Startup Metrics: Is CAC Outdated?

More often than not, one of the big questions venture investors would ask entrepreneurs is “What is your customer acquisition cost (CAC)?” It’s a valid question, you want to make sure that the unit economics of the business works so that it can eventually become a sustainable, profitable venture. This is usually measured by the ratio CLTV/CAC (customer lifetime value on CAC). It tells us for a dollar of cost I throw into customer acquisition, what is my “return on investment”. To make their business more viable, most entrepreneurs would focus on reducing CAC, which is the easy way out (considering all you need to do is to increase conversion and ROAS).

Recently, I was reading an article that Jason Bornstein written for his firm’s blog (see reference), and it struck a chord in my heart. A contrarian view of “YOUR CAC DOESN’T MATTER”. I was at first shocked, but then I realized what’s he’s saying: The brands of the next decade will win with loyalty, not acquisition.

How do we inspire brand loyalty? For me, I always believe in giving my customers the best service I can ever provide. I always believe in overdelivering. If I promised my customer that I will give 100% of my effort, I give 150% of my effort. Always wow them at every turn, make them impressed and want to come back for more. It’s like taking drugs (not that I have taken any), get them addicted to your awesome customer service and alignment, and they will keep coming back for more.

Being a B2B startup founder previously, I have always learnt the importance of Monthly/Quarterly/Annual Recurring Revenues (usually I use quarterly to get a better picture). QRR has been one of our key metrics we track closely. However, I realized that this is always correlated with our QRC – Quarterly Recurring Customers. This metric tells me exactly how many of my clients are satisfied and coming back for more. It allows me to do a more qualitative analysis on my business when I go back to them and understand what went well, and more importantly, how we can improve. Same thing, when I speak to clients who churn, I am able to discern the reasons why we can’t meet expectations and work towards that. I have always worked towards keeping my churn rate below 15%. It is something I strongly believe in (QRR can always scale much faster with QRC rather than acquiring new clients).

So next time, when you are looking at your business, do spend time looking at your QRC and churn rate. This will be one of the best tactics to scale your business exponentially.



Explaining Convertible Notes – Keep It Simple

Recently, I have had a number of friends who asked me about how convertible notes usually work. Thought I will explain how convertible notes work (or at least the usual ones).

There are three key items in any convertible note (or in usual convertible notes):

  1. Valuation Cap. This is the maximum valuation you will invest into the company at.
  2. Discount. This is to compensate earlier investors for investing at an earlier stage of the company with less traction. Therefore, earlier investors will have a paper gain on the investment should there be a next round raised. Typical discount rates range from 10 to 30%, with the most common being a 20% discount.
  3. Coupon Rate. Similar to any bond you purchase out in the market, some convertible notes have a coupon rate attached to them. This is usually acting either as accrued interest, or as an interest that will be paid to investors at conversion. This may not be offered for all convertible notes though (though if offered, it usually ranges from 6 to 15%).

Now comes the tricky part: conversion. How do you determine the price you are converting at. I like to simplify it as follows:

  1. Calculate the amount invested into the company (including any interest that you are earning which will be accrued and converted to shares).
  2. Calculate the number of shares you will receive on each situation.
  3. Pick the one that is more favorable to you.

I have summarized the calculation methods in the diagram below.

Hope this helps.