Category: venture capital

There are numerous metrics to focus on when launching an e-commerce startup. There are also several hypotheses that you will want to prove during the early months, but the most important hypothesis to make and prove is that your customer’s Lifetime Value divided by your Cost Per Acquisition is greater than 2x. This multiple holds true for numerous other startups, not just those in the e-commerce space.

While it is extremely important to continuously grow your daily Unique Visitors (i.e. shoppers) and number of Unique Buyers (i.e. customers), the LTV/CPA multiple will determine the scalability of your business. Note that 2x is what some would consider the minimum for investing. Aim to be at least in the 2x to 3x range.

My most important piece of advice related to this metric is to focus your efforts on increasing the LTV side of the equation. Too often I meet startups, typically with inexperienced entrepreneurs, that are not concerned about their low LTV because they anticipate using viral marketing to keep their CPA low. The web does make it possible to build a business based on a low LTV and CPA, but it is much harder and not as attractive. The one CPA aspect that you should pay attention to is the time to recover your CPA: aim to recover your CPA within the first 12 months. This will keep your working capital requirements down.

There are several levers you can pull to increase your customers LTV. The obvious ones are: increase cart-size, increase frequency of purchase, and move customers to higher margin products. One of the less obvious ways is to market third party offers to your customers. These are just a few of the things you can do to increase the LTV, which in its simplest form equals your Average Sale Price*Net Profit Margin*Purchases/Customer.

Lastly, their are different variations of an LTV calculations. Agree early-on what LTV calculation makes the most sense for your business, and start hypothesizing about your customers LTV, CPA, and the resulting multiple. Inherently, a large piece of your LTV calculation will be a forecast, and as with other startup forecast, it will be wrong, but the sooner you can create a hypothesis about your customers behavior and begin to test it…the closer you will be to proving your business model and attracting more capital.

Check out this infographic if you don’t know how to calculate your LTV.

And as always, check out some resources from other VCs:
Fred Wilson: http://www.avc.com/a_vc/2011/04/ltv-cpa.html
David Skok: http://www.forentrepreneurs.com/startup-killer/

We’ve all had the experience of discovering a new product or business and thinking…I had that idea years ago. This is especially true with new consumer products and consumer facing businesses. Knowing that, I can understand why first-time entrepreneurs are so nervous about having their ideas stolen. However, what these first-time entrepreneurs fail to realize is that there is a massive difference between having an idea for a business and successfully gaining market share. Turning an idea into a business and successfully launching it to the masses requires an enormous amount of EXECUTION and at least a teaspoon of dumb luck.

Numerous articles have been written on the topic of Non Disclosure Agreements, but this continues to be an issue for first-time entrepreneurs. I was recently approached by an undergraduate student at the University of Michigan (Go Blue!) who wanted help with his e-commerce startup. The conversation only lasted ten minutes because he wouldn’t tell me anything more than that he was working on an e-commerce startup. He wouldn’t disclose anything about his idea unless I signed an NDA. Needless to say, I didn’t sign the NDA, and unfortunately wasn’t able to help him out. Following this experience, I thought it might be helpful to publish a list of articles on the topic of NDAs.

In summary: VCs don’t sign NDAs because they are constantly evaluating businesses and will often be looking at 3-5 companies in the same space as they decide where to place their chips. Also, a typical VC might look at close to 1,000 businesses a year, and it would be a nightmare to manage the paperwork and conflicts associated with signing NDAs. Lastly, and most importantly, ideas in and of themselves are useless and proving their origin is impossible.

There isn’t much I can add to what the below guys have already said. I will say that a company’s ability (and need) to require an NDA changes as it matures. Of course a late-stage startup like Facebook has the right to demand an NDA before disclosing information to potential investors.

Hope the following list is helpful.

On NDAs and Confidentiality – Mark Suster
Why VCs Don’t Sign NDAs – Fred Wilson
Why Most VCs Don’t Sign NDAs – Brad Feld
The Venture Capitalist Wishlist – Guy Kawasaki
Perfect Your Pitch – Brad Feld
Going to Raise VC? Here’s a Primer on Process, People & Powerpoint Deck – Mark Suster
Why a VC Will Take a Lighter to Your NDA – Startup Lawyer
Why Startups Shouldn’t Ask Investors to Sign NDAs – Jerome Gentolia