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The Importance of LTV/CAC in Fundraising
When it comes to fundraising, investors are looking for one thing: can this company scale and grow efficiently in the long term? One key metric that gives investors a perspective on this question is LTV/CAC (Customer Lifetime Value/ Customer Acquisition Cost).
What is LTV/CAC?
- LTV is the total value of a customer to a business over their lifetime
- CAC is the cost of acquiring a new customer
Why is LTV/CAC important in fundraising?
- It gives investors an idea of whether a company can scale and grow efficiently
- A ratio of 1 or higher indicates that a company can sustain its growth, while a ratio below 1 may indicate a potentially bumpy road ahead
- Understanding how quickly a customer cohort will provide a ROI to the company is critical for both investors and companies
How to calculate LTV/CAC
- Factor in all sales and marketing costs (macro view)
- Focus on costs per lead and demonstrate how efficiently a company can scale individual transactions (micro view)
Best practices for using LTV/CAC in fundraising
- Evaluate data relative to an appropriate peer set, never in isolation
- Use LTV/CAC data to paint an accurate and compelling picture of your business’s potential
- Increase transparency at the systemic level by using data-driven storytelling
By understanding and utilizing LTV/CAC effectively, founders can increase their chances of securing capital and building trust with investors.
Related Topics
- Business Intelligence
- Customer Acquisition Cost
- Customer Lifetime Value
- E-commerce
- Fundraising
- Revenue
- Sales
- Startups
- Venture Capital
