Where we’ve been, what we think, what we’re doing.

Frog Blog

All / Growth Investing / TELL /
  • How growth companies benefit from data – the Customer Lifetime Value example

    By Jens Düing

    In this post on our series on growth investing, we are looking at how leading KPIs shape the prospects of growth companies. 

    One great privilege of investing in growth stage companies is the availability of historic data, as all companies at this stage have successfully outgrown the start-up phase. Yet while revenue metrics are a decent indicator of past successes, they tell us very little about the future prospects of a company. You have to look at trends, and you have to look at leading indicators for future revenues and profits. 

    Therefore, at Frog we always look at unit economics and its constituents. For businesses with repeat purchases, one of the critical constituents of unit economics is the customer lifetime value (CLV). It’s often quoted, but we also regularly encounter some unmerited creativity in this metric. 

    One such creative short cut lies in the oversimplification of the CLV calculation. Simply adding up the expected revenue over a customer lifetime has charm simplicity. And if you are a SaaS company with 90%+ margins, basing your CLV calculations on customer revenue might be an acceptable approximation. It is a different picture, though, if you are an ecommerce site with e.g. 25% margins, as this approximation might lead you to ruinous decisions. 

    Consider this example: Repeating customers buy a pair of shoes from you twice a year, with 33% of customers repeating from one purchase to another. These shoes are nice ones and cost €100 a pair and you make a 25% on each purchase. So, how much should you pay to acquire this average customer? Let’s look at the example below:


    By looking only at the revenue generated from an average customer, you might conclude that €50 acquisition costs would allow you both to be profitable on first order and to earn back your acquisition costs three times over four years. Sounds good, doesn’t it? I’m sure you are sensing where I am going with this. And obviously, the picture changes dramatically when we take into account profit margins:


    Jubilation turns into consternation as you realise that customers acquired for €50 will never be profitable. Forget raising money from Frog, your business isn’t sustainable! 

    If you want to go deeper on this topic, there are many great blogs out there that provide more insight on CLV. I particularly like the following one.


    This is just one placative example of how growth businesses could and should use data to inform business decisions that enable them to scale up further.

    More articles on Growth Investing 

  • To all growth stage founders and CEOs – a quality board pack will make your life easier, let me show you what it might look like and explain the benefits.

    By Steven Dunne

    To many stressed and stretched founders and CEOs, a board pack is an unwanted burden that comes with outside investment and consumes resources that could be better used to drive the business forward. This attitude is missing the point; the board pack drives the quality of discussion at the board meeting and if your board is not adding value you are either not making the most of the opportunity to talk strategically with people who have value to bring or you have the wrong people on the board.

     “What is the purpose of a board pack?” is a question that will have many answers depending on the stage of the company and the perspective of the respondent.  An early stage VC investor might just want to know what performance was like in the last period and what are the prospects for the next period. A larger company non-executive might say it needs to be sufficient for their fiduciary duty to acquire and maintain a sufficient knowledge and understanding of the company’s business to enable them properly to discharge their duties as directors.  A more practically minded SME executive might say that the board pack provides the information to enable the discussion and decisions at board meetings to be as relevant and productive as possible. All are correct to some degree.

    For a growth stage business, a key consideration will be the time required to prepare a board pack but this should be consolidation not creation as the board should only be reviewing information the company prepares for its own operational needs.  When I was a CFO in a PE backed business I rejected many investor director requests for additional information by simply asking what decision would be different if we discussed that information at the board meeting. 

    Additional work specifically for the board should therefore be the simple narratives from the CEO and CFO/COO and other departments heads as relevant and this should be a useful opportunity to step back from the day to day and assess progress from a higher level.  It should encapsulate what worries or excites you not what you do every day.  The board pack should have a consistent format so it doesn’t require re-invention and it builds trust by following up themes month after month not just presenting the good news and dropping elements that no longer read so well.

