What are investors REALLY thinking about when they ask about your CAC…?
Transcript
LTV and CAC. We have talked about these many times in these videos and I'm going to do it again.
And not just because I like the sound of it and not just because I like the ratio. Of course, I want to see companies whose lifetime value is significantly above their customer acquisition cost because that's great unit economics.
But I want to share with you how I, as an investor, think about these and why I dig in so deeply.
This is not a check-the-box exercise.
You see, as an entrepreneur, you have some data about what your numbers have been,
various KPIs, including lifetime value and customer acquisition cost.
But I'm not buying your data and I'm not buying your history.
What I'm investing in is your future.
And so when I think about CAC and I get an answer to a question on CAC about, well, my blended CAC is XYZ, that's useless to me.
And the reason it's useless is that CAC is made up of multiple components.
You have some customers that you got for free.
They stumbled across your website.
You have some that came from referrals.
You have some that came from social media.
You have some that came from paid ads, etc.
And each one of those channels scales differently.
It's difficult to scale organic growth.
It's difficult to scale referrals.
You'll have some.
It's much easier to scale paid CAC.
But are you making money on those particular customers?
And so what I want to see are the various components that make up CAC today.
and ideally the history of how each component has gone over time up or down because what I'm doing
is I'm plugging them into a model to try to figure out what your CAC is going to be tomorrow
because we are investing in your company's position tomorrow. By the way, the same is true
of a lifetime value. It's great that you have a lifetime value number today, but I would much
rather see how that number has changed over time, ideally growing. So the next time an investor asks
you for LTV and CAC numbers or the rest of your KPIs, think about what they're really asking.
They're not asking about your history. They're trying to use the data from your history to
project your future. And the better you are at giving them the components and allowing them to
project their future with confidence, the more likely they are to invest in your company.
I hope this has been helpful.
Some investors ask a LOT of questions about LTV, CAC and KPIs. Knowing the numbers you have today is important, but investors are looking for something else… Check out the latest video from Troy to find out what investors are REALLY thinking when they ask about your LTV, CAC and other KPIs.
Originally published on the MATH Venture Partners blog.