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#004 Impact-Scale: A critical balance!

Thu, 08 Aug 2019 11:13:12 GMT

When investing in B2B startups, typically Series A / A+, one of the most critical measures we use is the Impact-Scale balance!

A very simple question which helps us answer this:

How many customers do you need to reach a revenue of $10 million?

If the answer is anything more than 500 customers (~$200k per customer per year), that’s a red-flag for us! It implies that the startup isn’t able to generate significant revenues from it’s customers … which really implies it isn’t creating significant meaningful value for it’s customers!

Typically customers are willing to pay a 10th (or lower) of the “impact / value” created for them to the startup. Therefore if the revenue per customer is low it’s nearly impossible for the startup to scale.

Challenges are two-fold:

Retaining existing customers:
Let’s take an example of $10k per year, simply implies the quantification of the impact created is $100-200k at best! That’s clearly not large enough to keep the customers interested in working with the startup for an extended time duration. Additionally, there is a high risk of substitution as the customer could easily opt for the next cheaper option, and worst of all, the customer may just stop using the product / solution.
Scale requires a large number of customers:
If a startup requires 10,000 customers to reach a reasonable revenue number, the cost of customer acquisition and the cost of operations are going to be prohibitive. Such a large B2B customer base requires a huge operations team, significant on-ground operations, and an enormous customer success team to support them; therefore non-viable to scale!

For us as investors, a lack of this balance of impact-scale is a deal breaker when evaluating potential investment opportunities.

- Abhishek

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