Startup Success – Good Growth, Gross Margins, CAC Payback, and Burn Multiple

Market gyrations and startup valuations have been the hot topics lately. With so much turmoil across the economy, it’s clear we’re still in for more pain as the world adjusts. On the startup front, a number of entrepreneurs are thinking through what to do and what needs to change in their current plan. While some startups are doing well, many that raised money in the last 18 months did so in a way that their valuation got too far ahead of their performance. What to do?

In the most recent episode of the All-In podcast, David Sacks shares that high growth startups with moderate burn will get funded while ones with moderate growth and high burn won’t. Continuing that thinking, he outlines four metrics startups need to optimize for if they want to raise money:

  1. Growth rate > 50%
    Growth has been one of the biggest drivers of value creation for the last few years. Now, instead of growth at all costs, it’s one of several factors that must be evaluated. So, keep growing fast, but do so in way that’s more measured in relation to other metrics.
  2. Gross margins > 50%
    Gross margins are what’s left over when you subtract the cost of goods sold from the sale price. Some startups have negative gross margins (lose money on every customer) or low gross margins because the business model is either sub-scale or challenged in other ways. The key is to have large, positive gross margins.
  3. Customer acquisition cost (CAC) payback < 1 year
    Sales and marketing costs to acquire a customer can easily get disconnected from what makes for a good business when capital is cheap. Now that capital is more expensive, it’s important to be able to acquire customers at a cost that’s less than the revenue received from the customers in the first year.
  4. Burn multiple < 2
    The old adage that you have to spend money to make money still rings true. Only now, for every $1 dollar of burn, the startup should add one net new dollar of annual recurring revenue. Many startups are burning an excessive amount of capital relative to a new dollar of recurring revenue and will have to adjust.

This isn’t RIP Good Times; it is a return to the basics: build something people want, acquire customers in a way that makes sense financially, and scale as fast as the metrics allow.

Entrepreneurs should focus on their growth rate, gross margins, CAC payback, and burn multiple in a way that’s thoughtful and optimized for their business and market opportunity.

Today’s Our Best Day and Tomorrow’s Even Better

Last week I was catching up with a few startup leaders and we were talking about different styles and personality traits of entrepreneurs. One of the entrepreneurs in the group said something that really resonated with me:

I believe today’s our best day and tomorrow’s even better.

Now, I’ve known this entrepreneur for over a decade and he’s truly sincere when he says that. There’s something to be said about the real belief that today is absolutely the best day and the conviction that tomorrow will be even better. Optimism and positivity is a wishy-washy subject that incredibly subjective. Yet, personally, as someone who feels rather analytical, I believe it makes a difference, even if it isn’t objective.

Why? I’ve met many entrepreneurs that have done amazing things — things that are so far beyond defying the odds — and they are all optimists. Even with a world around them saying “no” or “that can’t be done” these entrepreneurs push on and make things happen. It’s so easy to not take the risk, not put yourself out there, and not get rejected.

The next time you talk to an entrepreneur, ask them about today, and then ask what they think about tomorrow. If there’s optimism and enthusiasm in their voice, know that their chance of success is higher. Today’s our best day and tomorrow’s even better.

Catalytic Mechanism to Drive a Desired Outcome

One of my favorite learnings is the power of the catalytic mechanism to drive a desired outcome. Jim Collins popularized it decades ago writing:

Catalytic mechanisms are the crucial link between objectives and performance; they are a galvanizing, nonbureaucratic means to turn one into the other. Put another way, catalytic mechanisms are to visions what the central elements of the U.S. Constitution are to the Declaration of Independence—devices that translate lofty aspirations into concrete reality.

Turning Goals into Results by Jim Collins

In everyday life, the most common ones we see are things like “The meal is free if you’re not given a receipt” and “Money back guarantee if you’re not 100% satisfied.” In the first example, the desired outcome is that every order is entered into the cash register and rung up so that the payment isn’t stolen. In the second example, it’s an effort to ensure customers are happy such that they are both treated well and more inclined to speak up if something wasn’t right. By doing one thing, you’re increasing the chances that a different, more important thing happens.

Here are a few questions startups should ask:

  • What is the desired outcome?
  • What’s necessary to achieve that outcome?
  • How can I catalyze or incentivize the opposing action or actor to help achieve the desired outcome?
  • What are other ways to align adjacent pieces to help with the desired outcome?

Simply put: what is it that you want to happen and what other behavior can you influence to achieve it?

