Month: February 2017

Profile make 2017 Sunday Times Top 100 Best Small Companies List

Profile Financial has been included in the 2017 Sunday Times Top 100 Best Small Companies List. The Sunday Times publish their list every year to honour the ‘cream of Britain’s employers’. The award follows much dedication towards the team environment and to creating a positive culture for everyone who works at Profile.

COO of Profile, Rachel Blundell commented:
We know that Profile wouldn’t be the success that it is without great people and that’s why creating a healthy culture and working environment for our team is crucial to our business strategy. As a young business which has grown quickly in three years, we are incredibly proud to be on the list and we have bold ambitions for the future!”

Read the full story here.

Infinity welcomes three senior hires to UK & new US offices

Infinity, the cloud based marketing technology and call tracking provider, has announced its US expansion as well as three senior hires to lead the implementation of the company’s major growth. Andy Sadler joins as Chief Revenue Officer, while Trent Walter and Michelle Garnham join as Sales Director for North America and SVP of Customer Success respectively.

The three new hires bring a combined 50 years of industry experience to Infinity and they will work with its fast growing customer community to drive value and success, both commercially and with customers.

CEO of Infinity, Paul Walsh commented:
“2016 has been a key growth year for us, despite growing political and economic uncertainty across the world. We doubled the headcount, have three new executives in the team, are opening an office in the US and have exciting product launches coming up. Andy, Trent and Michelle will add the expertise we need to take Infinity and the market to the next level. As many companies seem to reconsider investments in certain markets, we’re looking at 2017 as the year of further global expansion and consolidation, with the UK and US being the primary drivers of growth.”

Read the full story here.

Antidote launch Prescision Medicine for Me

Antidote have announced the launch of a new project, Precision Medicine for Me, with patient empowerment organisation Patient Power. Precision Medicine for Me is dedicated to providing support to patients who want access to the best possible information and services related to precision medicine. It aims to ensure that all patients have access to next-generation tumour testing and the latest treatment options, including promising new drugs currently being tested in clinical trials.

CPO of Antidote, Sarah Kerruish commented:
“We recognised a major problem; it’s very difficult for patients to learn about and gain access to tumour testing unless they are treated at a major cancer centre. This means they aren’t benefitting from the latest treatments, both approved and in development.”

Read the full article here.

Smedvig Capital lead £12m investment in Shipping Container Pricing Index Xeneta

Xeneta, the leading ocean freight benchmarking and market intelligence software platform, has raised $12 million in a Series B investment round led by London-based Smedvig Capital. Existing investors including Creandum and Alliance Venture also participated in the round. The financing will be used to fund Xeneta’s continued global expansion and to strengthen its product development and technology platform. Rob Toms, a Managing Director at Smedvig, will form a part of Xeneta’s board of directors. Smedvig will join Xeneta’s earlier investors Creandum, Point Nine Capital, Alliance Venture and Alden, bringing the total raised by Xeneta since 2012 to $20.5 million.

”We are excited to be backing and working with Patrik, Thomas and their team to continue their impressive growth. The business has already had a major impact in the $200bn+ container shipping market, and we are confident that Xeneta will continue to drive change in the ocean freight and related markets,” said Rob Toms, a Managing Director at Smedvig Capital.

“We were looking for a VC who shared our strategic long-term outlook. Shipping is not a fast-paced industry and Smedvig’s extended investment perspective plays very well with our strategy making them an ideal investment partner,” said Patrik Berglund, CEO & Co-founder at Xeneta.

“One thing that was particularly appealing about Smedvig was that their founding roots stem from the shipping industry. That coupled with their experience in scaling enterprise technology businesses in traditional industries globally made it a perfect fit for us,” said Thomas Sørbø, CBDO & Co-founder at Xeneta.

Xeneta has positioned itself as the leading container pricing platform and challenged the status quo of the traditional volatile shipping industry. By digitizing the crowdsourcing of ocean container prices it has created the most complete global container pricing index bringing pricing transparency to all stakeholders in international container trade.

“Xeneta is one of my favorite Creandum seed deals because from the very first meeting you could see such a massive potential in the team and in the opportunity to bring price transparency to global freight. Xeneta has developed phenomenally and we’re very happy to welcome Smedvig Capital as co-investors, as we share the founders’ long-term vision for the company,” said Fredrik Cassel, Partner at Creandum.

This was also echoed by Jan-Erik Hareid, Managing Partner at Alliance Venture noting that Xeneta has carved out a unique position in the container freight marketplace making it a one-to-watch company.

Founded in 2012 in Oslo, Norway, Xeneta is the largest ocean freight rate benchmarking and market intelligence platform. In just 2 years, Xeneta has grown in its database of contracted shipping rates from 2MN in 2015 to 23+MN in 2017, while increasing revenue by 200% in 12 months. Customers include global market leaders such as Kraft Heinz, Electrolux, Continental, Thyssenkrupp, Akzo Nobel, Brother International, in addition to the world’s leading suppliers in the automotive, chemical and retail industries.  The company has offices in Oslo, Hamburg and establishing a presence in the U.S. east coast, currently New York.

