Growth Hacking Marketing Tech Venture Capital

How to build a cash machine: what matters in VC

It’s quite easy to build a business that generates $1 billion in yearly revenue. In fact, I can do it right now on the spot. Just look for a commodity like gold, buy $1 billion worth of that commodity and sell it immediately on the market below the spot price. For commodities with a lot of liquidity you can probably move it within the day. I don’t need to explain to you why that would be a very bad idea. It would be fundamentally unprofitable and there would be no perspective on how this could possibly change in the future. Yet in venture capital, we often see deals where massive funding rounds get allocated to startups that are operating at a negative gross margin. In VC there is a trade-off that needs to be made between growth on one hand and financial sustainability on the other hand. Policies of central banks worldwide that flooded the markets with cheap money have tipped this balance to the extreme of ‘growth at all costs’ while completely disregarding financial sustainability. This is not always the wrong approach. For example when customer stickiness is high and a couple of startups with a similar value proposition are battling for market share, it makes sense to disregard sustainability for a while and just aggressively acquire customers. However, it can only make sense when keeping in mind that at some point you need to drastically increase prices again. When you have a shot at establishing a monopoly, or when switching costs for the consumer are really high, you can go down this road.


However, the current Covid-19 crisis is highly likely to cause a decrease in available capital to be deployed and will rebalance the trade-off back to financial sustainability. That’s okay, the trends in VC move like a pendulum between these two extremes. As a founder you just need to be aware that you will be assessed based on dollar-efficiency. Basically, the ultimate metric to guide VC’s here is your LTV/CAC ratio. It’s simply the total profits a customer generates on average for your startup in his entire lifecycle, divided by the total costs associated with acquiring him. I will list the obvious strategies to optimize this ratio below:

1) Increase acquisition efficiency
This one is obvious. If you bring down the average acquisition cost per user, your LTV/CAC metric will improve. You can do this in 5 ways: 1) find the right audience for your product or service, 2) target them via the right channels, 3) optimize your marketing strategy, 4) launch referral campaigns and 5) remove all frictions to signup.

It has never been easier to do this. Point 1 to 3 can be optimized by applying growth hacking strategies in your digital marketing. Especially if you’re a consumer startup, test all possible channels and target difference audiences. It’s easy to set up different marketing campaigns across all channels. You can segment based on demographics and check where you get most signups from. Once you know your best audience, just try out different campaigns and keep track of your metrics to determine where your ad spent per customer won is the lowest. Point 4 and 5 can be tackled by testing your landing page. Add a referral program and keep track of the points where you experience a drop-off in customers. The key is to have a data-driven approach and pivot fast. The faster you can implement changes, the faster you can get feedback and adapt. The faster you can iterate, the bigger your advantage over your customer.

2) Decrease churn
Your churn is the % of customers you lose, often measured on a monthly basis (the basis should be the basis you bill your clients on). Obviously, it’s cheaper to keep an existing customer than it is to convince a new one. Your churn is an important metric that is often used by VC’s to determine whether you have product-market fit (we’ll write about this later). When it comes to minimizing churn, all strategies are fair game. If you’re a monopolist it’s very easy since customers have nowhere to go. If not, your pricing is an important aspect. However, try not to go too far in undercutting your competitors since this will decrease your LTV as well. You can increase switching costs, whether by doing this contractually or by making it very inconvenient. The champion of high switching costs is Hubspot. Want to use a different CRM? Say goodbye to all your data. There is a reason you can start using it at a 95% discount. They practically make it free so you start putting in data and at one point you find yourself locked in for the lifetime of your company. The easiest -and arguably the most customer-centric- way to decrease churn is to obsessively track customer satisfaction. Amazon is an example of a company that does this and I heard they are doing pretty well.

3) Up-sell or cross-sell

Increasing the amount of profit a customer generates can also be achieved by up-selling or cross-selling. Up-selling is when a customer upgrades to a better -more expensive- plan. Cross-selling is when you sell a complementary product or service. It’s closely related to customer satisfaction, but also to understanding what your customers need or want and their willingness-to-pay.

