Very True by Verissimo

Sophia (00:00)
Welcome to the Very True Podcast. I'm Alex Oppenheimer, the founder of Verisimo Ventures, an early stage venture fund investing in Israel and the U.S. Previously, I was a tech banker at Morgan Stanley and a VC investor at NEA. I then spent several years working directly with startups on finance, business models, rev ops, and more before launching Verisimo Ventures in 2020. I got into this business because I enjoy working with founders and helping them realize their vision and fulfill their potential. I created this podcast to shine a light on the day-to-day reality

that most people are too afraid to discuss. The pivots, the fumbles, and the so-called non-core aspects of building a business from scratch. Rather than focusing on the end of a successful road, we spend time here discussing the tougher, lesser-known parts of the startup life cycle. The goal is to offer insights to founders to improve their startup experience, whether that means avoiding problems and finding success faster, or just feeling more confident and less isolated on their entrepreneurial journey.

Alex (00:53)
We're back with another episode of very true and I am excited to have Ariel Mensch back on the podcast as promised. ⁓ in our first episode, went, we covered a lot of ground, but we didn't go that deep, but we think that one of the most valuable things we can do is actually scenario planning and scenario modeling and bring up a really relatable example. And we'll talk about it effectively from my perspective as an investor and kind of. Advisor finance geek theorist.

And then Ariel's perspective as someone who's on the ground in the weeds, actually building the right frameworks and owning chunks of finance for companies. So we today are going to talk about what I'm calling the new networking capital. That's not network. That's net working capital, which is a concept in accounting that we'll explore a little bit further, but I'm going to hand things over to.

Ariel, who is the founder and CEO of Raftel Strategy which is a leading outsource CFO, full stack service organization in Israel, serving clients all over the world. And I will hand it over to him.

Ariel Menche (01:58)
Thanks, Alex. Yeah, I wanted to paint a picture of actually we're seeing with a number of companies that we work with. Now we talked about like what the new networking capitalists and the reason why we're saying new is because the business models of today don't reflect the business models of let's call it yesteryear or the more traditional models of I'm buying a physical object and then I'm selling it for a markup.

We're dealing with software companies, companies that don't necessarily have any physical inventory. And we also have something called subscription revenue, right? As opposed to licenses, which we used to do with software first came out. Now people are on subscription. So the whole PNL structure is a little antiquated and we'll probably talk about that at a different time, but this idea of the networking capital, ⁓ which is on a very high level is the money that you need to keep inside your company.

in order to make sure that it's able to operate and fund and run. Which is not the same money that is like the investment into the company. This is money that needs to be sitting in your bank account because things go up and things go down on a daily and monthly basis. And you just need that money cash to be in the business for it to run properly. So the picture I want to paint is the classic or maybe not so classic, but the what you strive for, which is this software company that is

very good ⁓ LTV to CAC ratio. And what I mean by LTV to CAC is LTV is the lifetime value of a customer. You could calculate, okay, I have on a regular month, a gross margin of, I don't know, let's say a hundred bucks for a customer and the customer is gonna last 10 months on average. So you multiply a hundred times 10, great, you have a thousand dollar of lifetime value. And the CAC is the acquisition cost of the customer. Let's say it costs you 500 bucks to acquire a customer. So upon spending,

Again, keeping some very simple numbers. $500,000 in marketing spend, 500 CAC, you get 1,000 customers, great. So you spend $500, you get the $1,000 back over the course of 10 months, fantastic. Now you have this LTV to CAC ratio of two, and I wanna hyper grow. The only problem is now that money, that thousand bucks actually comes in over the course of 10 months.

And so I'm putting down the $500 today. I'm not going to get that money back, that $500 back until five months pass. And so what ends up happening is I'm now in a hole, right? I'm in the hole for 500 bucks for this customer until the money comes in. And so when you want, even though there seems to be really good unit economics, right? Hey, give me money, give me money for the company and I'll put it into my machine.

For every dollar I spend, getting $2 in return. That's a great investment. But I wanna grow fast. I wanna beat the market. I wanna hyper-growth, go into hyper-growth. That puts a real burden on the company. And so I kinda wanna throw the question at you is what have you been seeing and how do you explain to your portfolio companies or just companies or founders in general how to approach that situation?