Catalytic mechanisms are a powerful tool entrepreneurs should incorporate into their startups. While some can seem obvious, take the time to think through how you can use catalytic mechanisms to help achieve your goals.

The Card Game War and One Little Change

As a little kid I loved playing the card game war. War is an incredibly simple, pure luck card game. Two or more people are dealt all the cards in the deck. Then, each turn every player flips over their top card and the person with the highest card wins all the other cards. If two or more of the highest card are the same card, then it’s a “war” where only the players with the highest card then put two cards face down turn a third card face up. Whoever has the highest card wins all the war cards. Finally, whoever wins all the cards in the deck is the ultimate winner.

As a kid, there’s excitement and joyful randomness playing the game. What’s going to flip over next? Is it going to be a war where we have matching cards? Who’s going to win the war? Am I winning?

As an adult, there’s joy in playing with the little ones, but also concern as the game can continue on for hours after one or more players are out. Ideally, three or four of us could play and the downtime between getting out and starting a new game wouldn’t be that long. When I first played with my kids, after decades of not playing the game, I was taught a new rule: every time that a war occurs, each opponent puts one additional card face down. So, instead of always having two cards face down for each war, the first time you have two down, the second time you have three down, and on and on.

One little detail — adding an additional card for each war — changes the game so we can play more often, with more people, and have more consequential wars as the game progresses.

While there are no silver bullets, I’ve found that there are step function improvements that can come with changing one little detail. In the moment, they’re rarely identifiable, but with time, the results can be dramatic. The key is to keep iterating, keep improving, keep working through ideas. All the work is necessary, but some little changes are more valuable than others.

The next time you’re iterating on the product, go to market motion, or any other initiative, remember the war card game and how tweaking one detail can dramatically change the entire experience. Make the small changes knowing that they build on each other and occasionally one little update will turn into a major improvement.

I Have all the Problems I Want

Several years ago there was an entrepreneur that I’d meet with regularly. As is custom, I’d ask the standard meeting intro, “How are things going?” Now, with 99% of the people I talk to I get something along the lines of “Good. How are things with you?” Instead, with this entrepreneur, I’d always get the same answer, “I have all the problems I want.”

Hmm, “I have all the problems I want” is an unusual answer and I’ve never heard it from anyone else. At the time, I didn’t think much of it. Yet, here I am, years later, thinking about that answer to the most common of questions.

That answer prompts several questions:

  • What problems do I want?
  • What problems don’t I want?
  • Do I want a life with no problems?
  • What’s the value of having problems?

This makes me think the entrepreneur has a strong locus of control and works to manage his life around “good” problems and attempts to eliminate most “bad” problems.

From here, I go to a saying I heard last year:

Humans feel most alive when experiencing, creating, or problem solving.

That resonates with me. If most “bad” problems are removed, more flexible time is available and can be devoted to experiencing, creating, or problem solving.

Do you have all the problems you want?

6 Business Value Creation Questions in 10 Words

Lately, I’ve been thinking more about David Friedberg’s Rubric for Business Value Creation. I’m always searching for ideas that capture an important concept with broad applicability. After working on it a bit, I’ve distilled the six value creation questions into simpler phrasing and tweaked them slightly.

Six questions for business value creation in 10 words:

  1. Makable?
  2. Desirable?
  3. Customer profitable?
  4. Customer profitably acquirable?
  5. Investment scalable?
  6. Platformable?


Can you actually make the product or service? Is it possible? Some categories are easier, like a mobile app, while other categories are significantly harder, like a solar panel with dramatically more efficiency.


Do people want what you’re offering? Is there authentic demand? Most new ideas suffer from a lack of demand — no one wants the product — ultimately resulting in failure.

Customer profitable?

Can you make a positive gross margin on each unit you sell? For software, this is easier, while other categories, like more complicated physical products, becomes much harder.

Customer profitably acquirable?

Can you make a positive gross margin on each unit you sell after adding in the sales and marketing costs to acquire the customer? Acquiring customers is often expensive, making it challenging to both produce the product and sell it with a positive gross margin.

Investment scalable?

Can you continue to invest in the business and earn a high ROI as the business grows by improving gross margins, economies of scale, etc.? Some businesses, like software, have high ROI from continued investment whereas others don’t see an improvement in their business.


Can you add more products and services to upsell and cross-sell customers thereby taking advantage of your scale and infrastructure? Also known as a multi-product strategy, the main idea is being able to scale beyond the initial product in a way that creates additional enterprise value.


