Customer Acquisition and the Cash Flow Trap

Startups as well as existing firms recognize the need to invest in order to acquire customers for their new ventures. And as each customer is expected at some point to have generated sufficient gross margins to cover their CAC, management expects that, soon enough, the overall cash flow will allow them to get out of the red and into the black. However, it turns out that getting into the black often takes much longer than originally expected and, moreover, an aggressive pace of growth can greatly exacerbate the situation - in terms of the cumulative deficit or financial “hole” that the company might find itself in. This note intends to help companies, particularly those with a recurring monetization model (e.g., subscription or SaaS), think through these issues. It further aims to develop a framework for effectively foreseeing the connection between customer acquisition efforts and the cumulative cash flow deficit, aka the “cash flow trap”, as well as highlight several managerial considerations and implications that emanate from this framework.