In 2016, Xeneta was named Nordic Startup of the Year – Norway and Patrik Berglund, CEO, received the prestigious Lloyd’s List Innovation in Shipping Award.

SaaS Metrics – What am I aiming for?

In my last post I presented LTV:CAC and CAC Payback as the two most important metrics for SaaS businesses.

LTV:CAC tells us how profitable a business will be at maturity and CAC Payback tells us how much cash it will take to get there. Therefore, these are the two most important metrics, and entrepreneurs should monitor them religiously.

Management should strive to improve these two metrics. But founders often ask us “how good does my LTV:CAC and CAC Payback need to be?”

In this second post of three, I will explain why for SaaS businesses to ‘work’, they need to have LTV:CAC of at least 3x. I will also show that for capital efficient returns, CAC Payback should ideally be less than 12 months.

I will then demonstrate unit economics in action through a worked example.

LTV:CAC must be at least 3x, ideally 5x.

In a previous post I explained that LTV:CAC is a great predictor of profitability at maturity.

As it turns out, there is a direct mathematical relationship between LTV:CAC and ‘steady state’ contribution margin.

By ‘steady state’ we mean once the business has stopped investing in growth and is just spending enough on sales and marketing to replace churn and maintain a constant revenue.

‘Steady state contribution margin’ is the percentage of revenue that is left after taking off variable cost of sales, and sales and marketing costs (churn replacement only). It is what is left over to cover fixed overheads before getting to ‘steady state operating profit’.

The chart below shows how for a given gross margin, steady state contribution increases with increasing LTV:CAC. This improvement is steep at first, but as LTV:CAC increases, the rate of contribution improvement starts to slow.

So, what can we learn from this?

Well, below 3x LTV:CAC it’s going to be almost impossible to make a highly profitable business. Benchmarks (such as those published by Pacific Crest) tell us that even the largest SaaS companies have an overhead base of at least 30% of revenue. Therefore, to leave enough room for a ‘meaningful’ profit margin (say 10%) we need contribution margin to be greater than 40%. Unless LTV:CAC is at least 3x, this will be tricky.

Between 3x and 5x there is a steep improvement in contribution margin (roughly ten percentage points improvement). At 5x LTV:CAC, contribution margin is high enough that a very profitable business should be possible.

Beyond 5x, there are still benefits to be had, but we start to see diminishing returns. Doubling LTV:CAC from 5x to 10x only yields a further ten percentage points improvement in contribution margin.

So in conclusion:

LTV:CAC needs to be at least 3x for a business to have a chance of profitability, but really management should be aiming for 5x to make a great business.

I will explain the maths of this relationship in a later post.

Ideally CAC Payback should be less than 12 months.

CAC payback is an indicator of how much cash a business will need to spend on sales and marketing to reach a certain size in a certain time.

Again there is a mathematical relationship here, although it is more complex than the LTV:CAC rule. I will delve into the maths in a later post, but the rule of thumb that we apply at Smedvig Capital (and has been written about by various other commentators) is:

CAC Payback needs to be less than 12 months for a business to have a good chance of capital efficient growth. But for enterprise SaaS businesses with high value clients, this can probably be stretched to 18 or even 24 months.

This is a slightly more nuanced, less objective rule than the LTV:CAC rule because the amount of cash one is willing to invest depends on the expected size of prize and appetite for risk.

For most SaaS businesses, CAC Payback needs to be less than 12 months to provide the capital efficient growth that attracts investors to SaaS in the first place. But for enterprise SaaS companies with high value, low churn customers (and thus high LTV:CAC), a higher CAC Payback period (18–24 months) can work.

So that’s the theory, but to demonstrate the impact of unit economics, let’s do a worked example.

Thought experiment: unit economics in action

Imagine we have three SaaS businesses with identical P&Ls. Each is raising a £7m Series A round to invest in sales and marketing acceleration.

Three ‘identical’ P&Ls.

All three are run rating £2m Annual Recurring Revenue (‘ARR’) and growing 10% month on month. All three have a gross margin of 75% and all three are spending just under 50% of revenue on sales and marketing and a further 50% on overheads (tech, product, finance, admin). They are all loss making to the tune of -£0.5m. They look like three good, early stage businesses.

But with different underlying unit economics.

Company A has low CAC, quick CAC Payback, small contract values (Monthly Recurring Revenue, ‘MRR’), high churn, low LTV. This is the sort of profile we might expect from a consumer subscription business for example.

Company B has very high CAC, long CAC payback, large contract values, low churn and high LTV. This is more like the profile of an enterprise SaaS business selling large, bespoke, contracts into blue chip companies.

Company C is somewhere in between. Perhaps the metrics of a SaaS product aimed at small and medium sized businesses.