Now, in 10 words, we have six questions for business value creation that are universally applicable and readily understandable. Use these ideas the next time you’re contemplating a new business or working with an entrepreneur on her business. Creating value is challenging, but not impossible. Good luck!

Entrepreneurs as Probabilistic Thinkers

Last week I was talking to an accomplished entrepreneur and I asked what trait he saw in another entrepreneur that made her successful. Without missing a beat, he said she was a probabilistic thinker. Hmm, that’s interesting. I hadn’t heard anyone use that characteristic when describing someone else.

Now, several days later, that idea is still resonating with me. Growing up in the traditional K-12 and higher education world, most things were black and white — grades, test scores, etc. Only, the real world is dramatically different. Perfect information isn’t a thing. Decisions are made using the best available information and outcomes are much more nuanced. Then, layer in entrepreneurship and the quantity of decisions that have to made with limited information goes up even higher.

A probabilistic thinker is someone who thinks through chance variations. What’s the likelihood A, B, or C happen? What can we do to change those probabilities? What decision do we make based on the probabilities? Whether they realize it or not, entrepreneurs are constantly assessing the chance variations and picking a path.

Layer in chance variations across so many facets of a startup like sales, marketing, product development, customer success, operations, and more, and the overall complexity is intimidating. Yet, an entrepreneur that’s a strong probabilistic thinker is making better decisions repeatedly that compound over time. Similar to the idea that if you’re 1% better per day, that equates to a 37x improvement over a year, better decision making on a daily basis results in remarkably better outcomes over longer periods of time.

The next time the topic of successful entrepreneur traits comes up, add probabilistic thinker to the list.

Search Funds Eyeing SaaS Startups

Lately, I’ve heard of new search funds eyeing Software-as-a-Service (SaaS) startups as their acquisition target. A search fund is typically an individual that’s raised a specific amount of capital with the sole purpose of acquiring and running a company. Think of it like a private equity firm with a solo partner that only buys one company and the partner becomes the CEO of the company. Search funds have been around for decades but ebb and flow in popularity.

From a search fund perspective, the target is usually a “good business” with the potential to grow into something significantly larger, often exiting in 7-10 years, just like a standard investment fund. In addition, they have a set of criteria of what they’re looking for in an acquisition:

  • Strong management team
  • Consistent growth and profitability
  • Recurring or re-occurring revenue
  • High gross margins or maintainable gross margins
  • Industry growth or opportunity to grow market share

Looking at this list of criteria, it becomes clear why search funds are eyeing SaaS startups. Save for the profitability component, many SaaS startups check all the boxes:

  • Consistent growth
  • Recurring revenue
  • High gross margins
  • Industry growth

While a strong management team is critical, it’s slightly less so in the search fund example where the search fund leader is going to be the CEO of the acquired company.

In addition, a huge number of SaaS startups have raised a large amount of money over the last few years, yet a meaningful percentage haven’t been able to grow into their valuations. The clock is ticking for these angel and VC-backed startups to find a home as ones that aren’t growing fast are having a harder time raising money. Search funds, much like private equity, are a perfect exit opportunity.

Look for search funds targeting SaaS startups as a growing trend.

7 Lessons from 15 Years of Angel Investing

Last week I was talking to a potential angel investor and he was asking a number of questions. My first comment to him was how it’s dramatically more difficult than it seems. Yes, it’s easy to write a check. No, it’s not easy to be good at it and/or make money at it. As with anything, there’s a tremendous amount of survivorship bias. People only talk about the winners and rarely talk about the losers. And, most investments don’t work out (the loser investment bucket overfloweth with non-existent startups).

Thinking more about it, here are seven lessons learned from 15 years of angel investing.

Every Deal Looks Great at Time of Investing

When an angel investment is doing well people like to ask, “What did you see in the opportunity?” Of course, it’s always a great team, TAM (total addressable market), and timing. Only, every consummated investment is believed to have those. When making an investment, it’s hard to tell which one is actually going to succeed.

Winners Take Time, Losers Lose Fast

One observation I didn’t expect is that winners cruise along with the usual ups and downs, but don’t die, and then eventually something clicks where growth takes off. For the ones that don’t work out, it’s obvious right away, usually within 3-6 months. They don’t close down that fast, rather they flounder and don’t show authentic signs of forward progress.