Alex (04:56)
So this is the crux of every business. This speaks to everything from gross margin to contribution margin to unit economics to subscription revenue, ARR, churn rates. It's all incorporated in this idea. And I think that in the past, I was very worried about what you were gonna say about LTV because I have thrown LTV in the garbage.

because of how incorrectly it's been calculated and how it's been used as a benchmark rather than an operating metric. And as a benchmark, it's beyond useless. As an operating metric for internal purposes to be able to compare one cohort to another or one customer to another, it's actually critically important. As soon as you start basically extending out the way that you interact with your customers. Back in the day, or let's say,

even today in other industries, when you become a customer of something, you go buy it. And like, that was the whole relationship. You paid them, they give you the thing done. Now we're talking about subscriptions and the entire reason that this subscription was a novel idea. We'll start with this in software, even though it's totally not novel. As I always say, like software is a service. Like why do we have to now make this thing like software is not a service? The original Salesforce logo was like a circle with a line through it around the word software. And it was like,

But it like it's soft and what was ironic was that back then they were actually shipping appliances to people's offices and that's how they were delivering it and everything. People talk about it back then, but then there was this thing called maintenance revenue, which was this beautiful thing. The whole point of the transition from perpetual licenses with maintenance revenue to what we all appreciate as modern subscription based SaaS is this idea that you can actually lower your CAC by reducing the barrier to purchasing.

by pushing it out over a longer period of time. So instead of saying like an Oracle box will cost you a million dollars and then it'll cost you like $80,000 a year in maintenance, instead it's like, hey, why don't you just pay $150,000 a year? And so again, that sounds like a very big number. Works similarly if you're a consumer and it's like, okay, you have to pay a thousand bucks right now for this versus you can pay 50 bucks a month. And like,

That's all an exchange math. People got a little bit greedy and took this a little too far with how that can actually work and whether or not it's actually better and cheaper to acquire a customer with that lower front price tag or not. But that is the crux of the transition to SaaS. So we'll start with that idea. Another really important thing that you touched on here is

this concept again of lifetime value, right? We used to have repeat rates and this sort of stuff and I've gone into all this like mathematical mumbo jumbo and I invented this term like 10 years ago of like the half life of a customer. Because if you look at a customer from a probabilistic standpoint, you say once there's more than a 50 % chance that they've churned in the kind of like decelerating or asymptotic, know, march to zero of.

every customer's life cycle on average. Once it goes below 50%, you basically can't count on that customer being there. And so that's the half life. It's like E to the negative PRT, right? It's radioactive decay. Again, I'm a nerd in case that anyone wasn't ⁓ already completely aware of that. It just doesn't matter. But the way Ariel put it is like, OK, you know that on average you keep this customer for 10 months.

and that's a critical assumption that you need to be able to make. Now, if you work in an industry where you're selling, I remember I saw this data once, was like consumer or SMB cybersecurity solutions, and it's just like the lifetime is two years. Like we know that the average lifetime in this industry is two years, people have been selling it for a long time, it's two years, 24 months, like after that, if you're not profitable in 24 months, like it'll never work.

Now in most things, it's not so cut and dry like that. And what you're selling is novel and it's new and it hasn't been done before for this sector and blah, blah, blah, blah. It's too unique. And so when you're first getting started, this is where I'm very big on business model design. And this is a critical aspect of assumption, questioning, and mechanical business model design of let's...

First figure out how much we think it's gonna cost us to acquire this customer. Then let's figure out how much we think we can charge this customer. Then let's figure out how long we think we can keep this customer for. And those are your three critical ingredients to that lifetime to CAC, lifetime value to CAC ratio. Yep.

Ariel Menche (09:24)
I would add one more.

The gross margin is something that's usually forgotten, but I think once we start switching into more AI models with the software, those token costs will start appearing. so gross margin won't be 99 % anymore. And customer success is also part of that.

Alex (09:40)
So that is a fantastic point.