    From the CFO point of view, I always considered the board pack to be the visible product of all the internal hard work which helps to build confidence with stakeholders through being accurate, transparent, informative, insightful and demonstrates integrity and impartiality by being proactive in highlighting and addressing issues. It is not a selling document to make the board feel good about the business; it should be consistent and I would never change indicators to put performance in a good light, irrespective of what anyone else might want.  The finance report should be easy to digest and contain graphs, charts, colour-coding, and bullet point narrative.  

    The finance section should include useful KPIs and forecasts for P&L and cash flow but the board pack as a whole should recognise that, especially for a growth stage business the finance section will always be a lagging indicator of value. The key divers will be customer behaviour, internal progress and challenges and value creation initiatives.

    A good board pack architecture can be built around the Kaplin and Norton balanced scorecard approach which lists the four key elements as:

    Customer perspective (How do customers see us? – client acquisition, churn, penetration, new product take up, satisfaction ratings, references)

    Internal business perspective (What must we excel at? – unit economics, product innovation, lead times, staff retention and development)

    Learning and growth perspective (Can we continue to improve and create value? – life cycle to product maturity, time to market versus competition, market dynamics, responding to competitors or substitutes)

    Financial perspective (How do we look to shareholders? – sales growth, cash burn contribution margins, fixed overhead build, capex, trade debtors)

    But in addition we should add a fifth

    Governance perspective (How would we look under investigation, could be regulatory, litigation or due diligence related –  minutes, actions, fiduciary duty disclosures, controls, reviews)    

    It should be noted that though it is often non execs who raise issues of information provision to meet fiduciary responsibilities, all directors should bare this in mind and be driving broad and open information exchange at board level.  If a domineering CEO puts the company at risk through hidden unethical behaviour, all the directors are at risk and the executives cannot rely on the narrow remit of their title to save them from the obligation to push to know more.   

    The categories above take different perspectives but let’s be clear, a good board pack provides the agenda for discussion, it is not a presentation.  In part the contents allow certain areas to require little discussion (most historical information should be taken as read and have sufficient explanation in the document or be discussed in advance with the more financially orientated non execs) and allow the focus to be on more value add, forward looking topics.  

    The people around the board table should be there because they can contribute to providing high level advice, best practice experience and help to resolve issues.  They should not feel the need to drill too deeply into executive operational issues unless they are concerned about performance and competence. Matters reserved for the board should be clearly spelled out and addressed and any detailed operational information requests should be parked for a separate conversation to avoid derailing the potential to engage in valuable high level discussions.  Concerned non execs should spend more time in the business not use the board meeting as an examination on the detail.

    The contents page of a template board pack might therefore look as follows:

    1. Agenda

    2. Company secretarial – Governance perspective – usually run by CFO

    2.1. Prior minutes – conclusions and actions clearly recorded

    2.2. Open actions –  responsibilities allocated, review each month until closed

    2.3. Other – share and option issues, changes of rights, director appointments etc.

    3. CEO report – Learning and growth perspective – high level commentary covering trading momentum, markets, competitors, product road map, key client wins/losses, key initiatives update

    4. Sales and marketing (often part of CEO report) – Customer Perspective, Pipeline KPIs, account management, client feedback, marketing campaigns effectiveness and future plans   

    5. CFO report – Financial Perspective KPI dashboard and narrative – include unit economics if appropriate

    5.1. Management accounts – P&L, cash flow and balance sheet month and YTD v budget and prior year

    5.2. Revenue and contribution analysis – by client, product, geography as relevant 

    5.3. Forecasts – cash flow and P&L full year outturn at least

    5.4. Funding update – current projects or timetable to meet future requirement

    5.5. Bank covenants if applicable

    6. COO report – Internal business perspective – Operations performance KPIs, HR and IT likely to be covered as well 

    6.1. HR report (often part of CFO report) – FTE by department v budget (list by name if < 50 FTE), departures and joiners with reasons, promotions, recruitment underway, next 6 months recruitment plan (identifying what is in budget and not).  Training and development summary.    

