To avoid a surprise, startups should move away from a “blended CAC” concept as soon as possible and attribute CAC by channel. In short, the low-hanging fruit dries up. Another rule of thumb is that LTV (the lifetime value of a customer) should be at least 3X CAC.Įxamples of channel saturation include: graduating from a startup accelerator whose network delivered the initial customers running out of email lists or running into email deliverability limits burning out a viral channel running out of high-quality inbound leads so sales reps have to spend more time prospecting. It is generally considered uneconomic to spend much more than first year’s revenue on CAC. It is not uncommon for promising startups to saturate their initial distribution channel, at which point growth will stall or, to maintain it, the startup will begin overpaying on customer acquisition cost (CAC).
#OFF THE RAILS UPGRADE#
The bar goes up with each round, and the startup that does not upgrade its financial standards over time will suddenly find it much harder to fundraise.įor more on this topic, see my post The Gross Margin Problem.ĭistribution is one of the toughest problems for startups - even the startup that appears to have product-market fit. Growth investors look at unit economics more carefully. Early-stage investors have fewer data points and are mainly trying to figure out if a new idea will broadly catch on. The public markets scrutinize margins much more closely than venture investors. The sudden realization that there might not be any can cause a BlitzFail, even on the eve of IPO. This is generally true - provided there are profits to be optimized. Profits can be optimized after winning the market. After all, the most important thing is to find product-market fit, then beat the competition. Startups rationalize margin problems as something they can fix later. This is an important muscle that startups tend to under-develop. Proper attribution is necessary to tell the difference. Losing money at the corporate level is ok losing money at the unit level is not. The question is which type of money they’re losing. This trap is easy to fall into because there’s nothing unusual about startups losing money. If a startup is not maturing its finance function to keep up with its growth, it may discover a margin problem too late, when the company is already operating at scale and a brutal restructuring is necessary. When the product is priced correctly, however, growth may stall, or even worse, the startup may discover it did not really have a business. Hypergrowth is easy when you’re selling dollar bills for 90 cents.
This occurs when a startup is selling a product for less than its variable cost. Nothing can give a startup the illusion of success like negative unit economics. My hope is that outlining these pitfalls will help founders avoid them. Third, they are common enough to occur across many startups. Second, they are surprising they tend to go undetected for awhile, then manifest suddenly. The issues have three things in common: first, they are existential they are capable of derailing a startup. In this post, I identify the top reasons why fast-growing startups go off the rails (or “BlitzFail”). If one looks for underlying causes, some common themes and patterns emerge. These meltdowns make for sensational headlines, yet each instance is hardly unique. The speed with which a unicorn can go from hot startup to turnaround - from filing for an IPO one week, to fighting bankruptcy the next - is head-spinning. Every year, the tech ecosystem witnesses once-promising startups go off the rails.
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