What are investors REALLY thinking about when they ask about your CAC…?

0:00 LTV and CAC. We have talked about these many times in these videos and I'm going to do it again.

0:12 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.

0:24 But I want to share with you how I, as an investor, think about these and why I dig in so deeply.

0:31 This is not a check-the-box exercise.

0:35 You see, as an entrepreneur, you have some data about what your numbers have been,

0:40 various KPIs, including lifetime value and customer acquisition cost.

0:44 But I'm not buying your data and I'm not buying your history.

0:50 What I'm investing in is your future.

0:53 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.

1:04 And the reason it's useless is that CAC is made up of multiple components.

1:09 You have some customers that you got for free.

1:11 They stumbled across your website.

1:13 You have some that came from referrals.

1:16 You have some that came from social media.

1:17 You have some that came from paid ads, etc.

1:20 And each one of those channels scales differently.

1:24 It's difficult to scale organic growth.

1:29 It's difficult to scale referrals.

1:31 You'll have some.

1:33 It's much easier to scale paid CAC.

1:36 But are you making money on those particular customers?

1:39 And so what I want to see are the various components that make up CAC today.

1:44 and ideally the history of how each component has gone over time up or down because what I'm doing

1:52 is I'm plugging them into a model to try to figure out what your CAC is going to be tomorrow

1:56 because we are investing in your company's position tomorrow. By the way, the same is true

2:02 of a lifetime value. It's great that you have a lifetime value number today, but I would much

2:09 rather see how that number has changed over time, ideally growing. So the next time an investor asks

2:17 you for LTV and CAC numbers or the rest of your KPIs, think about what they're really asking.

2:24 They're not asking about your history. They're trying to use the data from your history to

2:30 project your future. And the better you are at giving them the components and allowing them to

2:37 project their future with confidence, the more likely they are to invest in your company.

2:43 I hope this has been helpful.