This goes under the name of "Unit Economics" and is reasonable for small startups to use. It's VERY hard for a potentially high growth startup to cover their overhead costs. (If they were already cash flow positive, most likely they wouldn't be talking much to VCs anyway)
Companies go through stages:
1 - "Can we build something"
2 - "Will anyone pay for it?"
3 - "Can we turn a profit on each unit?"
4 - "Can we grow profitably and eventually cover our fixed costs?"
Generally you want to know #3 before tossing bags and bags of money at a company, but it's ok for startups to ask for money without having it answered. It's also ok for companies to ask for money without having covered their fixed costs yet.
To oversimplify...
Let's say my fixed costs are $10mm. Let's say each delivery I make turns a profit of a dollar, and each customer uses me for 20 deliveries over the course of 4 years. (Lifetime value of $20, which I get $5 per year) Let's say that it costs me $10 to acquire a company. (Customer acquisition cost)
Then in year 1 I'm $5 behind on each customer, but by year 4 I'm $10 ahead.
If I'm reasonably confident of these #s, then it pays for me to get as much investment money as possible to invest in customer acquisition. From a current cash flow (and potntialy from GAAP [0] earnings too) perspective I am losing money, but this will maximize the long term value of the firm.
[0] https://en.wikipedia.org/wiki/Generally_accepted_accounting_...
Companies go through stages:
1 - "Can we build something"
2 - "Will anyone pay for it?"
3 - "Can we turn a profit on each unit?"
4 - "Can we grow profitably and eventually cover our fixed costs?"
Generally you want to know #3 before tossing bags and bags of money at a company, but it's ok for startups to ask for money without having it answered. It's also ok for companies to ask for money without having covered their fixed costs yet.
To oversimplify...
Let's say my fixed costs are $10mm. Let's say each delivery I make turns a profit of a dollar, and each customer uses me for 20 deliveries over the course of 4 years. (Lifetime value of $20, which I get $5 per year) Let's say that it costs me $10 to acquire a company. (Customer acquisition cost)
Then in year 1 I'm $5 behind on each customer, but by year 4 I'm $10 ahead.
If I'm reasonably confident of these #s, then it pays for me to get as much investment money as possible to invest in customer acquisition. From a current cash flow (and potntialy from GAAP [0] earnings too) perspective I am losing money, but this will maximize the long term value of the firm.
[0] https://en.wikipedia.org/wiki/Generally_accepted_accounting_...