Find a Lead Angel Investor

Someone has to care and want to help the entrepreneurs. Today, it’s far too common to have a big party round with dozens of investors putting relatively small amounts of money in the round such that no one takes the lead. Signs of a lead investor include issuing a term sheet (not a SAFE/convertible note), joining the board, holding a weekly call with the entrepreneur, etc. Startups are messy and complicated, even more so for first-time founders. Someone needs to step up and pro-actively help the entrepreneur.

Ask Why You’re Getting a Look at this Deal

When a deal falls in the lap of a potential angel investor, the very first questions that should be asked is, “Why am I getting the chance to see this amazing investment opportunity?” Rarely is the answer the investor tells him or herself a good one. In reality, it’s likely been looked at by professional investors and people with relevant expertise such that they’ve passed on it. Go seek the professional investors and ask why they passed before writing your own check.

Think Investing in a Minimum of 20 Startups

An old startup adage that’s incorrect goes something like this: out of 10 investments, one makes a ton of money, 2-3 make some money, and most lose some or all the money. I don’t believe this is true. I actually think the odds are dramatically worse. At a minimum, if angel investing for a financial return, plan on 20+ investments and budget appropriately. Maybe, if all goes well, one out of the 20 will be a homerun and return 50x+ while most will not be successful. Investing in five or 10 startups isn’t enough. Plan accordingly.

Reserve 4x+ in Follow-On Capital for the Winners

When a startup does well it almost always raises more capital, and in today’s world, significantly more capital. As an angel investor, the best investment is always doubling down on the winners by investing more capital in subsequent rounds. Put another way, instead of planning on investing in 20+ startups, plan on investing in however many startups it takes to get a homerun, and once you have a homerun, stop investing in new ones and put everything you can into the winner. Startups are power laws where the winnings are so massive that they make up for all the losses. Plan for investing at least four times more than the original investment in the outliers.

Expect 10 Years to See a Return

After 15 years of angel investing I’ve invested in 50+ companies and it takes significantly longer than expected to see financial returns. Ones that are doing well readily show strong returns on paper, but converting those paper returns to cash returns is a different story. Plan for a minimum of seven years to see financial returns for the ones that do well and expect it to often take 10+ years. And, for the ones that are doing well, there’s a conundrum that you typically have the opportunity to sell early because there’s strong demand from new/existing investors, but know that even greater returns often accrue in the later years as the business is growing fast at scale.


Angel investing is a strange activity that’s equally fun and energizing while most likely not financially rational without a unique edge. As an investment strategy, it should be viewed as part giving back (charity work) and part paying it forward recognizing the success in life that afforded you the opportunity. Regardless, go into angel investing eyes wide open knowing that it’s much more challenging than it looks. Good luck!

Post Entrepreneurial Exit —Bias Towards Action

Over the last couple weeks I’ve had the opportunity to talk with multiple entrepreneurs that have had nice exits and are thinking about what’s next. After putting thousands of hours into a venture and going through so many low lows and high highs, it makes sense that an entrepreneur would be thoughtful about what’s next. Building a company is incredibly taxing, both mentally and physically. Now, with financial freedom, a good deal of urgency and ambition is often tempered.

When talking to these entrepreneurs, my main point always stays the same: don’t lose your bias towards actions.

Keep moving.

Keep pushing yourself.

Keep exploring.

Keep tinkering.

Many years ago, I was on the other side of the table after we sold Pardot. I was talking to a successful entrepreneur, seeking advice as to what to think about now that it was time for the next chapter in life. He said something that has always stuck with me, “Your skills will immediately start atrophying if you don’t stay in the game.”

Figure out what game you want to play next.

Join/buy an existing business?

Invest in startups?

Do board work?

Do nothing?

Most of the time, the entrepreneurs I talk with want to do something. Rarely do they want to jump in and grind out another startup from scratch. For me, I think of it like the parent vs grandparent analogy.

As a parent, you always have to be on. You have a deep responsibility that’ll likely last a lifetime, but often at least 18+ years. It’s an experience that’s immensely rewording and challenging at the same time.

As a grandparent, you don’t always have to be on. You care deeply but can come and go with no day-to-day responsibility. The highs aren’t as high and the lows aren’t as low, yet the joy is still there.

Entrepreneurs post exit would do well to maintain their bias towards action, figure out what game they want to play, and what level of responsibility they desire. While there’s no right answer, it’s important to be thoughtful and keep moving forward.