Breaking the j-curve
On VC math & efficient growth
Venture capital math is smart in theory, stupid in practice.
Theory:
In THEORY, you care about things like your LTV/CAC ratio, and make CAC investments based off CAC payback.
So let’s say you sell a $4k MRR software solution. Industry standard is a 12-month CAC payback, so what are you willing to spend on CAC to acquire a customer?
In VC math, the answer is ~$48k. (Some simplifying assumptions here, but this is largely accurate.)
As long as you can acquire customers for a $48k CAC, VCs should load you up with your Series A → B → C → D → IPO.
And if you can retain customers and grow how much they spend with you over time, you wind up with the fabled J-curve: Lots of up-front investment lead to massive revenues and high gross margins (potentially eventually actual profit, too!)
Practice:
Be skeptical, very skeptical of J-curve math if you’re trying to build a solid, sustainable business that also grows.
In short: The J-curve math works when it works. When it doesn’t (and it often doesn’t), you get *wrecked*.
Three reasons:
Many of the J-curve costs are relatively fixed costs (e.g., employees). They are hard to shed when the numbers start looking iffy. Related: J-curve behaviors are hard to shed too. You’ve designed a business around a certain go-to-market approach that assumes a certain cost-per-lead and close rate. When the J-curve math breaks, you have to rebuild this from scratch while hemorrhaging cash.
When something breaks, you find out too late to fix it. To grow at the expected pace, you’re adding new product lines, customer segments, new GTM channels, etc. The thing that doesn’t work tends to surprise you. By then, it’s hard to recover from.
Even if the j-curve math DOES work for your business, you can get caught in a bad funding environment and still get wrecked. Call me a New Hampshire guy, but I don’t like the idea of my entire net worth being one VC vibe shift away from going to near-zero. Noooo thank you.
So what do you do if this is the case? The simplest answer is to find some unfair, low-cost (or no-cost) source of pipeline that breaks you out of the J-curve game. With this, you can grow at the right pace for your business - not the one that makes the spreadsheets work.
So how do you find this low-cost source of pipeline? It’s probably different for every business, but here are a couple of examples I’ve seen:
Customer referrals
Key partnerships
Open-source / free software
Communities
Brand
These are the exact things that AREN’T “money-in, predictable money out.” They are only things that emerge based on some interesting insight into the shape of your market. They’re often weird and hard to replicate, but when they work… they really work.
(One of the things I was working on at HW, for example, was a “next-level manager training course” that every manager in an hourly job would HAVE to take.)
So - take a think. What unfair pipeline approach can break you free from the j-curve math, so you don’t have to build the engine that will eventually run you over?
PS #1:
The waitlist is growing for PMF Camp #3. If you’re on the fence… learn more & apply ASAP! Launches in April, and PMF Camp #4 won’t launch till late Summer / Fall!
PS #2:
Bongiorno from Italy!