That's a fantastic point. It was never 99%. Again, I had these like small scale companies that aren't, you know, operating efficiently and they're like, yeah, our gross margin is 100%. And I'm like, that's funny because public companies are at 75 % in the same sector as you. I don't know how you're beating them when they have economies of scale. And it's just miss allocated expenses. We're not going to go down that alcohol, but it's an extremely important point that you can calculate all these metrics on a revenue basis, but you've

And that's maybe okay if your gross margin is in flux, which it probably is if you're an AI powered company, but you also need to do it on a gross margin basis.

Ariel Menche (10:19)
I think you should

really only be doing it on gross margin basis. You know how many bad business decisions are made because you see these ratios without taking into account those gross margins and it's just completely incorrect. And we're dealing with cash here, right? And so cash is either gonna disappear or it's gonna grow. And if you're excluding a key component of your cash out of this formula, forget it. You could be sending your company down the drain in just a matter of months.

Alex (10:35)
Yeah.

So ⁓

100%, I will say two things about gross margin in the age of AI. The first is that it should change, meaning like you should have that as another variable in your really basic model that you're building with these variables I'm talking about. It should be like, okay, we think they're going to pay us this much and then we see that we're going to be able to, our costs are going to go down and therefore we're going to earn this much of each dollar that they're paying us more.

a year from now than we're gonna pay now. And you can run that as an assumption through your model. That's one. Two is accounting gross margin does not often accurately represent what the concept of variable cost represents. I don't really wanna go down that rabbit hole right now, but it's better than nothing by about 1000X. take what your accountants give you as a gross profit number if you're a traditional SaaS company.

Use like 85%, don't use 99%. If you're plowing through AI stuff and it's scaling up with each customer and their usage and users and everything, then you really have to get tight on that. And by the way, if you're not and you are using AI extensively in your product, then like you're definitely in trouble. So now that we've got though, these variables, we can start to leverage this concept of lifetime value to CAC, which

CAC is Attributed Customer Acquisition Cost. It often maps to sales and marketing, not really. Let's just talk about it on an economic basis before we get into the details of where you can pull these line items from traditional accounting metrics. And then the lifetime value, which again, is something that came into focus with the prevalence of subscription businesses, but has always been the case. Repeat rates, all this stuff, it's always, always been the case.

But what I'm gonna add in here is that when you're first getting started and you're trying to design that business model, you wanna figure out first, again, okay, how much are they gonna pay us? Ariel pointed out very stutely, how much of that do we actually earn on an ongoing basis? So you have to subtract out the variable cost, the COGS, whatever, to get to that gross profit, gross margin level. Then there's how long do we expect to keep them for, which you may just not know at all. And then there's how much did it.

cost us to acquire them. Now, in each of them,

Ariel Menche (12:56)
Yeah, I think on a high level,

just to repeat those back, price, cost to get the service out, CAC, and the last one is the churn rate. And so the quick formula for that is if you take the inverse of your churn rate, that gives you approximately how many months a customer stays with you. It's high level, you know, it's very high level assumption, but like a 10 % churn means 10 months. Give or take.

Alex (13:18)
Yeah, it's

good. It's a, it's very, ⁓ it's a good hack. ⁓ but what I would say is the, the, the metric that I really like using instead of LTV, because there's just so many ways to get that wrong. In my opinion is CAC payback. This is my favorite unit economics metric because it works in two directions. The first direction, when you're starting your company, you can simply ask the question, okay,

We know what our price is. We know what it costs to deliver it. And we know what it costs us to acquire the customer. Out of that, right, you just say, okay, we charge $120 a month. We earn $100 a month after variable costs. That's our gross profit per month per customer. And it costs us $1,000. Great, so like Ariel was giving, like, that's 10 months. Great, so now we know that our CAC payback,

going into the relationship is 10 months. And what that tells us operationally, which is what we really care about, is we need to keep this customer for 10 months in order to be making any money off of them. Otherwise, we're losing money on them. Now, if you're talking about numbers like that, like $100, $1,000, you're probably more looking at cohorts of customers rather than individual customers, and that's a safer way to think about it. When I worked at monday.com, that is how we thought about it. It was a monthly...

