key questions for your interviewer to assess whether or not their startup is built to last
Every engineer has some concept of the kind of company for which she’d like to work. They’d have an awesome team, and use a cutting-edge tech stack. The pay would be great, and she might even get stock options. A meal plan would be killer too, right?
Close your eyes and picture it with me, won’t you? You're right in the thick of things as your startup gets featured in TechCrunch and raises a sizable series A. You sit back and watch as the value of your equity rises in pace with your company's non-stop hype train.
Suddenly, the music stops. Your co-workers pack up their ergonomic work-stations and MacBooks and leave the building, never to return. The chocolate fondue fountain in the company kitchen sputters to a stop. What's happening? What blasphemy, what madness is this?
The company ran out of money, they say. Everyone has to find a new job, they say. Including you, or so they say.
But there’s another way! The job search is a two-way street. When you’re considering a prospective employer, there are steps you can take to validate their business and verify that it’s built to last before you join.
My background is in venture capital. As an investor, I’m always trying to reduce the complexity associated with a business to a finite set of quantifiable metrics. These factors are relevant whether you’re deciding on an investment in a company, or considering a full-time position there.
In this blog post series, I’m going to step through the seven questions whose answers I consider most indicative of startup viability. It’s completely fair to bring up these topics during the interview process with a prospective employer. In fact, doing so demonstrates that you’re interested in the business as well as its technology, which will differentiate you from other candidates.
Let’s get started! Today’s topic is…
#1: LTV/CAC ratio
Lifetime value (LTV) is the amount of revenue that a company generates from a single customer over the entirety of their remaining a customer.
Customer-acquisition cost (CAC) is the cost associated with convincing a customer to buy your product or service—this includes advertising, marketing, sales efforts, etc.
At a fundamental level, every profitable company is exploiting an arbitrage opportunity between the cost they pay to acquire customers and the revenue they generate from them over time.
Let’s pause here, because the above statement is the single most important thing I’m likely to ever type on this blog.
LTV, CAC, and the factors that impact them dictate the viability of a company over time. These factors define the unit economics associated with a business—the financial picture of the business on a per-customer basis.
So, how can you discuss these factors with your interviewer in a casual and context-appropriate way? Take a look below at some questions and themes related to LTV and CAC, respectively:
LTV: How much do we make from our customers over time? How long do they stay with us? How often do they use our service? What are things we can do to increase retention and usage rates?
CAC: How much does it cost to acquire a customer? What are the factors that impact that cost, and how are they likely to change over time? How will the technology we produce impact those costs?
If the LTV/CAC ratio is less than 1 (meaning that customer-acquisition costs are higher than customer lifetime value) and the company doesn’t have a strategy for remedying this, they will almost certainly fail. If that ratio is healthy and expanding, you can feel more confident that the business is fundamentally sound.
If you don’t have a good sense of these metrics for your prospective employer, just ask! Knowing this ratio could save your life—or at least save you from a job search in six months when the company burns through its venture funding.
Tune in soon for part two! I’ll be discussing total addressable market (TAM) and fragmentation.