    6.2. IT report (often part of CEO report) – Project updates, KPIs (e.g. downtime %) 

    7. AOB: Special papers e.g. planning cycle, reforecast, large capex, departmental review

    All functional reports should be produced by the head of that department even if they aren’t board level and don’t deliver them. It is, however, good practice to get second tier management to present occasionally to the board both to broaden their own experience and give better visibility on the bench strength to the board members.

    This agenda provides a comprehensive board pack for a small company but as stated earlier nothing should be required that is not needed to run a fast growing operation that wants to scale up successfully.  Executive responsibilities can vary (though I would strongly advocate otherwise not all companies have a CFO on the Board but they might have a CTO or COO) and drive a different board pack structure but the 5 perspectives should still be covered. This might be something to aim for over time given capacity constraints but it would be interesting to hear a justification of why any part of the report is not required.

    Shockingly in tech growth businesses, the report I have noticed is most often omitted is the HR report. Virtually all these businesses spend the largest proportion of their overhead on people and would say they are its greatest asset; yet with no board report, this fundamental part of the business growth story might get no board airtime at all.

    The board pack sets the agenda for board discussion and when done well helps to build trust and alignment between execs and non-execs.  If you are not producing a quality board pack, I would be confident that you are not getting as much value out of your board meetings as you could and consequently not getting as much out of your business.

    A good board meeting is more likely with a good board pack and a bad board pack makes it more likely to be an unproductive board meeting but there are many other factors to consider, not least being who is sitting around the board table and why are they there.  That is a topic for a whole other article.  

    More articles on Growth Investing 


  • Every growth stage CEO knows that people are your company’s greatest asset, right! So where’s your asset management programme?

    By Steven Dunne

    Many entrepreneurs feel that they should keep the essence of the exciting business culture a company had as a start-up throughout its life. This is admirable to an extent but can allow nostalgia for a rose-tinted view of the early fun times getting in the way of sensible, appropriate business planning and structure as the business scales up. 

    Founders may view proper HR processes and people development programmes as very corporate and the antithesis of the entrepreneurial spirit but without them businesses easily fall into perceived cronyism and favouritism and don’t challenge the capability status quo, when in reality every growing business needs to be continually developing its skillset to keep up with new challenges.

    Every role performed within a business is more effective if it is put in context of a Clear review structure:

    (i)             a clear business vision

    (ii)            a clear organisational structure

    (iii)           knowing how the role’s objectives fit into achieving higher level goals

    (iv)           knowing how success or failure is assessed at each level

    (v)            identifying individual development needs to improve chances of success

    (vi)           knowing that the Company is supportive in addressing development needs

    Every individual should see that this is good for them, that it is applied consistently across the business, and importantly that no one is above being accountable for their contribution or in being expected to address shortcomings. For every one of a favoured group who loved the early freewheeling (unaccountable) days, there is probably at least one equally talented person who felt the business was clique ridden, unfair and failed them but their voices have not been heard; most likely because they left and it was attributed to “cultural differences”. Departures are often put down to poor recruitment when in reality it could have as much to do with poor organisational structure. 


    People asset management

    The key “asset management” challenge for people is to address both the factors that are likely to drive high level job satisfaction and the different issues that create dissatisfaction. In Herzberg’s Two Factor Theory these two categories are Motivators (challenge, recognition, responsibility, sense of worth) and Hygiene Factors (job security, work environment, remuneration, benefits, company policy, supervision, relationship with their boss, relationships with peers). It is tempting to believe that the two factors apply to two distinct groups, the senior people and high flyers looking for motivation and the rest looking to just get on with fewer complaints, but in my experience they are very much interlinked.

