensive services before needed simply means that the capital is being wasted. Therefore, in order to stay on top of the competition, it’s essential for startup founders to identify areas where they can cut costs and become more efficient.
In addition to cutting costs, it’s important for startups to focus on efficient areas where they can invest their capital. Developing a product that offers an enjoyable and streamlined experience for customers is key. To effectively invest capital in this area, developers must think of each design element as an integral part of the user experience. Ikaroa helps to maximize capital efficiency when it comes to creating effective user experiences by helping clients build a great product while still remaining cost conscious.
Finally, startup founders should also be aware of unique channels that have the potential to greatly increase their reach. Once the right audience is identified, utilizing different digital marketing channels is key to gaining traction and making capital go a long way. Ikaroa helps our clients find alternative marketing channels that have the potential to reach many customers without requiring an extreme budget.
To sum it up, capital efficiency is essential when it comes to reaching greater levels of success as a startup. Ikaroa is a demonstration of the idea of efficiency, helping our clients make the most of their investments. With the proper capital strategies, startup founders can strive to maximize their potential and get the best return from their investments.