accumulation. It wasn't trying to attribute a single ad on Facebook to a single customer joining like that just doesn't work. Now, if you're an enterprise company, and you've got a longer sales cycle, you've had it becomes much more complicated. And that CAC number is not so simple, right? The way that I often think about CAC when you have a sales team, I'll just give like a quick example here is, okay, let's say you you know,

or you expect, let's say, to have a six month sales cycle. And you've got a sales team now, or you worked in this industry before, and you know that these customers take six months to sell. Now, hopefully your first 10 or 25 customers or something are much quicker than that because you've got market pull, but at steady state, you're expecting, okay, it's gonna take six months to close them. And so the way to think about CAC is like the way that you drive your funnel. And you wanna get into a certain healthy level of detail and precision here.

because it will drive better results. And then I'll tell you at the end why it does something that's a little bit counterintuitive, which is if you just take one of these hacky benchmark report things, I'm not gonna call out any VCs, but you know who you are, who publish these like hacky benchmark things, which are effectively founder clickbait and really other investor clickbait. And it's like, ⁓ this company, whatever. I'm not gonna go on a rant right now about that. But it'll say like, yeah, take the last quarter's S spend and that's your cack.

What? Like, you run the company, you can do a much better job than that. So if you just look at your CRM, whether that's a spreadsheet, a notion thing, an air table thing, a sales force, a house buy, like you look at your thing and you say, this company entered, went from a lead to a marketing qualified lead to a sales qualified lead to closed one in this much time. And it took one month to get from a raw lead to a marketing qualified lead, at which point it was passed to the sales team.

It took another month to become an SQL. Then the AE had to work on it for four months to close a deal. That's a six month sales cycle. So when you do attribution on an enterprise client like that, you can actually say like, hey, the marketing spend came from six months ago. The BDR qualification, whatever, SDR spend came from five months ago. And then we have four months of a salesperson interacting. And then in the last month,

That's when the salesperson actually gets paid their commission. So if you want to do this properly, you take the market, the, the spend of advertising effectively from six months ago on the monthly basis. And you can do this all in line in cells and take it all as averages. You just need to make sure you're not double counting or non counting things. Then you can take that SDR cost of these. Again, these were your SDRs from four months ago. Then you take the average base salary of your AE over that four months.

then, and really your AE team, frankly, then you pay that commission in that last month when the deal actually closes. And this is a really simple way, I do this all the time, like using financial data effectively with some light sales and marketing information to figure out actual CAC. Like to a much more, again, I always say if you're adding precision, you wanna make sure you're also improving accuracy. So I think this is like a pretty easy way.

where you can take an average over four months. So when you see my SAS models, you'll see it'll say like minus six, like SDR minus five, and then like sales minus four to zero, or minus three to zero, whatever it is. And that shows you what the attribution is. And you could program this in using like a really complicated formula, or you can just like drag it and take averages and just make sure it's right. And then as the data comes in, you can start to see how these things adjust. Now the beauty of this.

is if you think about it, we're talking about growing companies here. Growing companies are hiring people. Growing companies are spending more money on sales and marketing next month than they did this month. So what this actually is doing is it is reducing your CAC number, your average CAC, which is what you care about. Like that average CAC on a deal closed in January. Yeah, assuming your number of salespeople, your number of SDRs, your number of, you know,

Ariel Menche (18:34)
assuming your marketing spend increased month over month.

Alex (18:41)
your marketing headcount, your marketing spend, your advertising spend is all going up, which it probably is at some rate. The smoothness, who knows, but it actually is looking back several months and those numbers are be lower six months ago than they are now. That's generally the case with growing companies on the cost side. So that's how you get to CAC. And you gotta just think about what is the attributed cost of CAC. Now,

I'll bring up this, let me just make one more point on this six month sales cycle thing. If you're in like selling to governments and you're looking at like two years sales cycles, that marketing spend, that AE headcount, that AE headcount whose salary you're spending before they ever close a deal and before there's any money there, you've got to fund their salary. Now, this is why a bunch of these kind of like debt providers to pay for CAC.

came up because they're like, once you've got the machine going and you show that we can put in this much money and this much ARR pops out the other side, like, yeah, we can actually underwrite that once you've done it very consistently. If you're a really early stage company, you have not done this very consistently. You should not be taking debt. I don't care what the debt providers or the VC say. Do not take debt when you have a seed round under your belt. Like if you have 40 million of ARR,

Ariel Menche (19:48)
So I think this is a really important point to

talk about just because the debt can unlock a tremendous amount of opportunity, but it is dependent on consistent cash flows and that you know that those cash flows are having even a healthy company. If you're spending $500,000 a month on marketing spend, and then because debt unlocks five times that amount to spend, you don't know what that looks like for your company. Increasing that much of spend will inherently increase cash.

