A 20% increase in marketing efficiency results in a 40% increase in growth from 1.7x to 2x and a 10% decrease in burn from $47M to $44M. A 20% decrease in marketing efficiency lowers growth by 40% to 1.3x and increases burn by 10% to $49M. Similarly, a 20% increase in revenue retention lifts growth 18% from 1.7x to 1.8x while lowering burn 4% to $46M. A 20% drop in retention reduces growth 16% to 1.5x and increases burn 2% to $47M. Small changes in key variables like efficiency and retention can significantly impact growth and burn.

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BUILDING A SUSTAINABLE GROWTH
ENGINE
Managing Growth, Burn & valuation
Blog: www.thenetwortheffect.com

2. Entrepreneurs are waking up to the new challenge of
managing ‘Growth’ & ‘Burn’ together !
 The environment has changed (for the good!) – Limited Cash, Time &
Resources
 “What levers to pull to optimize both growth and burn? Which lever provides
maximum bang for the buck? Where should I start?” are questions that
surface sooner than later.
 The idea of this post is to do the following –
 Define ‘sustainable’ growth, identify key factors driving the same & more
importantly understand their impact.
 To highlight the current flawed approach to business planning which tends to
miss or misunderstand relationships between key variables and hence, can result
in negative surprises for both entrepreneurs and investors alike.
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3. Defining ‘Sustainable Growth’
 Before penning this down, I went about talking to my colleagues in the VC industry
to close in on the simplest possible definition of ‘sustainable growth’
 To my VC colleagues - thanks to all who gave me feedback and this is an honest
attempt to incorporate all that we spoke in a single line) – “Maintaining high
growth while minimizing cash burn and in the process maximizing
shareholder value or valuation”.
 No rocket science here – ‘Growth’ and ‘Burn’ are the two most critical factors driving
your survival and success with ‘valuation’.
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4. ‘The Fairy Tale Approach’ to business planning
 The ‘Fairy Tale’ approach - the approach generally entrepreneurs take to these
questions is to build a ‘hot’ model which projects a handsome growth with minimal
marketing spend and rapidly improving contribution margin.
 In my experience, 99% of these models have little or no linkage of marketing
spend to new revenue earned or new revenue to revenue retention (%) or for
that matter build bottom up estimates of contribution margin – I call these
models the ‘fairy tale’ or ‘startup grows happily ever after models’. In my firsthand
experience, the following is the outcome of the fairy tale approach -
 Short term outcome – everybody is happy to see an aggressive plan – the
management team, board members, potential new investors etc.
 Medium term outcome – revised plan! – (Disclaimer – I am not averse to revised
plans in the wake of new market movements but just plain revised assumptions can result
in serious negative surprises with regards to resource planning, new fund raise timelines,
valuations etc.)
 Final outcome – existing investors lose trust in the entrepreneur’s ability to
plan or execute, new investors hate negative news, fund raising becomes
harder and a downward spiral begins.
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5. Understanding the following variables is crucial to develop
and track growth and burn plan
 In order to avoid the abovementioned situation and accurately understand,
build and execute on your growth and burn plan, the company needs to be
in complete sync with the following metrics -
 New revenue earned – revenue from new customers acquired
 New revenue retention – how often do customers repeat and how much
do they spend when they repeat over a period of time. Revenue
retention numbers are derived from revenue cohorts (more on this
here)
 Marketing efficiency – defined as the ratio of new revenue earned to
marketing $ spent
 Contribution Margin – Revenue less all variable costs as a percentage of
revenue
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6. In order to understand the impact of these variables, I
constructed a model (next slide) with the following
assumptions
 Marketing spend - I assume that the company pumps in $2 million of
marketing spend every month.
 Marketing efficiency - Every $1 of marketing produces $ 4 of new revenue
($ 8 million) so the marketing efficiency is stable at 4.
 Revenue Retention - I assume that revenue retention goes down to 4% at
the end of 12 months.
 Contribution Margin & Fixed cost - the business has a healthy 10%
contribution margin and a $3 million fixed cost.
 Revenue calculation - total revenue booked is a function of new revenue
earned and revenue retention - for example in the 1st month, the revenue is
100% of new revenue created, for the second month it is 100% of new
revenue created in the 2nd month and 10% of the new revenue earned from
the 1st month, similarly in the 3rd month it is 100% of the new revenue
earned in the 3rd month + 10% of the new revenue earned in the 2nd month
and 9% of the new revenue earned in 1st month.
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7. Base Case - The output of this model are two things
(highlighted yellow) – (1) Growth (2) Burn
6
 Growth which is defined as the ratio of the revenue in the 12th month to
that of in the 1st month. In the base case, this number is 1.7x
 Burn – which is the summation of all losses experienced post marketing,
post fixed costs. In the base case, the burn is $47 million
Month 1 2 3 4 5 6 7 8 9 10 11 12 Growth
Marketing Spend $ Mn 2 2 2 2 2 2 2 2 2 2 2 2
Marketing Efficiency # 4 4 4 4 4 4 4 4 4 4 4 4
New Revenue $ Mn 8 8 8 8 8 8 8 8 8 8 8 8
Revenue Retention % 100% 10% 9% 8% 7% 6% 5% 4% 4% 4% 4% 4%
Total Revenue $ Mn 8 9 10 10 11 11 12 12 12 13 13 13 1.7
Contribution Margin (%) % 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%
Contribution Margin $ Mn 1 1 1 1 1 1 1 1 1 1 1 1
Marketing spend $ Mn (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2)
Post marketing contribution margin $ Mn (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1)
Fixed cost $ Mn (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3)
EBITDA Loss $ Mn (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4)
Burn $ Mn (47)

