Why LTV:CAC is a Key Metric For Investors

An article we liked from Thought Leaders Jamie Sullivan and Alex Immerman of Andreessen Horowitz:

Why Do Investors Care So Much About LTV:CAC?

To put it simply: higher LTV:CAC → higher margins → higher valuation.

Investors often use 3x LTV:CAC as a rough benchmark of a consumer company’s financial health. If your customer lifetime value (LTV) is 3 or more times your customer acquisition cost (CAC) within 5 years, that means your company has efficient returns on sales and marketing spend. But there’s little discussion of how a higher LTV:CAC actually translates to long-term profitability and, ultimately, valuation.

Solid unit economics has a cascading effect across your business: a higher LTV:CAC ratio means for every dollar of sales and marketing investment, your company has higher margins and so more profit to reinvest back into its business, which means that you can build better products and, hopefully, capture more market demand. Companies are ultimately valued on their future cash flow generation, so the higher your margins, the higher your valuation.

In fact, improving your LTV:CAC from 2x to 3x can nearly triple your valuation.

To illustrate, let’s walk through some calculations using the long-term margin projections across 60+ US public consumer internet companies with extensive sell-side equity analyst coverage.

A few notes before we jump in. For the sake of this post, we consider LTV as your…

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