They were raising $1 million at a $10 million valuation. I passed. Here's why.
ReadMate helps kids learn how to read. ReadMate is a composite, not a real startup. But it shows why some consumer startups get funded, and others don't.
A Wonderful Mission
ReadMate has guided stories that get children reading on their own. They include animated characters and progress in difficulty over time.
When I met the founder, he seemed to really care about children. He struck me as deeply committed and in this business for the right reasons.
ReadMate has a wonderful mission. But unfortunately, this company also had some real problems.
Looking Under the Hood
Growth was stalling, hitting just 2% a month. A great seed stage company is usually growing at least 10% a month.
ReadMate was also struggling to get customers in a cost-effective way.
Its Customer Acquisition Cost (CAC) was $35. This means it took $35 worth of ads to find a paying customer.
ReadMate wasn't making much money from those customers. An annual subscription was only $50, and fewer than half of customers renewed.
The founder estimated a Lifetime Value (LTV) of a customer at around $90. With CAC at $35, ReadMate was below a 3:1 LTV:CAC ratio.
This is not good, especially for an early stage company. 3:1 is a bare minimum. I like to see 12:1 or better, because I know that ratio will probably get worse over time as the company grows and they saturate ad channels.
Making a Decision
I love investing in companies that are making a better world. That's one of the reasons I get up in the morning!
But although ReadMate has a wonderful mission, I had doubts about whether they could pull it off.
ReadMate wasn't catching on. The company was barely growing.
ReadMate needed more customers, but couldn't get them in a cost-effective way. The rock-bottom price of the product made paid ads hard to afford.
The company was stuck.
Wrap-Up
As much as I loved the product and the founder, I had to pass on ReadMate.
I almost wish I'd invested in it. I really loved the idea!
But we have to be disciplined.
I can't invest in companies that aren't performing well, even if I like them. If I do that, I'll lose all the money I've allocated for investing in startups, and I won't be able to invest in anyone!
I hope ReadMate turns around in the future and I have another shot at it. I'd love to see them succeed.
How do you look at consumer startups? Leave a comment and let us know!
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