8. Understanding the impact of change in Marketing
efficiency – 20% increase scenario
 20% increase in Marketing Efficiency –
 Starting 2nd month marketing efficiency is up by 20% from 4.0x to 4.8x
(highlighted in GREEN in table below).
 Growth – 2.0x & Burn - $44 million
7
Month 1 2 3 4 5 6 7 8 9 10 11 12 Growth
Marketing Spend $ Mn 2 2 2 2 2 2 2 2 2 2 2 2
Marketing Efficiency # 4 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8
New Revenue $ Mn 8 9.6 9.6 9.6 9.6 9.6 9.6 9.6 9.6 9.6 9.6 9.6
Revenue Retention % 100% 10% 9% 8% 7% 6% 5% 4% 4% 4% 4% 4%
Total Revenue $ Mn 8 10 11 12 13 13 14 14 15 15 15 16 2.0
Contribution Margin (%) % 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%
Contribution Margin $ Mn 1 1 1 1 1 1 1 1 1 2 2 2
Marketing spend $ Mn (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2)
Post marketing contribution margin $ Mn (1) (1) (1) (1) (1) (1) (1) (1) (1) (0) (0) (0)
Fixed cost $ Mn (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3)
EBITDA Loss $ Mn (4) (4) (4) (4) (4) (4) (4) (4) (4) (3) (3) (3)
Burn $ Mn (44)

9. Understanding the impact of change in Marketing
efficiency – 20% decrease scenario
 20% Decrease in Marketing Efficiency –
 Starting 2nd month marketing efficiency is down 20% from 4.0x to 3.2x
(highlighted in GREEN in table below).
 Growth – 1.3x & Burn - $49 million
8
Month 1 2 3 4 5 6 7 8 9 10 11 12 Growth
Marketing Spend $ Mn 2 2 2 2 2 2 2 2 2 2 2 2
Marketing Efficiency # 4 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2
New Revenue $ Mn 8 6.4 6.4 6.4 6.4 6.4 6.4 6.4 6.4 6.4 6.4 6.4
Revenue Retention % 100% 10% 9% 8% 7% 6% 5% 4% 4% 4% 4% 4%
Total Revenue $ Mn 8 7 8 8 9 9 9 10 10 10 10 11 1.3
Contribution Margin (%) % 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%
Contribution Margin $ Mn 1 1 1 1 1 1 1 1 1 1 1 1
Marketing spend $ Mn (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2)
Post marketing contribution margin $ Mn (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1)
Fixed cost $ Mn (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3)
EBITDA Loss $ Mn (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4)
Burn $ Mn (49)

10. 20% change marketing efficiency has a 40% swing on
growth and a 10% swing on burn
9
20%(20%) Growth
Base Case
Marketing efficiency impact on
Growth and Burn(%)
5.1% (5.1%) Burn
+20% Marketing Efficiency
(20%) Marketing Efficiency
Any improvement or decline in marketing efficiency has a
steep impact on both growth and burn!

