We figured we’re due to go back to analyzing some good old fashioned financial metrics for fast growing companies. This is a topic that is integral to our services and one our founder, Chris Arndt, is especially fond of. Chris presented a workshop on these three metrics and why many scaling businesses fail because they don’t put enough emphasis on the Payback Period (which we’ll get to soon).
Don’t have time? Here’s a two-minute breakdown for you:
“All companies should be gross margin positive.”— Mark Suster, Partner at Upfront Ventures
Meaning what? A quick reminder of what “gross margin positive” actually means. As Fortune recently pointed out, gross margin positive is different than “net margin positive,” which includes corporate costs like marketing and R&D.
There may be times when you are not net profitable because you’re focused on scaling, which will be seen in your operating margin. Your gross profit is your revenue minus cost of goods sold. Basically, if you’re not gross margin positive early on, then you need to seriously examine why. In fact, if you’re gross margin negative, then you’ll LOSE more money the more you grow! But if growing yourself broke is the goal, then by all means go for it!
Three Mistakes You Don’t Want to Make When Growing Your Company
- Not using your complete Customer Acquisition Cost (CAC) to get that ever popular Lifetime Value (LTV)/CAC number. While paid advertising may be obvious, it’s important to remember not to omit things like PR, Free Trial support and hosting, etc.
- Getting LTV confused with meaning it’s OK to lose money on acquiring customers. Some companies that are scaling can be overly optimistic. Figure out your churn rate to get an accurate LTV. Read more about churn rates here.
“A faster PBP means more profit cycles in a shorter time period (and less capital needed to fund growth).” — Chris Arndt
- And here’s the big one: Forgetting to take into account the importance of the Payback Period (PBP). If you don’t have the capital to fund losses, your PBP should be short. A good PBP is 12 months or less, but it’s ideal to be less than six months if you’re in hyper-growth mode (greater than 50 percent revenue growth per year). Have more than two minutes? We recommend you check out Mark Suster’s nine-minute read Why Misunderstanding Startup Metrics Can Cost You Your Business.