Until recently, many Startups have prioritized growth at all costs, disregarding profitability and sustainability to acquire users and leverage deep venture capital to dominate markets. However, recent market conditions have shifted towards 'lean growth', which balances growth and profitability and creates a path to sustainable scale-up.
As investors, we focus on identifying efficient growth in a company's early stages. What are the early indicators of long-term success and efficient growth of a startup? To find the answer to this question, we use a variety of analyses, some of which we will discuss in this article .
The flaws in using LTV/CAC — why use cohorts to measure sales efficiency?
Before getting into the analysis, I would like to explain why commonly used metrics can be misleading. Investors often evaluate a company's go-to-market engine by its LTV/CAC (lifetime value/customer acquisition cost) metric, but this metric is not important for early-stage companies for several reasons. This often happens.
- There are too many ways to calculate LTV.
- Churn rates are not stable enough to accurately predict a customer's lifetime. As an early-stage company, your customer churn rate will fluctuate as you pursue product-market fit. If the product improves over time by adding features that address customer needs, we would expect the churn rate to decrease. Despite product improvements, there are external factors beyond a company's control, such as macro headwinds, that can drive higher churn rates.
- There is a time discrepancy in this ratio. LTV/CAC relates today's sales and marketing spend to a customer's future discounted cash flows, which are essentially estimates. For example, using metrics collected during the COVID-19 outbreak to predict the future may result in inaccurate predictions.
As investors, we leverage cohort analysis to uncover the mechanisms of growth, retention, and sales efficiency.
Given the different ways LTV can be calculated, the lack of steady-state churn data, and the estimates of LTV/CAC calculations, it's possible that we don't know the true meaning of what drives customer acquisition and retention for businesses. There is a gender. Given the shortcomings of LTV/CAC calculations, we suggest using cohort analysis to plot how long it takes to recoup the initial sales and marketing spend to acquire each cohort .
What is a cohort? Why is it important?
Cohort analysis is a method of evaluating a business by classifying customers into groups (cohorts) from different points of acquisition and observing how they behave over a defined period of time. Behaviors tracked include number of orders, amount spent, and number of features used within a time period.
This analysis can be applied to a variety of business models, including SaaS, fintech, and even marketplaces (we used it to analyze a ride-hailing company at the time).Cohort analysis is valuable in looking at specific variables over time This allows you to understand the business story regarding revenue, acquisition costs, and churn within a single cohort and across cohorts.
Here's how we conducted the analysis: