In the SaaS world, one of the common best practices is to have the cost of customer acquisition be equal to or less than the first year’s revenue (or even better would be gross margin). So, if on average it costs $5,000 in fully loaded sales and marketing expense to acquire a customer that pays $5,000 per year, things are going well. After learning that heuristic, and working with a number of entrepreneurs, I’ve come to take it one step further and judge the success-to-date of a startup based on the amount of money burned all-time vs the annual recurring run-rate today, especially if it’s one to one.
While burning $1 to get $1 of recurring revenue might not sound like much, it’s actually really good. Think of a company that’s growing fast at $5 million recurring on $5 million burned all-time. In today’s market, that company is likely valued at $30M .- $40M (6-8x run-rate). Spending $5M to build a company worth that much is likely a good scenario for everyone involved including founders, employees, and investors. A common phrase in the startup world is “if the company sells for 10x the amount of money raised, everyone does well.” While a valuation of 10x the capital raised is excellent, consider the ratio of capital burned all-time to current recurring revenue as another metric to evaluate the success of a startup.
What else? What are some more thoughts on evaluating a startup based on cash burned vs recurring revenue?