And then could also send all your unit economics upside down and so you need to do it in a careful manner and if you're gonna be taking on that amount of debt you just Like first of all, like if you have the cash flow, this is it could be really great opportunity big do you know trepidation is is the key When you don't have that cash flow this is not a lifeline that's I think that's a I think that's very important but I do want to go back to this Alex

Alex (20:40)
Yeah, well, you can do a whole episode on venture debt. Maybe we'll loop in our friend Rich.

Ariel Menche (20:47)
Because when you have this ratio, when you know your CAC payback, right? I know my CAC payback is six months and I keep my customers for 10 months and all those different pieces are really like, they're aligned. I'm still out cash from an operating perspective, right? You need to fund those six months.

Alex (21:05)
Yeah. So, okay. I'll, I'll talk about two things real quick. So I talked about the forward looking when you're first getting started. Once you've got like a year of data of cohorts and how they behave, you can have a really nice, it looks like a triangle chart and down one side, has like cohort one, cohort two, cohort three. And those are all like time-based cohorts. It's like January 25, February 25 and like, okay, how many customers joined? What is the associated CAC? What was the first month MRR from those customers?

And then how did that change every month for the next year? Did it go up? Did it go down? Was there upsells? Was there downsells? Was there churns? You can never add people to this cohort. This is conversation for another time. But you can never add people to that cohort. But then you can start to see, you can actually then do the whole thing on a percentage basis, because you know what the CAC was. You can gross margin adjust all of the MRR appropriately. And then you can see like, OK, yeah, in cohort one, it took six months.

because there was some big upsell. In cohort two, it actually took 11 months because there was a bunch of churn and no one upsold. And then you start taking averages and weighted averages across these cohorts and you can actually start getting what really amounts to your payback curve. It ends up being a curve where on average you can say, is where our payback is. That's the exercise. We've been kind of operating and talking about it as if it's a simple assumption. There's a bunch of math that you have to do here. It's not rocket science.

⁓ I'm pretty sure I have templates on my website that do this for you if you can capture the data properly, which is also not trivial. So that is backwards looking CAC payback. And then again, you've got the forwards looking CAC payback. that's number one. The bigger question here that we're approaching is, okay, but your business consumes cash because you have to pay before you get paid. Now I'll talk about two things there. One is

investability and the approach of investors. And the other is, I don't want to harp on it, but like customer contracts, the number of times that I've had founders tell me, yeah, we have annual contracts. I'm like, well, where's the cash? And then I go, the customers pay us monthly, but there aren't annual contracts. I'm like, I'm sorry. That's like marginally better than a monthly contract, but not enough to call it an annual contract. The whole hack in SaaS and like subscriptions is annual subscriptions that get paid upfront.

Because if you're getting the cash upfront, when you earn the revenue, it's just like, who cares? Like you're already locked in. Yes, if there's upsells, wonderful. But like, you're not gonna see, if you're doing a one year of a cohort, if your first cohort is January of 2025, and everyone paid a year upfront, you know what that cohort's gonna look like? Exactly flat. It's a beautiful thing. Like, you don't want it to be able to go down. And so, this is a critical thing that you have to, I just, you can't ignore it. That like,

It's only cash problematic if you're dealing with it. So like when I worked at monday.com back in like 2017, 18, they nailed this. Like Roy and Iran, this was all they cared about. had monitors up in the office all over the place that showed all these different things, weekly paying and all this stuff. And they had the split between monthlies and annuals and the conversion between the two. Like this is, this was, they were maniacal about this.

