When the Honeymoon is Over, It’s the Economic Model that Counts!
September 29, 2011
When we look to invest growth capital in expansion stage software companies at OpenView partners, we do a lot of analysis on a company’s economic model. The reason behind that focus is simple: The greatest cost in scaling a software company is is always sales and marketing.
Granted you have to build out development, product management, customer service, professional services (if it’s part of the model), and finance, but at the end of the day sales and marketing is where most growth capital is used.
That’s why understanding how much marketing and sales dollars it takes to acquire a customer — or the CAC number — is important. And it’s also critical to track how customer churn impacts the lifetime value of customers acquired. Key metrics like these and others determine how much capital it will take to grow the company, how fast you can grow it, and when the business will achieve profitability.
Those things are important because whether you’re raising a round of venture capital, looking to be acquired, or seeking an IPO, your valuation will hinge on growth and profitability. And more often than not, the companies that achieve the greatest valuation have both high growth and high profitability
In the last two days there have been a couple of articles — one in the WSJ about Groupon and the other in Business Insider on Zynga — that have once again illustrated the simple truth that once the Honeymoon is over it is the Economic Model that counts.
So if you are looking to raise capital, be acquired, or IPO, remember that your economic model will determine how well you do!
All the best!