    In my CFO roles, I have always been responsible for HR and have learned enormously from the HR managers reporting to me; particularly as they tend to be the “agony aunt” of the business and hear the views that don’t percolate up the management hierarchy. A key message that comes through consistently is that however confidential you think your discussions are, everybody eventual knows pretty much everything and any decision made behind closed doors will be held up to workplace scrutiny. The worst position to be in is that you turn a blind eye to this and don’t think your decisions need to be justified, allowing the court of ill-informed public opinion to hold sway and drive dissatisfaction. My litmus test on any HR decision is always therefore how comfortable would I be standing up in front of the whole company (or indeed an employment Tribunal) to defend it.


    What’s the risk?

    Of course, individual discussions should not be made public but what you can do is have clear policies and guidelines for how decisions are made and ensure they are, and are seen to be, followed. Whilst it is tempting for a founder CEO to promote up an exceptional individual without due process because it is an obvious call and a fantastic surprise and motivation for that individual, the message to other staff can be that the decision was arbitrary, contrary to policy or good practice and therefore unfair.

    An apparently generous act might well cause enough dissatisfaction amongst a larger group to more than offset the positive impact on the lucky and presumably motivated recipient. I have experienced the tension between motivation and hygiene many times in practice as my CEOs have naturally leant more towards driving motivation with big gestures whilst I manage the downside risk. The compromise is usually finding a way to make the apparently spontaneous, generous act conform to proper process by doing more preparation beforehand. Sitting behind this will be a robust performance management and appraisal process that can validate why certain individuals are rewarded and others are not, based on merit. It is also key to expectation management that the process is clear about development needs and more importantly that the business follows up to support addressing these needs in practical ways and then makes the hard decisions if this process is exhausted. There is nothing more demotivating to new employees than seeing someone who is not performing and effectively getting a free ride because they were there in the early days and part of company folklore. 


    Process drives better outcomes for all

    Inexperienced managers, and most founders sit in this category, can easily fall into the trap of focusing on the supportive, encouraging, motivating (and enjoyable) part of performance management and skip the harder performance appraisal elements of identifying and communicating weaknesses and development needs and ultimately making tough decisions if there is no commitment to effective change. In the long term this is doing both the company and the individual a disservice as the chances of improvement are slim without acknowledgement of the issue and direction on rectification. Ultimately this can be classified as poor communication which might mislead an individual in their expectations meaning they will be de-motivated or leave when their unrealistic expectations are not realised. It is inexcusable in my book (not to say often costly) for someone to be dismissed for poor performance and not to see it coming, or know in advance what they needed to do to turn things around. This is the worst type of incompetent, inconsiderate communication by omission and in the context of the headline question, unacceptably poor asset management. 

    The CEO will normally set the tone for how people perceive what is acceptable within a company, especially in a small company, but these individuals do not necessarily get good feedback on their own actions. Without good company processes it is entirely possible for a workforce to be generally motivated but dissatisfied. The CEO will get the feedback on motivation and think they are doing all the right things but without a good HR function or someone who plays a similar role (e.g. a longstanding employee not in management but with a good open relationship with the CEO) they might not hear about the minor but consistent complaints that indicate growing dissatisfaction with the basic requirements. The CEOs motivational aura may protect them from personal criticism, which is aimed at “the company”, but the negative impact on company performance exists nonetheless.  


    Set the standard and live by it

    As CEO of a growth stage company you need to set a good example to the senior managers, and indeed the whole company, in being accountable, open to feedback and committed to addressing development needs (for themselves and the company). This is perhaps demonstrating a degree of vulnerability that many founders and CEOs would not naturally want to show; starting and running a company requires a high degree of self-belief and the ability to instil confidence in others so most founders feel that anything that looks like self-doubt is to be avoided, especially in the early days. The essential development away from feeling they need to have all the answers is a journey that any founder who wishes to stay long term as CEO needs to go through and almost certainly they will need a good mentor or coach to get them there. Identifying the appropriate development approach required for each individual is a fundamental part of the asset management programme for your greatest asset. Engaging with this requirement as CEO sets the tone for an open, robust approach to people development that should be apparent throughout all levels of the company. Even CEOs will benefit from the review structure set out at the beginning of this blog.