4) Increase usage
This one is closely related to up-selling and works when you charge on a pay-per-use basis. Again, it’s related to your customer satisfaction. I listed this separately because it’s an important one because it directly impacts a different metric that is often used to assess a startup and that is based on your CAC: the CAC payback period. This one is relevant if your startup operates in a highly competitive environment. When a VC allocates capital for you to deploy in order to acquire customers. If it takes a customer on average 1 month to generate profits equal to your CAC and it takes your competitor 2 months, you can deploy that capital twice as fast to acquire your next customer and you will grow twice as fast. This is something to keep in mind. Notice how in the example I started this article with, you will never get there. Even if your CAC is €0 (which is a fair assumption in a transparent commodity market where the only differentiator is price), you only make losses so your LTV will be negative.

What to benchmark it with?
In general a LTV/CAC ratio of 3 or higher is considered good by VC’s. However, it will be benchmarked with your industry and the most relevant competitors. The same holds for the CAC payback period. VC’s are often pitched similar ideas by different founding teams simultaneously. These metrics are often crucial in deciding which startup they will ultimately back.

Silicon Valley Tech Venture Capital

VCs in seed rounds: signaling theory

One of the economic theories that I learned during my studies at the University of Leuven and that has always sticked with me is the signaling theory. It’s the bedrock of behavioral economics and it’s the theory that explains a big chunk of all human behavior. In fact, you don’t need a degree in Economics to be confronted with this theory on a daily basis. I still remember, when we were on holidays at the Dalmatian coast with the family, our mother would insist we would dine in the most crowded restaurant. Bonus points if it was crowded with locals. Of course, from a pure rational economic point of view this didn’t make sense at all. All other variables remaining constant, you can expect longer waiting times, slower service and more restrictions on the menu; Yet, this strategy proved to be very successful very fast (and obviously the other variables were no constants). It’s a fair assumption that people -and especially locals- would prefer the best restaurant and thus the most crowded restaurant would be the best one.

Signaling theory wasn’t only useful for our family to find the best Croatian goulash, but is also used by VCs to find the best investment opportunities in the startup landscape. The signal they follow is the investors that covered the seed round and their behavior when the new funding round is announced. Signaling theory is useful in cases where participants in a market have asymmetric information. The theory assumes that when there is asymmetric information, the behavior of the market participants will reflect what they know. When you’re playing poker and your opponent suddenly goes all-in, you know it reflects very favorable odds from his side. You might not be able to see his cards, everything he does will reflect his position.


When you raise your seed round with angel investors, you are largely protected from signaling risk. After all, these investors are not expected to (or able to) lead or even join in on the A-round. It’s a smart move since you keep all options open, however it can also be beneficial to have an investor from the beginning that can lead the A-round as well (signaling can work in your favor too). When a VC looks at a startup, they know that -even with thorough due diligence- they will never have perfect information. The investor that invested in the seed round has worked extensively with the founding team, knows about all the roadblocks and how they handled disappointments early on. He knows the story behind the numbers and knows the vision behind the strategic decisions that have been made. Consequently, when the founders start raising the A-round, every VC will look at the seed investor.

When the seed investor is a VC that is also active in post-seed/A-rounds, whether or not they lead the follow-on round is very important. After all they have the most complete information and can best assess the opportunity. Additionally, how fast you complete raising the round matters as well. The word spreads fast once you start talking with investors. When a house is for sale and it’s not sold after a year, people will get suspicious and assume there are a lot of hidden problems. The same happens with startups. Once you publicly start raising, you better close the round fast. Convincing the seed investor to lead the follow-on round enables you to almost close the round before the fact that you’re raising becomes public knowledge.

The numbers seem to confirm the signaling theory. Research by CBInsights suggests that startups that raise a seed round have a 35% chance of raising an A-round as well. When the seed investor is considered ‘smart money’ (VC) and this investor follows in the A-round, the chance increases to 51%. If this VC doesn’t lead the follow-on round the chance of an A-round drops to 27%.

The reason I decided to write this article is that I meet a lot of founders that don’t really realize the consequences of their decision which investor to work with in the seed stage. With Micro-VC funds popping up left, right and center (more than 200 VC funds have raised > $4bn to be deployed in early stage startups), this has become more relevant than ever. I suspect that with seed-focussed VCs booming and A-round VCs remaining the same, startups not being able to secure a follow-on round from their seed investor will become more common.

