VC Fundamentals: LTV / CAC Ratio
During pessimistic market conditions (e.g. market downturn / epic failures of venture-backed companies) you can expect the venture market to shift and the fundraising process to become more difficult for entrepreneurs. Concomitantly, you can also expect investors to return their focus on the “fundamentals” of startup businesses; VCs look hard at burn and unit economics to ensure that their investments can weather leaner conditions. Two important unit-economics metrics, customer-lifetime-value ("LTV" or "CLV") and customer-acquisition-cost ("CAC"), can often derail the unsuspecting (or unprepared) entrepreneur. These two metrics are a foundation of unit-economics (the amount a company earns or loses on each sale), and tend to be critical in in investment decisions at the venture stage. While seemingly straightforward at a high level, there is a great deal of nuance in determining appropriate CACs & LTVs for a given enterprise.