    More articles on Growth Investing.

  • To all growth stage founders and CEOs – A quality CFO is not a late stage luxury but a current requirement – here’s why

    By Steven Dunne

    After the excitement and freewheeling of the first creative stage of growth driven by entrepreneurial or technical zeal, all businesses face similar challenges and unfortunately the data would suggest 80% to 90% don’t make it successfully through. As a founder or CEO you need to do everything you can to improve your chances of transitioning to the next stage without losing the strengths of your business.

    New problems in this growth stage scaling up are likely to include:

    – Forward thinking and planning for a range of scenarios; just being quick to react is no longer viable

    – Identifying potential bottlenecks and planning how to resolve them

    – Creating the operational platform and organisational structure that supports future growth

    – Professionalising and mitigating single points of failure (founders, key employees, partners, suppliers)

    – Ensuring available funding moves in line with strategy

    With new challenges you need new resources and here’s where there is a good fit between the growth stage requirements and your CFO recruitment. You may not think you need a CFO, or indeed you may have someone with the title who you think is good enough to lead the finance reporting function (and is therefore fulfilling a financial controller role) but I would advise you to think again. 

    The core differences between a good CFO and a financial controller are:

    – Sees the big picture from market dynamics through to operational delivery

    – Forward thinking not just keeping score

    – Operational involved and driving change through influencing across departments

    – Analytical and challenging at board level and with departmental heads

    – Understands all stakeholders’ objectives (investors, bankers, founders, directors, management, employees) and what drives value creation

    A good CFO will be decisive and transparent in decision making, commercial, robust, approachable and a good manager of their own staff and influential in interdepartmental relationships. They will also be experienced and comfortable with change management such as new systems, products and revenue streams, roles and people. They might not be inspirational or innovative but they get things done with minimum fuss.

    Ultimately a good CFO is a widely applicable, high level resource that just happens to have a functional expertise in Finance but can bring analytical and organisational skills to bear across all areas of the business. They usually have a very complementary skill set and character to an entrepreneur and they eat up the tasks the CEO never gets around to, or gets bogged down in; freeing time to drive employee engagement, product development, client relationships, industry partnerships, marketing and the many other growth factors which are essential to your company’s chances of success.  

    In the two PE backed businesses where I have been CFO, the CEO was only too pleased to be able to fully relinquish decision making responsibility across a range of areas like IT, HR, Compliance, Administration, Quality Systems Management, Client Services and take a partnership approach to running the business knowing that I would be supportive of his ambitions but keep him honest and realistic; never letting him promise something externally that we didn’t have the resources to deliver. 

    Where’s the finance function value add?

    By being at the heart of decision making, providing quality data and insight by broad knowledge of the business, robust challenge of assumptions being made and ensuring there is good debate before committing, the CFO can ensure that resource allocation decisions are optimised and that the Finance function evolves away from being expenditure police to be a centre of insight and a genuine value add proposition for the business. One of the key resources in a small business is of course the time of the founder/CEO and, as with my personal experience, the partnership between a good CEO and CFO can free up huge amounts of the CEO’s time and allow a greater focus on their areas of strength rather than, as is often the case, growth exposing and exacerbating weaknesses which is a major cause of the high failure rate.

    What does the CEO get? – time to think 

    The best CEOs know their own strengths but justifiably feel that they just can’t afford all the functional heads ideally required. As a Founder or CEO you naturally take personal responsibility by putting yourself forward to solve the major departmental problems as they arise. This is clearly admirable but unsustainable through the growth stage and for your own sake, and that of the business, you need to create some headroom for yourself to improve the chances of a successful scale-up.

    The best way to do this is by upgrading the only other role that can have impact across the whole business, the CFO. 

     More articles on Growth Investing