Growth Hacking Marketing Tech Venture Capital

NoCode: a gamechanger

This week, I sat down with a founder of a startup that was raising funding and wanted to give my fund allocation. To give you some background, I work for a fund that participates in rounds between €50k and €250k at valuations between €0,5M and €2,5M (pre-seed and seed rounds). I agreed to have a meeting with him because I liked the problem he was working on and the industry size (enterprise software).

Big was my disappointment when he elaborated on the amount of funding he was looking for and -what’s more- the use of funds he had planned. He was looking for a €450k round just to complete his product. Apart from some interviews he had conducted with potential clients, no market research had been done. When challenged on his approach, he told me he felt insecure about going to market with a product that is not perfectly polished and free from glitches. This is completely the wrong mindset to start a business. With the tools out there, it’s so easy to test the market while keeping your burn rate at a minimum.

I actually know great companies that started out as a Whatsapp or Facebook group and worked from there. Was it perfect? Not by a long stretch. Were their customers happy? Happy with the solution but frustrated with the implementation. When the problem you’re solving is a pain point big enough, the pull factor from the market is often so big that an imperfect product doesn’t stop customers. Many startups even prove the market before having a complete product, by building a waiting list and charging customers to sign up. The opposite also holds true. When you’re building something nobody is waiting for, a super polished product won’t save you.

It has never been easier to build
NoCode solutions, where building a landing page or website is as easy as drag-and-dropping whatever it is you need, have completely leveled the playing field and have enabled everyone to start on online business. This has caused a shift in the investor community from looking for people that can build (app and web developers) to looking for people that know how to execute.

Common wisdom states that it takes 10,000 hours of practice to excel at something. This is factually incorrect. Do 10,000 hours of the same thing and you won’t improve a lot. It actually takes 10,000 iterations. With this in mind, it’s impossible to build a startup by relying on third parties for building your product. The time it takes to get customer feedback, communicate it clearly to a web development agency (that has no background information on your industry), wait for a price and time estimate, agree to the proposal and then wait for them to find the capacity to build it is simply too long. Even if you have the financial resources to outsource this development, you should still consider NoCode solutions.

Additionally, a NoCode solution signals to investors that you know how entrepreneurship works and handle your resources strategically. When a founder walks in and tells me he got 1000 customers to signup for his service and charged them already (proving willingness-to-pay), it blows my mind and makes me curious to see what that founder can achieve when he has substantial resources to build his product and launch a marketing offensive.

I could compile a complete list of services that can get you started, but the guys from pretty much nailed it here.

I have seen founding teams pull off some pretty incredible stuff with the following tools:

Webflow for building complete apps
Stacker to build apps based on Google spreadsheets
Bubble for web applications
Voiceflow to build voice apps
Wix, Tilda, Squarespace to create websites

There are plenty of options to integrate payments and social media, find your first users, translate your website to test new markets, etc.

A bit of research can go a long way in creating your MVP in a matter of moments at almost no cost. Combine it with growth hacking tactics and you can go to investors with a lot of valuable data already.

Venture Capital

How to calculate unit economics

In the article I wrote a couple of days ago, we discussed how increasingly more scale-ups are fundamentally unprofitable and don’t have any perspective on a change since their companies are build on unhealthy unit economics. Their future is highly uncertain, because if your growth is artificially subsidized by VC’s how can you ever be confident in the consumer’s willingness-to-pay for your product or service?

Unit economics matter more than most people -even in tech- realize, and for reasons other than simply determining whether your business model and pricing is sustainable in the long run. It helps you to make better judgements regarding what products or services you should be offering and for what segments over which channels. Every decision you make can be evaluated with regards to how it impacts your unit economics. Measuring and keeping track of unit economics is a good way to estimate your profits. Additionally, it’s a great feedback loop regarding your value proposition. You might be able to capture a substantial chunk of your serviceable attainable market. However, if it’s at prices below the total cost of service or costs of goods sold, you are building an empire on quicksand and you didn’t really test the market.