It’s tricky to disentangle all the individual metrics to get a read on how the three businesses will perform overall.

But, they all have the same P&L so should all be pretty similar… right? Well, let’s see where they end up five years after the investment.

Very different outcomes five years later.

Company A: Disaster

To be fair, Company A has grown to a respectable £13m ARR. However, growth has all but stopped now. It burnt through the £7m investment in just over three years and had to raise another £2.6m. It is still not through break even. More worryingly, even if we strip out growth costs, the company would still be loss making (steady state EBITDA ~ -£1.3m).

Company C: Solid investment

Let’s jump to Company C. This has been a great investment. It is now at £22m ARR, growing 11% per year and has reached break even without needing any more cash. It is dropping £1.7m EBITDA whilst still growing, and if we strip out growth costs, its ‘steady state’ EBITDA is £3.5m.

Company B: Big win… eventually

Company B is a really interesting one. After 5 years it is smaller than Company C at £17m ARR. It burnt though the £7m investment in 23 months and needed to raise a further £4.6m — much worse even than Company A. However, it has reached break even (just). More excitingly, it is now growing the fastest at 18%, and if we strip out growth costs its steady state EBITDA is £4.1m. So it is poised to become a more profitable business than Company C and is arguably a more exciting business (depending on your risk appetite).

So, could we have predicted this outcome?

We should have seen this coming.

Well Company A had a LTV:CAC ratio of 2x which should have been a pretty clear warning that it would struggle to become profitable.

Company B had a super high LTV:CAC (15x) which highlights its potential to be a ‘big win’. However, its long CAC Payback period (24 months) was a warning that it would take a lot of cash and a long time to get there.

Company C had a solid LTV:CAC of 5x and a similarly strong CAC Payback of 12 months. This should have told us that it would get to a good level of profitability without burning too much cash. A nice, lower risk, investment even if Company B ends up being the bigger win.

So despite all three businesses having the same P&L, we could easily have predicted their divergent outcomes, just by looking at two metrics.

Avoiding traps: when to invest and when to hold back.

Finally, let’s look at how Company A and Company B evolved over time. This will demonstrate how unit economics can help us to avoid traps when deciding whether or not to invest in sales and marketing. We will ignore Company C for now because it is straight forward — a good investment from the get-go.

Take company A (red line) first. Because it has such a quick CAC Payback (6 months) it was able to acquire new customers and revenue very fast. It grew faster than the other two companies initially and after twelve months it had grown ARR 5 fold to £10m (left hand chart). Consequently its burn had come down the most, to about -£2.5m after 12 months (middle chart), and it had burnt through the least amount of cash, just under £4m (right hand chart).

However, because churn was so high (hence low LTV:CAC at 2x), as soon as it reached any scale, it had to invest huge amounts in sales and marketing to replace churning customers just to tread water. By 24 months, almost all of its sales and marketing spend was going on churn replacement rather than new growth and so growth all but stopped (left hand chart). EBITDA never got to break even and plateaued at -£1m (middle chart). The business continues to lose money today and will never become profitable (dotted line).

The trap: in the first 12–24 months, management could have looked at the stellar growth rate and decreasing burn and decided that everything was going smoothly. It would have been easy to make the mistake of investing further to accelerate growth when in reality they needed to do the exact opposite — cut sales and marketing spend and focus on fixing churn. A quick look at LTV:CAC would have told them this.

Company B (orange line) has a long CAC Payback (24 months) so it took a long time and a lot of money to get going. After 12 months it had only reached £5m ARR (left hand chart) and after 3 years it was still the smallest company despite spending the most on sales and marketing (right hand chart).

However, because it has such low churn (hence high LTV:CAC at 15x), as it began to grow it gathered momentum. The customers it acquired (at high cost) stuck around and spent lots of money. By the end of 5 years, it has a large, stable, base to build from and almost all new investment goes into growth. By year five it is growing the fastest (left hand chart) and is through break even (middle chart). Importantly, because it has a stable base of revenue, it can chose to ‘turn-off’ growth spending at any time to increase profit (dotted line, middle chart).

The trap: management may have lost their nerve and chosen not to invest further when confronted with sluggish growth and high burn early on. This would have been a mistake. Now is exactly the right time to accelerate sales and marketing to win market share and push through the cash trough (right hand chart). Armed with CAC Payback and LTV:CAC numbers, management could have seen what was going on and had the confidence to press on.


Over the last two articles I have demonstrated the importance of LTV:CAC and CAC Payback. Management teams need to be totally focussed on keeping LTV:CAC above 3x and driving up towards 5x. Almost as important is keeping CAC Payback down, ideally below 12 months.

I will discuss various approaches that management can take to improve LTV:CAC and CAC Payback in my next post.


Note: this analysis assumes that the addressable market is large enough, and the competitive environment stable enough, to maintain constant metrics. This is a simplification designed to isolate the impact of metrics from other important factors.