This is what, by the way, like the insight team saw and was like, yes, like these guys were able to scale this to the moon. And obviously they have, but again, half of their customers were on monthly contracts. And so there is churn there. It goes up, it goes down, like customers leave and come back. There's reactivations. This stuff's complicated. The good news is that back in my day, I sound old now, like,

We had to do all this manually, just pulling from like raw accounting data. I remember the first time I did this, I was literally looking at an Acton software, which no one's, no one who's listening to this has ever even heard of. This is like a, like is it made by Sage? I don't even know. Like outputs and then doing the MRR like analysis on top of that raw accounting data to back into one definition of MRR, which we're not gonna explain that nuance here.

But, so, that's a really important aspect. And when you're monday.com and they were at 10 million of ARR, let's say, they had already established the fact, again, we're talking about what I call very liquid customers. Once you have what I call customer liquidity, which is a certain volume and consistency of the customer behavior, both on the CAC side and then post customer acquisition, post sale, how they behave.

Again, you start becoming much more reliable, and if I'm a growth investor, which I am not, and I can explain why I'm not, but if you're a growth investor, that is exactly what your equity capital is meant to fund, is growth. And so this company's gonna consume a lot more cash, we want it to grow faster, let's go. Now, I said growth investor, I didn't say venture growth, I didn't say growth equity, I can explain the history of those terms.

If go back to the original growth equity, we were talking about EBITDA positive companies, companies that were like EBITDA positive or neutral, like they were either making a little bit of money or not losing money at least. And a financier shows up and says, I think we can put a little spice in this gas tank over here. And instead of growing 20 % a year, we can push it to 50 to 80 % a year by throwing more gasoline on this fire.

Ariel Menche (26:16)
some Metro.

Alex (26:23)
right, whatever analogy you want to use. And that was classic growth equity. Then entered venture growth equity, which was like, we're not making money. We have no established track record of making money, but we're growing really fast and we think we can grow even really faster. So we can grow from, go from 60 % annual growth to 150 % annual growth if you give us a bunch more money. Obviously that breeds like massive inefficiency. That is the nature of it. Like this is the thing I would say that the monday.com founders just

They got this. Basically, two weeks of every month, they would blow out the marketing spend across every channel. And then the next two weeks, they would say, okay, now let's scientifically go through all of that spend and figure out what worked on a very detailed level. This is what teams of people were working on. Let's figure out what worked, and then let's just double down on that next month. So it's like this kind of, I call it like a breathing. You expand and then you intelligently contract, and you expand and you intelligently

and this is how you learn to focus and expand in the most efficient way possible. I talk about this too, like efficiency is speed. Like that is just a, that's a reality of driving a company of life, right? Like I've been cycling a lot. Efficiency is speed, period, right? Like I don't weigh a lot. It's easier for me to go fast. Surprise, like I was riding with a guy the other day.

⁓ He weighs 60 pounds more than I do. It's much harder for him to do literally everything. That's just one example. It's the same thing with all of these companies. You're putting money in, you're seeing it pop out the other side. You put more money in, slightly less pops out. mean more, but at a lower rate pops out the other side. The issue is sometimes you don't know why. And this is why just that exercise that I talked about of splitting out the sales cycle between, to reflect.

the funnel, which the marketing team might own, but the finance team needs to be focused on to say, okay, you did this, this and this, but like, is that actually working? Right? Like, we went to this conference and so our marketing spend popped up, let's say in this month, like, did it actually drive more leads or did the leads come from some new ad campaign that we ran on YouTube? Like, if you don't understand these things, it's very easy. I have this visual in my head, which I tried to get like Sora to make a video of this.

Ariel Menche (28:19)
Yeah.

Alex (28:37)
It didn't quite work, but I'll describe it I think people will get it, which is, you have a video of just the top half of someone riding a bike, and you can tell they're pedaling really fast, and you zoom out, and then you see that they are pedaling really fast. And then you zoom out a little further and you realize that the bike has no chain. So yes, they're pedaling really fast, but that's not what's making the bike move. And then you realize the frame of reference is wrong.

and the whole screen tilts, and you realize that they're just going downhill. And I think that this is probably where venture growth has been a disservice to a lot of companies because it's made attribution non-critical. And as soon as attribution is non-critical, you end up throwing more fuel on fires that might not be the fires that are driving the engine. And this is a word of caution, but this is where when you take growth capital,

which this is what this is for, to fund the growth of a business. When you take growth capital where you can get yourself into a lot of trouble because you're not actually attributing things properly. And as a result, that growth capital is just being lit on fire. It's, you know, it's the blow off from a, from the gas coming out of an oil well or whatever. But that's the, that's probably the critical, I guess, you know, we'll wrap this up here in just a minute, but.