There are two ways to work with unit economics and in my opinion, both are strategic exercises you should continuously conduct in your startup. The difference is in the way you define a “unit”. You can either define it as “one extra unit sold” or as “one customer”. In the previous article, we were mainly talking about one extra unit. If you calculate unit economics based on extra units sold, you will learn if your business model is sustainable. You simply calculate this by subtracting the variable cost of one sold item from the price you charge for this. Important to note is that this doesn’t include overhead costs such as marketing. It’s okay to operate at a loss as a fast-growing startup. The entire point of venture capital is to facilitate fast and aggressive customer acquisition. The problem arises when you’re losing money on every item you sell. In theory, your startup decreases in value for every customer you acquire. The case that you could simply increase your price should never be made without having tested this assumption thoroughly.

The second way of measuring unit economics is by assessing the total net value an extra customer contributes. It’s important to segment your customers here. The value is derived by subtracting the customer lifetime value (LTV) from you customer acquisition costs (CAC). Both the LTV and the CAC differ between customer segments. Conducting this exercise requires some assumptions regarding the churn rate. You might find out there are customer segments that will never be profitable. You need to fire these customers. If the costs of servicing them is more expensive than what they generate in revenue, you should stop the contract and refocus your marketing efforts on segments that are profitable.

Unlike unit economics with regards to extra units sold, unhealthy unit economics with regards to customers can keep under the radar for a long time. The reason is that problematic unit economics for certain customer segments don’t necessarily surface because costs are often not accounted for on a ‘per customer’ basis and the losses made on these segments are made up by profitable segments.

With what’s going on in the world right now, I expect VC’s and angels to care more and more about your unit economics. Making your case and showing you at least have a roadmap towards healthy unit economics will make all the difference.

Tech Venture Capital

Unit economics: why they matter

Interesting times

Something seems off in the tech landscape lately. Nobody seems to be able to really pinpoint what’s going on but there is a general consensus that a bubble is forming and that the collapse might be imminent. In a world of continuous supply of cheap money facilitated by central banks (a trend that even accelerated post-Covid), we can’t help but notice that money has become a commodity. With increasingly more money chasing fewer opportunities in venture capital, we see venture capitalists pushing for growth at all costs. This growth at all costs is disrupting the basic economics that have basically been the driving mechanism behind several industries. Not only is this destruction harmful, it benefits absolutely nobody in the long run. Think about this pizzeria restaurant owner that ended up buying their $24 pizza’s themselves for $16 using DoorDash.

These stories might seem funny but what it actually signals is how VC and tech is completely disregarding unit economics and are destroying incentives and balances that have driven the local economic ecosystems for decades. What’s even crazier than the tactics that are being used to aggressively acquire customers, are the justifications of these actions. Like Sam Altman pointed out these practices are justified by claiming infinite retention, complete robotization of their labour costs or the claim that the acquisition costs will ultimately drop to zero.


How do you measure success?

It’s as if VC’s nowadays are willingly ignoring unit economics in plenty of cases. Companies like BlueApron and WeWork are companies that will probably always keep losing money. Yet they managed to secure funding rounds that enabled them to grow to giant corporations. How can companies with weak fundamentals make it this far? Are VC’s 10 steps ahead of everyone and indeed betting big on technological innovations that would decimate the costs? It wouldn’t be the first time that visionary’s in Silicon Valley are way ahead of the curve and are indeed anticipating certain game changers. Autonomous vehicles in the case of Uber or drone deliveries in the case of food delivery services would indeed change the game instantly and in that moment the first mover advantage would be so powerful that the big players that are now losing money on every delivery would come out as monopolists. Yet, ignoring unit economics is a dangerous practise and the question remains how long you stay operational when you lose money on every order. It makes your company fragile and completely dependent on radical innovations that might take longer than you expect.

“Nothing can give a startup the illusion of success like negative unit economics. This occurs when a startup is selling a product for less than its variable cost. Hypergrowth is easy when you’re selling dollar bills for 90 cents.” — David Sacks, Craft Ventures

The quote above by David Sacks underlines that fast top-line growth at the expense of poor unit economics is unsustainable. Stay tuned for an article on unit economics and how you should apply some basic management accounting to make sure your unit economics are healthy and growth is sustainable.