Venture Funded Companies Have Higher Churn, Less Growth

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You've got the questions,

and we have the data.

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This is the ProfitWell Report.

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Hey, Patrick. It's Jeff

Wagner from Accomplice.

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Hope you're doing well.

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Big fan of your work, and

congrats on all the success.

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My question is whether you

guys have data or analysis that

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shows how venture capital

funding can impact a startup

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company's core unit economics.

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I, for one, would

love to know. Thanks.

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Okay.

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Jeff, you're asking me a question

that's absolutely going to get

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me in trouble because I'm both a VC

apologist and a bootstrap founder.

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And as we all know,

funding is a tool.

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It's not bad or good,

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but just like if you're using

a sledgehammer when you should be

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using a scalpel, you can

use the tool incorrectly.

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So to answer Jeff's question,

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we looked at the data

from three point seven thousand

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companies within the subscription

space and here's what we found.

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Let's start with arguably one

of the most important metrics

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within a subscription

business, churn.

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When comparing companies who took

on funding to those who haven't,

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you'll notice that at most

stages of the growth life cycle,

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funded companies have higher

churn with an average of twenty

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to thirty percent higher

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funded

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certainly plenty of

lurking variables here,

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but non funded companies likely

have a bit of survivor bias

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baked into these numbers simply

because they don't have funding

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to float them through

higher experimentation

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that is likely taking place

amongst funded companies.

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At least that's the most

charitable interpretation of

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this data as there are

certainly funded companies that

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just use the money as a

crutch instead of figuring out how to

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make sure they sell the

right product to the right customer

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and keep that customer around.

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When comparing customer

acquisition cost data amongst

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these groups, both

interpretations are supported.

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CAC is going up for

everyone, but amongst funded companies,

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we're seeing fifty to seventy

percent higher CAC than non

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funded companies.

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Funded companies likely

haphazardly or more targetedly

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use a good amount of their

funding to pursue higher cost

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channels or just more

channels in general.

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We're essentially seeing

different strategies along an

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axis of conservatism and risk.

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That being said, CAC and

churn obviously matter, but a common

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argument is that these two

metrics can be optimized later.

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It's all about growth now.

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Yet the data is mixed on whether

that notion is true or not.

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When we look at companies

under ten million ARR,

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it certainly is true.

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Funded companies handedly are growing

faster than non funded companies.

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There's just no question.

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No matter the ARPU,

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funded companies are growing

at a rate of forty to a hundred

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percent more per year than non

funded companies with massive

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variance where some companies are

growing at five x that of

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their non funded counterparts.

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A counter view to this though

is that there's a massive

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amount of indie and lifestyle

businesses that are under the

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ten million dollar ARR

threshold that just never want

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to be that large.

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Well, not directly supporting

this thesis, these gains from

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funding once we go over ten

million dollars in ARR seem to

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dissipate quite considerably.

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With the slight exception of four

figure or more MRR businesses,

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funded and nonfunded companies with

more than ten million ARR

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are essentially growing at the

same rate even when taking the

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entire mid spread of the

data into consideration.

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So where does this

put us as an industry?

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Well, in a sense,

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we're right back where we

started with funding being a

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tool that when used properly

can greatly increase your odds

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of reaching ten million

dollars or more.

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It's some of the differences

amongst the core unit economics

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as well as how similar

companies are when you reach

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greater than ten million

dollars suggests that in more

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cases than the industry

is probably willing to admit,

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funding can create moral hazard

and not always in the quote,

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let's make sure we're

comfortable taking the right

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risk unquote way.

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Instead, funding masks core problems

that simply get bigger as the

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company gets bigger.

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In essence, letting you use a sledgehammer

when you really should be using a scalpel.

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Well, that's all for now.

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If you have a question,

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ship me an email or video to

p c at profit well dot com.

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And let's also thank Jeff

for sparking this research by

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clicking the link below to

share and give him a nice

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little shout out.

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We'll see you next week.

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This week's episode is brought

to you by Protect the Hustle,

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a podcast about those who are in the

trenches actually doing the work.