Ben Topor
3 min readSep 7, 2022

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Fueling Fake Growth

An element of complexity that was added to the investment landscape is the appearance of mid-stage companies with damaged execution. That is a phenomenon that was exemplified because of the increasing access to liquidity in the market and the need for VCs to deploy capital quickly. These companies succeeded in growing sales to large volumes and achieving high growth rates but did so inefficiently. It used to be the case that very rarely companies would reach the $10M mark in ARR and the ones that did so were said to have surely achieved a “product to market fit” and to qualify as candidates to raise “expansion capital”. The 2021 cohort of supercharged companies, in contrast, have avoided letting go of their underperforming sales executives, and on occasions “bought their way into their customer base” with different financial incentives and de-facto have never achieved validation of their product-market-fit.

One of the fastest ways to estimate a product market fit is by calculating its CAC Payback period. Customer acquisition cost (CAC) can be quantified as the cost related to acquiring a new customer, mainly its sales and marketing expenses, whereas CAC Payback Period is the time it takes for a company to earn back their customer acquisition costs. The lower the payback period, the more efficiently a company is operating. Companies in different stages of their development are expected to have different CAC Payback periods as they move from customers that are “technology enthusiasts” who try almost all available products in the market and are cheaper for the company to acquire, to, later on, the mainstream market that is driven more by economic calculations rather than appreciation of product novelty and has a different set of requirements including referenceable customer base.

Top Quartile CAC Payback Periods By Company Revenue

*Source:Bessemer Ventures

In many instances, it is very difficult to improve the efficiency of sales because there are often issues that are structural to the business and are not repairable and no strategy initiatives or execution improvements could suffice — such as simply no sufficient demand for the product. In other situations, the steps that need to be taken are too strenuous for the current workforce to implement. For example, there is a need to increase the deal sizes by changing the ideal customer profile from the lower end of the market (small and medium businesses) to the higher end (enterprise & corporates). Such transformation requires new and expensive sales talent who have relevant contacts, in some instances also changing the corporate culture from “product-driven” low touch to service-oriented “high touch” service, and lastly the perseverance to withstand the large sales cycles periods without tangible results.

In contrast, companies that cross $10M of ARR with short CAC payback ratio began to build a brand and to have “second order effects’’ that increases revenue, i.e when the product is being recommended to peers and the brand has enough credibility to buy additional products/features. These companies see strong customer response and produce more than $3 dollars for each one dollar they spend, therefore inclined to raise capital in order to capture market share. At these stages marketing delivers more qualified leads for less money, sales channels become more efficient with product improvements and lower churn due to customer success teams. These companies entail significantly reduced exit and bankruptcy risk, and this stage provides an attractive entry point to make a growth stage investment.

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Ben Topor

Founder of Titan Capital Partners, a growth stage and secondary investment firm