For years the only way was up as money flowed to all parts of the start-up ecosystem – ‘unicorns’ were being minted at a rate of 2 per day in 2021 and global venture capital funding hit close to $700bn.

Growth at all costs was the mantra, and with it capital was available in abundance.

We as the marketing community benefited from this largesse as ‘customer acquisition’ was where most of this investment was targeted.

Last year the venture world changed. Interest rates jumped higher to curb inflation and cost control suddenly became a thing again. Valuations of venture backed companies dropped significantly and capital dried up in many cases, particularly where profitability was a distant mirage. 

“There’s a focus on budgets, less flexibility on spending and more pressure from investors and board members to deliver”, says Lars Nordwall, a venture partner at Creandum.

Regardless of the recent context; economic or geopolitical, “software continues to eat the world” as Marc Andreesen famously put it, and we are still in the midst of a profound industrial revolution which will be accelerated exponentially as generative AI enters the mainstream.

So, it’s a fine balance for venture investors – uncertainty driven by wars, high inflation and elections that see over 2bn people go to the polls in 2024, and the hangover of those on their 2023 valuations, counterbalanced against the economic opportunities of technology and AI.

The “magnificent 7” US tech companies surged by 74% in 2023, to a combined market value of $12 trillion, which is almost triple the GDP of Germany. The winners are winning bigger than ever, but there is now a clear separation between good and great, and there is a view that good isn’t good enough any more.

Indicative of this, the money hasn’t gone away – it remains available in abundance; globally at the end of 2023 the level of ‘dry powder’ (the amount of cash available to invest) in private equity firms hit a record of $2.59trillion, an all-time high…….But it is now much more discerning, and capital efficiency in businesses is the name of the game. And within that, marketing efficiency is central, and one of the easiest operational costs to cut if it isn’t performing. 

What does marketing efficiency mean? Venture capital investments are informed significantly by a relatively well-known marketing metric – sometimes called the “Magic Metric”.

The Magic Metric is the ratio of customer lifetime value to customer acquisition cost. In simple terms – how much is a customer worth to a business versus how much does it cost to acquire that customer. 

Having a good magic metric is the very essence of efficient growth and if you can lower the cost of acquiring customers over time, while maintaining or increasing lifetime value then you are winning in the eyes of investors and capital at high valuations will flow your way.

A general benchmark for the magic metric is 3:1; higher than that and trending in the right direction is the sign of a valuable and scalable business.

The growth of performance marketing ran hand in hand with the boom in venture funding; paid social and other direct response channels were a boon for founders who wanted to buy quick customer growth, to quickly drive their valuations up, but it was like an addictive drug, fun in the short-run, but long-term pretty unhealthy.

More hangovers.

“If you want to build a business, build a brand”, so said John Hegarty.

Marketers have known for some time about the Binet & Field work advocating a more balanced approach, typically 60/40 in favour of brand investment over direct response to drive optimal long-term sales performance. The data backs them up (visually below) and this message is now getting into investment boardrooms.

In the past the customer acquisition (CAC) payback periods for brand investment was challenging for investors, when the returns to short term activation were so readily apparent. But these were an illusion in many cases and over time the diminishing returns to another Facebook ad became a roadblock to growth and further capital.

In 2024 the best approach to helping customers to tap into the still substantial pools of venture capital is an honest analysis of a blended strategy that powers long-term sales growth.

By David Payne | Global CEO,  Mediabridge