After Positive Cash Flow: Should You Raise Again to Expand?

Many of the dilemmas we face today depend not only on how far ahead we can see, but also on whether we have the resources to get through each difficult stretch. #YouNeedToWorkThroughTheDilemmaOfTheNextStage Today, let us look at another difficult choice. In the normal course of running a business, you first invest resources to acquire customers. This is called customer acquisition cost (CAC). The metric directly compared with CAC is customer lifetime value (LTV). If CAC is greater than LTV, it is basically a viable business, but you also need to consider the customer churn rate (CCR). LTV*CCR>CAC The key is that LTV usually takes several years before you begin realizing it, while CAC requires substantial spending right at the outset. When you launch a business, you therefore have to spend first, then wait for enough customers to start contributing revenue. Once the business gets on track, it begins generating positive cash flow and may even start turning a profit. Here is the question: when you start generating positive cash flow, what choice should you make? You should seek more capital and commit to another big round of spending. This really tests human nature. After enduring years of struggle, you finally see the market accept your product, customer numbers grow, and positive cash flow and profits emerge. Just when you are looking forward to reaping the rewards—distributing dividends—you have to decide whether to spend even more and return to the painful cycle of a few years earlier. It is not just entrepreneurs who feel torn. Investors feel just as conflicted. Very few people can truly see to the heart of running a business, make the right choice at a critical moment, and still have the patience to wait.