11. Understanding the impact of change in Revenue Retention
– 20% increase scenario
10
Month 1 2 3 4 5 6 7 8 9 10 11 12 Growth
Marketing Spend $ Mn 2 2 2 2 2 2 2 2 2 2 2 2
Marketing Efficiency # 4 4 4 4 4 4 4 4 4 4 4 4
New Revenue $ Mn 8 8 8 8 8 8 8 8 8 8 8 8
Revenue Retention % 100% 12% 11% 10% 8% 7% 6% 5% 5% 5% 5% 5%
Total Revenue $ Mn 8 9 10 11 11 12 12 13 13 13 14 14 1.8
Contribution Margin (%) % 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%
Contribution Margin $ Mn 1 1 1 1 1 1 1 1 1 1 1 1
Marketing spend $ Mn (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2)
Post marketing contribution margin $ Mn (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1)
Fixed cost $ Mn (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3)
EBITDA Loss $ Mn (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4)
Burn $ Mn (46)
 20% increase in Revenue Retention –
 Starting 2nd month revenue retention is up by 20% to 12% and stabilizes at
5% in month 12 (highlighted in GREEN in table below).
 Growth – 1.8x & Burn - $46 million

12. Understanding the impact of change in Revenue Retention
– 20% decrease scenario
11
 20% decrease in Revenue Retention –
 Starting 2nd month revenue retention is down 20% to 8% and stabilizes at
3% in month 12(highlighted in GREEN in table below).
 Growth – 1.5x & Burn - $47 million
Month 1 2 3 4 5 6 7 8 9 10 11 12 Growth
Marketing Spend $ Mn 2 2 2 2 2 2 2 2 2 2 2 2
Marketing Efficiency # 4 4 4 4 4 4 4 4 4 4 4 4
New Revenue $ Mn 8 8 8 8 8 8 8 8 8 8 8 8
Revenue Retention % 100% 8% 7% 6% 6% 5% 4% 3% 3% 3% 3% 3%
Total Revenue $ Mn 8 9 9 10 10 11 11 11 11 12 12 12 1.5
Contribution Margin (%) % 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%
Contribution Margin $ Mn 1 1 1 1 1 1 1 1 1 1 1 1
Marketing spend $ Mn (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2)
Post marketing contribution margin $ Mn (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1)
Fixed cost $ Mn (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3)
EBITDA Loss $ Mn (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4)
Burn $ Mn (47)

13. 20% change revenue retention has a 16 % swing on growth
and a 3.2% swing on burn
12
Any improvement or decline in revenue retention has a
steep impact on growth and a moderate impact on burn!
7.9%(7.9%) Growth
Base Case
Revenue Retention impact on
Growth and Burn(%)
1.6% (1.6%) Burn
+20% Revenue Retention
(20%) Revenue Retention

14. Understanding the impact of change in Contribution
Margin – 20% increase scenario
13
 20% increase in Contribution Margin –
 Starting 2nd month contribution margin is up 20% to 12%. (highlighted in
GREEN in table below).
 Growth – 1.7x & Burn - $44 million
Month 1 2 3 4 5 6 7 8 9 10 11 12 Growth
Marketing Spend $ Mn 2 2 2 2 2 2 2 2 2 2 2 2
Marketing Efficiency # 4 4 4 4 4 4 4 4 4 4 4 4
New Revenue $ Mn 8 8 8 8 8 8 8 8 8 8 8 8
Revenue Retention % 100% 10% 9% 8% 7% 6% 5% 4% 4% 4% 4% 4%
Total Revenue $ Mn 8 9 10 10 11 11 12 12 12 13 13 13 1.7
Contribution Margin (%) % 10% 12% 12% 12% 12% 12% 12% 12% 12% 12% 12% 12%
Contribution Margin $ Mn 1 1 1 1 1 1 1 1 1 2 2 2
Marketing spend $ Mn (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2)
Post marketing contribution margin $ Mn (1) (1) (1) (1) (1) (1) (1) (1) (1) (0) (0) (0)
Fixed cost $ Mn (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3)
EBITDA Loss $ Mn (4) (4) (4) (4) (4) (4) (4) (4) (4) (3) (3) (3)
Burn $ Mn (44)

