Jamie Sullivan

We think AI, and the resulting personalization, will dramatically increase the market for online consumer services, with unlocks for both sides of the TAM equation (# of users and price). Detailed below! @aleximm @a16z

Disclosure: none of the above should be taken as investment, legal, business, tax, or other advice; please see a16z.com/disclosures for more information

5/ In other words, increasing your LTV:CAC from 2x to 3x more than triples your valuation! Increasing from 3x to 5x is another 60%, or more than five times the valuation of a 2x LTV:CAC business.

4/ Consumer internet public companies with ~16% margins (the derived margin in our 2x LTV:CAC example) trade at 1.5x gross profit. Those with ~33% margins (~3x LTV:CAC) trade at 5.3x GP. Those with ~46% margins (~5x LTV:CAC) trade at 8.4x GP

3x LTV:CAC is the golden rule for consumer startups… but why? @aleximm and I explore why going from 2x to 3x empowers greater reinvestment to build a compounding long-term advantage.. and more than triples your valuation! 👇👇 a16z.com/2023/08/22/why…

3/ Therefore, S&M% (and LTV:CAC), is the most important determinant of operating income margin as a % of GP. Revenue & GP multiples are coupled with long-term op income margins. As op income is a derivative of LTV:CAC, valuation multiples are also correlated with LTV:CAC.

2/ For consumer internet companies, opex margins vary as % of revenue across different gross margin buckets. But if you adjust the denominator from revenue to gross profit, the cost margins look similar across company types.

1/ For the avg consumer internet company: 1x LTV:CAC = unprofitable 2x LTV:CAC = 16% operating income as % Gross Profit (GP) 3x LTV:CAC = 33% operating income as % Gross Profit 5x LTV:CAC = 46% operating income as % of Gross Profit

A glimpse of revenue generation up-and-down the software stack over the last two decades + emerging sources of defensibility likely to determine value capture this time around with @DavidGeorge83 @a16z a16z.com/2023/08/11/clo…

8/ For more benchmarking, check out the Guide to Growth Metrics that @DavidGeorge83 @sarahdingwang @aleximm pulled together, which includes ARR per FTE. Layering on GM%, as done here, helps normalize across different cost structures. a16z.com/growth/guide-g…

7/ So what does this mean for you? As you finalize your 2023 budget, 3-year scenario plan, and path to profitability, consider using GP per employee as a sanity check to help determine how realistic your forecast is. If you are tracking towards $200k+, you are on the right path!

It’s 2023, and in this market, reaching profitability has become THE north star metric. But that often feels intangible. One way to break it down - how much gross profit per employee is needed to become cash flow positive? Here’s a framework 👇