How I identify viable startups based on 3 key things

Photo credit: Valter Dias

Alexander is a TIA Star Contributor and publishes high-value content that serves the Asian tech community. Read more from TIA Star Contributors here.

I’ve been studying startups for 10 years, and I’ve figured out that there are only three things that matter when figuring out if a startup is viable. While there are a lot of things that matter (market size, solving a problem, capability of team, etc.), these are the only things I focus on:

• How much you acquire people for = customer acquisition cost (CAC)
• How much you make from them = customer lifetime value (LTV)
• How long it takes to cover the cost of the CAC and recycle the money = payback time

Let’s dig into these a bit.

CAC

CAC is what you acquire customers for in $.

There are two ways you want to think about CAC:

• Basic CAC: This is your direct marketing spend. If you spend money on SEM and display ads, divide that amount by the number of, say, paying customers, and you have CAC.
• Fully loaded CAC: This is a bit more complicated. Knowing how much you blow on Google and Facebook is easy, as you get an invoice. But to acquire customers, you are going to have consultants, full-time managers, etc. If you really want to understand your true CAC, you need to bake in all the costs.

Don’t be delusional when approximating your acquisition cost; trying to deflate the number will screw you. So, it’s much better to round up, than round down.

Low CAC is good

A low CAC is seriously cool. There are a lot of ways to make it lower:

• SEO: You really do want to build this “engine of growth,” but invest early, as it takes a long time to get going.
• Virality: True virality is rare as balls, so do not think it will just happen. A tiny viral element can decrease your aggregate CAC.
• Email, social, etc.: There is a load of things you can do to decrease paid spend. Do it.

But it’s really important to note that CAC will only get bigger over time. As you grow more, you need to increase your margins to compensate for higher CACs. You need to be able to find economies of scale everywhere.

LTV

The next big thing that matters is how much money you make from your customers. Both CAC and LTV can be calculated in complicated ways, but let’s skip that. Ultimately, what you want to know is whether people are paying you and how much.

Payback time

What are good numbers?

A word of caution