Capital Chronicles #5

Hello there! Welcome to Capital Chronicles, saving you hours every week with ~2-3 minute summarised insights from the best venture builders, investors and capital allocators out there. This week: delving into the significance of the LTV:CAC ratio with a16z, introducing the Rule of 56789 by Dave Kellogg, and using customer segmentation to attract your ideal customers with Tien-Anh Nguyen and OpenView.

As subscriber #TBD, each web link below takes you to:

• A link to the original article (read time: varies)

• Summary / insights / implications per article (read time: 2-3 minutes)

Now, read on for the latest…

🛠️ On venture building…

Why Do Investors Care So Much About LTV:CAC? by the team at a16z. Delving into the significance of the LTV:CAC ratio, emphasizing its role as a key indicator of a consumer company's financial health

• Why you should read it: why do investors care so much about LTV:CAC ratios for consumer companies? Simple, better unit economics leads to higher value creation potential! While that might seem obvious, both Jamie Sullivan and Alex Immerman from a16z ran the analysis of 60+ US public consumer internet companies to illustrate why, demonstrating LTV:CAC is more than just a metric for consumer companies. It is a reflection of a business’s efficiency, profitability, and (ultimately) valuation.

🧭 On venture investing…

The Rule of 56789 for revenue growth, by Dave Kellogg. Introducing the Rule of 56789, a powerful growth trajectory framework for companies aiming to achieve specific annual recurring revenue (ARR) milestones.

• Why you should read it: when it comes to growth velocity benchmarking, Dave’s approach really caught my attention. It offers a counter-intuitive yet incredibly insightful perspective on measuring a company's revenue growth. By simply asking, "At what age does a certain revenue size become truly impressive?", the Rule of 56789 outlines a clear set of milestones to strive for on the path to becoming a venture-scale business.

📖 Learning resource…

Customer segmentation for growth, with Tien-Anh Nguyen and OpenView. A step-by-step guide on how companies can enhance their GTM market strategies by identifying and focusing on their most profitable customer segments.

• Why you should read it: to quote the author: “to scale efficiently and effectively, growth stage companies need to focus their efforts on a specific subset of customers who are most similar to their best current customers, not a broad universe of potential customers.” This guide lays out an incredibly practical approach to identifying, prioritising, and targeting your company’s best current customer segments, which all product and GTM leaders can benefit from.

📊 Market insight…

Where have all the green dots gone?, from the Battery Ventures team. An analysis of the drivers behind the notable decrease in software valuations over 2022/3, offering insights on whether this trend will continue in 2024/5.

• Why you should read it: while the market has evolved significantly since Battery Ventures first introduced their “Four Zones” of the Rule of 40 framework in 2019, the authors reaffirm its usefulness as a great guide for growth stage companies and investors wanting to understand the tradeoffs between growth and profitability and how the market is valuing companies across that spectrum.

🎲Lucky dip essential reads…

• LLMs and Sneaky Big Markets

• Stock based compensation: the headache caused by lower stock prices (and what to do about it)

• AI, and everything else

Before you go…

• Feedback: like (or didn’t) like this edition? Let me know!

• Share: could a friend (or two) benefit? Forward or share this article.

• Access: looking for the full Two by Two Playbook? Check it out here.

• Partner: interested in partnering? Learn more here.

Have a great week!

Josh