May 23, 2024

Growth Strategy for Startups: Validate Foundations and Product Market Fit, Set Business Goals

In part 1 of this series, we covered the importance of getting the fundamentals right while preparing to transition from initial traction to a growth engine.

In part 2, we’ll dive into:

Validate foundations and readiness
Set business goals

1. Validate foundations and readiness

To start with, ensure your twin foundations of Core Value Proposition and Ideal Customer Profile (ICP) are solid and aligned. This is time and effort well spent - any growth motion you prioritize will draw on these pillars to succeed and scale.

A) Core Value Proposition

Do you have a clear and compelling articulation of the product / service you provide?
What pain does it alleviate? What need does it satisfy?
- Do not use product features & specifications, frame this in terms of the benefit to customers
- [Note: If this is not clear, you may have a solution in need of a problem. Perhaps you’re too early for the market or you’re talking to the wrong segment]
Why is your offering differentiated or better vs. what the customer does today?

B) Audience: Ideal Customer Profile (ICP) and Serviceable Obtainable Market (SOM)

Ideal Customer profile (ICP): This is the persona who experiences the most value from your product or service. Note: If you have an existing base of users, this is likely the cohort that is the most loyal or engaged, with highest retention vs other segments. To drive focus, it’s also a good exercise to specify who is not your target audience. If you’re early on in the journey, you should start out with an initial hypothesis of who would value your offering and conduct qualitative interviews to validate your assumptions before proceeding further. This is the information you should aim to capture: ‍
- Profile: Demographics and Firmographics ‍
- Motivation & Behavior:
 - How is the ‘need’ or ‘pain point’ experienced? In an individual or group setting? In conjunction with another product? What is the frequency?
 - Go deeper on the ‘why’ - what is the value you are bringing to this audience?
 - What are the alternative solutions to using your product? If you’re in a relatively new category, this needs to be a broad definition of other ways your audience solves their problem today vs. a strict competitive set.‍
 - How does the user make a decision? What are his / her ‘watering holes’ - sources of information & influences?
Serviceable Obtainable Market (SOM): While Total Available Market (TAM) is a useful signal of market potential for investors seeking to determine exit sizing & viability, it’s better for operators to focus instead on Serviceable Obtainable Market (SOM). SOM is a more accurate representation of reality on the ground, takes practical tradeoffs into account and is a better baseline for setting goals.

C) Reconfirm Product Market Fit (PMF)

Note that PMF is an iterative process, not a ‘one and done’ exercise, as customer expectations, their experience with your product and the competitive landscape continue to evolve.

Look at data / signals across the following areas on an ongoing basis:

[Sentiment & Feedback]: How would your customers feel if they could no longer use your product? How many of them would recommend your product to others?
[Behavior]
1. High customer retention: If customers are continuing to use your product over time [frequency dependent on category behavior], this is the strongest sign that you are adding value or solving a problem for them.
2. High organic growth: If new customers are coming to you organically [without intentional or paid marketing efforts], this is a sign that you are being recognized in the market and referred by your existing customers.

2. Set Business Goals

These are the key questions to ask:

What is the target revenue growth YoY?
Break down revenue goals: from input to output
What budget or resources do you currently have to deliver these goals?

[Bonus] Understand the unit economics of your business

A) Target Growth Rate

A healthy growth rate is the best indicator that your initial idea or concept can be a workable business.

This is particularly important for institutional funding. Early stage companies that are looking to raise Series A are typically expected to show annual revenue [or user if the startup is pre-revenue] growth of 40-50% at a minimum, and 3+ months of consistent 15%-20% MoM growth - clear signs of momentum and scalability.

B) Break down goals: understand the levers (inputs) that get to your results (outputs).

Here’s a simple example to get your started: Deliver $1M in Annual Recurring Revenue (ARR).

Setting business goals: from inputs to outputs (ARR)

If your business is more nuanced or complex eg. if it’s a 2 sided marketplace or monetized via ads instead of paying users, adjust the calculations accordingly.

C) Resources: Budget availability

What budget do we need to deliver our goals?
Take into account current burn rate and timing of next / planned funding round to determine if a bridge round or additional financing is needed. [Bonus] Unit economics: CAC, LTV and Payback
Customer Acquisition Cost (CAC), LTV / CAC and Payback: If you’re relatively early in the journey and have been focussing primarily on finding Product-Market Fit with a small group of users, your marketing and sales costs to acquire new customers are likely to be on the lower side. However, as you prepare plans for growth, it is good to know your unit economics to understand how much a new customer is worth to you and given this - quantify how much you are able to spend on acquisition. While businesses can become more efficient over a period of time, if the fundamentals don’t make sense to begin with, it is far better to adjust the business model and monetization strategy before aggressively investing in growth.

A few definitions and benchmarks:

Customer Acquisition Cost (CAC): All sales, marketing & onboarding costs incurred in acquisition / No. of newly acquired customers

Note: this is a fully loaded cost, and should include the costs of the following:

Salaries of employees that are involved in acquiring customers
Tools deployed in the acquisition process
Spend eg. Paid media, content development, agency costs & commissions etc.

Note: Any costs incurred to grow or retain existing customers should not be included in CAC.

2. LTV / CAC = Customer Lifetime Value / Customer Acquisition cost

While the ratio to aim for is 3:1, this does depend on the business model at play. As an example, a good LTV/CAC for D2C / marketplaces is 2-3X while Enterprise SAAS can operate at 4-6X given the subscription nature of the business.

It is important to note that LTV projections can be notoriously difficult to estimate in early stages because there may not be many repeat buyers or retained customers as yet and churn data may not be reliable or stable. In case case, be wary of overinflating LTV projections - this can lead to justifying a higher CAC without merit.

3. CAC Payback: Customer Acquisition Cost (CAC) payback is the number of months it will take to recover the cost of acquiring a customer.

Note: Because of the LTV data quality and assumption risks mentioned above, CAC Payback is used more actively than LTV/CAC by early stage startups.

CAC Payback = Acquisition Costs / Monthly revenue * Margin

CAC Payback Targets to aim for:

D2C:

For products that are likely to have low frequency or repeat behaviour, aim to recover CAC in the first transaction itself
For repeat products (eg. household essentials), aim to recover CAC within 6-12 months

B2B SAAS: