Optimize for Growth while Adding Gates

Twice in the past week the topic of startups optimizing for growth at all costs came up. Pre-pandemic, there was more emphasis on the Rule of 40 save for certain white-hot sectors. With the Rule of 40, the general idea is to calibrate the trade-offs between the top-line growth rate of the business and the corresponding profitability (free cash flow margins, typically). Growth rate, as a percentage, was combined with profitability (or lack thereof) as a percentage, and the two were added together into a score with the goal of being 40, or higher. Well, that went out the window with the dramatic increase in valuations for high growth companies brought on by the reduction in interest rates, growth in demand for private investments, and the belief that tech markets are even larger than previously predicted.

So, if growth matters more than capital-efficient growth, should you care at all about other metrics? Yes, absolutely. The trick is to care more about the most important metrics (e.g. net dollar retention), and gate the slide of the standard metrics (e.g. cost of customer acquisition). Eventually, the market will revert back to an emphasis on more measured growth, but you never know when that is going to happen.

Let’s say before you were focused on the cost of customer acquisition relative to the lifetime value of the customer (CAC/LTV). Traditionally, a cost to acquire a customer that represented one to two years of revenue was fine (e.g. customer pays $10,000/year for five years, (Read more...)