The Need for Two Types of Payback Period Calculations
Tomasz TunguzVenture Capitalist at Redpoint If you were forwarded this newsletter, and you'd like to receive it in the future, subscribe here. The Need for Two Types of Payback Period Calculations
Imagine an AE closes two contracts for $100k ARR. The contracts are identical twelve month contracts except for the payment terms. Contract A requires annual prepayment - all the cash will be paid tomorrow. Contract B relaxes payment terms to monthly payment, 12 monthly installments for the next year. Is the payback period for each contract the same? On one hand, I could plug the numbers into the formula blindly and reply yes, they are identical. But the contracts are substantially different to the company. Contract A pays for itself today. Said otherwise, Contract A has a payback period of 0 days. All of the sales and marketing dollars invested to obtain persuade the buyer to put digital ink to pdf have been recouped immediately. One couldn’t assert the same for contract B, which takes 10 months in our hypothetical example. For a company with a longer payback, the payback period implicitly assumes a successful renewal to achieve the same positive effect on the company balance sheet. The payback period metric doesn’t capture the difference in the quality of the revenue/cash collections. That may seem like a distinction without a difference but the distinction is an important difference. A startup closing only Contract As will be far more capital efficient than one capturing Contract Bs. Contract As don’t require burning equity dollars to hire more AEs; the company reinvests customer revenue dollars to scale. Let’s take this idea time scale further out: multi-year deals. A multi-year prepay offers even greater benefit to a software company. It’s an interest-free loan from a customer to grow the GTM team. For example, if a three-year contract is discounted the startup’s cost of capital for borrowing is simply the discount amortized over the contract period (eg, 10% over three years or 3.2% per year which incidentally costs less than venture debt). And the company has two years of marginal profit to invest in the GTM. Most startups today prefer to run their sales teams on annual deals to accelerate sales cycles and minimize the risk of clawing back commissions on multi-year deals that churn at some point in the service period. But there is a viable GTM strategy for startups to book multi-year deals with pre-payment, and use that cash to finance GTM growth. Especially if logo churn is low, account expansion is strong, and the sales cycles are brief. Cash collections ought to be considered when calculating the payback period. After all, the point of the payback period metric is to determine when to invest more in sales and marketing. If an account executive can recoup all the cost of customer acquisition immediately, shouldn’t the startup collect those dollars and hire another AE? Today, investors (myself included) use payback period as an efficiency yardstick to compare the relative efficiency of GTM spend from one company to the next. It’s also useful to understand how much risk is involved with payback periods of longer than a year. That’s a useful tool. But it’s divorced from the original purpose of the payback period of determining when to double down on scaling a GTM team. It’s time for two metrics to exist: a cash-flow based months-to-repay and an accrual accounting metric. |
Older messages
The 100x ARR Multiple
Thursday, November 4, 2021
Tomasz Tunguz Venture Capitalist at Redpoint If you were forwarded this newsletter, and you'd like to receive it in the future, subscribe here. The 100x ARR Multiple The 100x ARR multiple might
Hex - The Best Product for the Technical Analyst
Wednesday, October 20, 2021
Tomasz Tunguz Venture Capitalist at Redpoint If you were forwarded this newsletter, and you'd like to receive it in the future, subscribe here. Hex - The Best Product for the Technical Analyst
Using the Reversal Mental Model to Invest Better
Tuesday, October 19, 2021
Tomasz Tunguz Venture Capitalist at Redpoint If you were forwarded this newsletter, and you'd like to receive it in the future, subscribe here. Using the Reversal Mental Model to Invest Better
Spot.ai - The Future of Video Intelligence
Friday, October 15, 2021
Tomasz Tunguz Venture Capitalist at Redpoint If you were forwarded this newsletter, and you'd like to receive it in the future, subscribe here. Spot.ai - The Future of Video Intelligence co-
The Two Cap Tables of Crypto Companies: What They Are and How They Relate to Each Other
Monday, October 11, 2021
Tomasz Tunguz Venture Capitalist at Redpoint If you were forwarded this newsletter, and you'd like to receive it in the future, subscribe here. The Two Cap Tables of Crypto Companies: What They
You Might Also Like
Peppered Kitty and The Penal Guard 💂♂️
Tuesday, November 12, 2024
The breed of the non-human͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏
🗞 What's New: HARO/Connectively is shutting down
Tuesday, November 12, 2024
Also: Use AI to beef up your security ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏
the wizard of oz.
Tuesday, November 12, 2024
Read time: 53 sec. Today I want to tell you about Cristiano. He was part of our last Starter Story Academy sprint. And during his first two weeks, he was busy designing and tweaking his landing page.
💃 Beyoncé loves her products...here’s how she did it
Tuesday, November 12, 2024
The exact steps to build your beauty brand empire Hey Friend , We just launched our newest course, How to Build a Million Dollar Beauty Brand. In it, for the first time, Alicia Scott—founder of Range
[CEI] Chrome Extension Ideas #166
Tuesday, November 12, 2024
ideas for Amazon, Twitter, Developers, and Students ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏
Navattic's PLG funnel with Natalie Marcotullio
Tuesday, November 12, 2024
In conversation with Navattic's Head of Growth about their product-led growth (PLG) funnel. ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏
You have one shot to sell your business 🤞
Tuesday, November 12, 2024
Just One Week to Go Until Exit Strategy Launches!
Product manager is an unfair role. So work unfairly.
Tuesday, November 12, 2024
How to thrive in “the great flattening” by redefining work norms ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏
Growth Newsletter #223
Tuesday, November 12, 2024
It's not "what" but "where" ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏
All stock, 6-figure deal
Tuesday, November 12, 2024
Plus, overcome a big barrier to exit planning: owner dependency ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