15. Understanding the impact of change in Contribution
Margin – 20% decrease scenario
14
 20% decrease in Contribution Margin –
 Starting 2nd month contribution margin is down 20% to 8% (highlighted in
GREEN in table below).
 Growth – 1.7x & Burn - $49 million
Month 1 2 3 4 5 6 7 8 9 10 11 12 Growth
Marketing Spend $ Mn 2 2 2 2 2 2 2 2 2 2 2 2
Marketing Efficiency # 4 4 4 4 4 4 4 4 4 4 4 4
New Revenue $ Mn 8 8 8 8 8 8 8 8 8 8 8 8
Revenue Retention % 100% 10% 9% 8% 7% 6% 5% 4% 4% 4% 4% 4%
Total Revenue $ Mn 8 9 10 10 11 11 12 12 12 13 13 13 1.7
Contribution Margin (%) % 10% 8% 8% 8% 8% 8% 8% 8% 8% 8% 8% 8%
Contribution Margin $ Mn 1 1 1 1 1 1 1 1 1 1 1 1
Marketing spend $ Mn (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2) (2)
Post marketing contribution margin $ Mn (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1)
Fixed cost $ Mn (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3)
EBITDA Loss $ Mn (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4) (4)
Burn $ Mn (49)

16. 20% change contribution margin has no effect on growth
and a 11% swing on burn
15
0%(0%) Growth
Base Case
Contribution Margin impact on
Growth and Burn(%)
5.3% (5.3%) Burn
+20% Contribution Margin
(20%) Contribution Margin

17. Key Findings
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20%(20%)
0%
7.9%(7.9%)
Marketing efficiency
Revenue Retention
Contribution Margin
Base Case
Effect on Growth (%)
5.1%(5.1%)
5.3%(5.3%)
1.6%(1.6%)
Marketing efficiency
Revenue Retention
Contribution Margin
Base Case
Effect on Cash Burn (%)
 The graphs above lucidly point out to the fact, that your ability to acquire customers
virally, through word of mouth, cheaply is the single biggest factor that drives growth and
controls burn. Essentially, if your product is growing virally or organically please do
give me a shout !
 Some of the leading consumer internet companies have been created on the back of
organic growth Uber, Facebook, Pinterest (Disclaimer – Pinterest is a Bessemer portfolio
company).
 Improving revenue retention, helps both growth and retention but impacts both the
parameters far lesser than marketing efficiency! Finally, an increase in contribution
margin has the same impact on burn as marketing, however it has no impact on growth. A
combination of all three creates a real winner!

18. Summary
 In summary, think of marketing efficiency, revenue retention and
contribution margin the important pillars / variables in your planning model.
 A rule of thumb is that you need to have at least 2 of these 3 parameters
working before raising ‘scale up’ capital (do reach me if that is the case!).
 Marketing efficiency is the most powerful lever to exercise and also, if not
handled properly, one of the key reasons for startup failure.
 I can understand at an early stage not having a perfect hold on these metrics
and that’s where your investors come in handy, who can potentially provide
enough examples, data points and direction in which these variables have
moved for similar / contrasting business models.
 Here’s wishing you ‘sustainable’ growth, much better planning and higher
valuations!
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19. The 3 pillars of Building a Sustainable Growth Engine
18
Marketing
Efficiency
Growth, Burn &
Valuation
BUILDING A SUSTAINABLE GROWTH ENGINE
Revenue
Retention
Contribution
Margin