In 2010, when the market was recovering from the great financial crisis, capital was not easily available. During this time, I started two companies — a mobile gaming company and a performance-marketing company.
My bootstrapped mobile gaming company achieved success, reaching $3K+/day and at times being the number one or two mobile word game on the iPad. Despite the opportunity, I was hesitant to double down and jump in the game of venture capital.
So, I co-founded a performance-marketing company with a veteran from the previous technology cycle. We scaled multiple business lines from zero to millions of revenue as a bootstrapped company. During this process, I learned the importance of capital efficiency and how to run a profitable technology business.
Now, as a venture-backed founder, I have observed that few people understand these nuances and the significant role they play in running a business for the next economic cycle.
Profitable Growth
In simple terms, positive unit economics means that a company is making more revenue from a customer than the costs that are being incurred to acquire and service the customer.
If a company spends $20 to acquire a customer that generates $50 in revenue, and they have $10 in variable costs, then the contribution profit would be $20 (i.e. revenue less variable costs less customer acquisition costs). Adding back in the customer acquisition costs, the company would have a lifetime value (LTV) of $40 and an LTV/CAC ratio of 2.0. This means that they are able to make $2 for every $1 spent on acquiring a customer.
Generally, if they can generate $40 in LTV for every $20 that they spend, it is optimal to spend as much money as possible. However, the amount of money that they can spend is directly influenced by the payback period.
Capital Efficiency
The payback period, or capital efficiency, of a business is based on the amount of time it takes to get back $1.00 of capital for every $1.00 of spend.
When the unit economics and payback period are healthy, the business can spend $20 to acquire a customer, generate $40 in LTV, and recycle the profit back into growth. This creates a perpetual feedback loop that allows the business to grow profitably over time without any external capital.
Businesses that have figured out the profitable-growth feedback loop are able to raise capital and grow faster.
Profitable Growth
Growth capital is the amount of money that a startup allocates to acquiring new customers. The amount of capital needed is directly related to the customer-acquisition costs (CAC) and the payback period.
Illustratively, a startup with a 3-month payback period can grow 8X faster on a monthly basis than a startup that h
