"Do the exact opposite. Don’t spend money acquiring users, instead build your product to go viral, and then monetize through selling access to users (and their data) to advertisers."
This idea that viral=free is pretty dangerous. "Viral" can be a very expensive way to acquire customers. Who develops these viral features? free developers? Who tests them, deploys them, scales systems to handle viral growth? Viral is only free if you aren't paying your development, testing, and ops staff.
Viral is single word which describes a business which grows at the rate of just over 1 for every new customer added.
It just means that its something that is good enough, enjoyable enough, or odd enough that someone who sees it tells other people they should see it too.
When your product is not viral, it means for customers don't tell other people to use your product. Or, they do, but the referrals can't figure out how to sign up, make sense of your value proposition, etc.
Markets exist for customer acquisition. You are bidding against other companies that are trying to do the same thing, capture your potential customer's attention. Some times those "bidders" are your direct competitors. Other times they are just another company that wants the same ad inventory you do. You have to be able to buy that inventory in a profitable manner, or the bigger you grow (if you are not viral) the closer you will get to failure, because each new customer is losing you money.
A perfect world can exist between viral and acquired. Customer acquisition can be done in a calculated manner to get the ball rolling in niches or channels which have not heard of your company.
If your product isn't viral, and it isn't all that spectacular (meaning a whole lot of things), eventually someone is going to copy it, and both your growth and margins will vaporize.
The problem with viral is of course that it's not really a choice. When something is truly viral it became so by accident. You can't have a board meeting and decide; "OK guys, time for this thing to go viral!" and not expect to first have to launch an expensive media campaign.
I'd think building virality into a product or service is one of the cheaper ways of acquiring customers. If you create something that works on its own, but is more fun when friends are using it, people are going to do the marketing for you. Instagram is a great example.
LTV = Life time value.
Have a high ratio between customer acquisition costs and life time value in order to be profitable at scale when CAC goes up. Hope that makes sense now.
The two options for a highly valuable company are to either spend heavily to acquire high value users (i.e. Palantir, LTV:CAC ratio), or spend nothing to acquire ubiquitous users (i.e. Facebook, high viral coefficient).
Another important factor not mentioned here (but highly relevant towards a $100M valuation) is market size, which can often provide a restrictive upper bound if the product is too niche (in either case above).
Actually, this article here has some good quantitative data. It puts the number around 200. It looks like most of the companies are non-tech/outside the Valley though.
I believe the rule of thumb is that there are 15 that reach $100M revenue. We could square the figure of 200 at $100M valuation with this rule of thumb if we assume valuation is say 10X revenue, so 200 reach ~$10M revenue. Thus maybe 1/15 or so of the companies that reach $10M in revenue hit the next level of scale and get to $100M revenue.
What do you mean by "users"? A business has to have customers, at least in the long run. Those customers may or may not be the people who actually use the products (Google/Facebook/Yahoo/etc - you're not the customer, you're the product). But whether you're making tires or milk or websites or religious experiences or whatever, you have a product, and someone is using it.
I doubt anybody at Goodyear or B.F. Goodrich talk about people who buy their tires as "users". To my way of thinking, saying "users" implies something very specific about the nature of the business in question... eg, Google and Facebook have "users", whereas Goodyear, Proctor & Gamble, and Alcoa have "customers" (or "accounts").
“Your business either has a high life time value per user, or your business has a high viral co-efficient,” said Wertz, mapping out the two paths to startup success.
This makes it sound like everything must be some kind of service, charged on a per/user basis. It completely ignores companies that have customers instead, who sell a product which is used by some unknown set of "users".
Or to put it a different way: Facebook, Google and Twitter have users... IBM, HP, Dell, CA, SAP, SAS, etc., have customers. Not quite the same thing, but the latter still manage to make a lot of money.
That said, the basic point still stands... you can either (A). have a high LTV for a given customer, or you can (B). sell to a large, and steadily expanding base of customers. I suppose you could argue whether introducing new products via brand extensions or line extensions and selling them to your existing customers is A or B or a 3rd option altogether...
This idea that viral=free is pretty dangerous. "Viral" can be a very expensive way to acquire customers. Who develops these viral features? free developers? Who tests them, deploys them, scales systems to handle viral growth? Viral is only free if you aren't paying your development, testing, and ops staff.