Ariel Menche (29:55)
Yeah. Yeah,

so I actually have a quick formula that I put together that kind of enables a company to see if because the truth with this when you have a base of customers, and they're giving you some recurring revenue, eventually, that recurring revenue should cover any of those gaps that you need to invest into new customers. Now you can get

let's say you have a healthy company, you even able to offset some of the marketing with some debt, you still have some, you know, your own capital that you're putting into the marketing and you have some cost to cover. But if you look at the previous month's base of customers, then subtract out this month's churn. So it's kind of like your net retention rate, but net retention of customers. And then you look at the gross margin of that revenue.

off that base. You can then see how much money you have generating off of your current base without including the new customers and that money. You could then compare to the marketing spend or the whatever that working capital hole that you're in and see if it covers it. And if it covers it, the next thing you could do eventually is see if he covers your OPEX as well. Then once you have that, you have something that's called a profitable company.

⁓ No, not just a profitable company, because it's a profitable company that could actually fund its own expansion. And then what you could do is measure the expansion based off of that that cac of the new cac of the new customers. And you could, you could essentially keep these things in control without taking outside capital. Now I said a little facetiously, but it's actually really interesting metrics to be measuring in the company is whether or not that cash base is able to cover cover new customers.

Alex (31:07)
Whoa, up the brakes.

Ariel Menche (31:32)
that's something else. So I found that that's a little interesting. But at end of the day, yeah, you if you have the the union economics, if you have the if you're looking at these LTVs, because remember, we're about to start this conversation, you're like, Oh, I hate LTV to cack. I don't like talking about it. But then when we jumped in, you're right, well, it depends what you're saying. So when I said LTV to cack, you assume those talk about the benchmark, which I also agree is a lot of I'm not gonna use the words. But when you're using it to understand your own unit economics, you understand your own cash flow, and all those different

Alex (31:46)
just sends people in the wrong direction way too often.

Yeah.

Ariel Menche (32:01)
Yeah, it's a that's what the building a profitable business is about. But I think, you know,

Alex (32:05)
And I

talked about this on my podcast with Todd Saunders about controlling your own destiny. And I think if you're a founder, like you've got to remember, like you got into being a founder because you wanted to control your own destiny. You didn't want to be beholden to anyone or anything else. And so do that. That's why you started a company. Like it's because there's a piece of your personality that like doesn't want to boss that, that again, it's not that you want to boss everyone else around, but you want to.

You want to be driving the bus. so it's not that hard to just cover your bases and make sure that when you go into it, and I think that great founders, they do do this and they are aggressive. It might not look like it from the outside, but a lot of them really are doing this math and figuring it out, and they're controlling their own destiny in that way. ⁓

Ariel Menche (32:53)
I can attest

to it. They are.

Alex (32:55)
The... I'm trying to... There was one other thing I wanted to say and then we got to wrap up, but...

You talked about the equation.

Ariel Menche (33:01)
the cash that your current base actually gives you.

Alex (33:05)
Yeah. I mean, I guess one other idea I'll just come back to that I've talked about before is you basically need three different types of metrics when you run a company in the modern era, especially with technology company, you need the accounting metrics, the revenue, the gross profit, sales and marketing, GNA, R and D. Like you need those metrics. Things need to be accurate. You need cash. You just need to simply understand cash in cash out.

cash metrics, and then you need what I'll call economic metrics, which are the ones that really represent the value that you're delivering to the market. And so, it sounds like a lot. You don't need like 50 of these metrics. You just gotta think smart about this and control your own destiny. So, hope this was interesting. There is a Q &A form on the verytrue.fm website that we welcome any questions. We'll touch on them on future podcasts.

We hope this was interesting, insightful, and helpful. And you know where to reach us if you want to delve into this further. Anything else you want to share, Ariel?

Ariel Menche (34:03)
Thanks for having me, Alex. It's always a pleasure.

Alex (34:05)
Always a pleasure. do it again soon. See ya.