The Value of LTV:CAC

Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.

The Lifetime Value to Cost of Customer Acquisition ratio is called LTV:CAC and is a useful ratio in determining the health of a startup.

To calculate the Lifetime value, take the monthly revenue and divide by the churn rate.

To calculate the Cost of Customer Acquisition, take the number of new customers for a month and divide by the cost of sales and marketing for that month.

Compare the LTV to CAC to determine the ratio.

The ratio must be at least 3:1 to prove the business viable.

The higher the LTV:CAC, the higher the gross margins and profit margins.

This provides a greater reinvestment rate into the business.

Investors place a higher valuation on startups with higher LTV:CAC ratios.

SaaS businesses often have a 5:1 LTV:CAC, which comes from the recurring revenue.

SaaS businesses at the Series A level often have a 7:1 LTV:CAC.

The higher the multiple, the higher the growth rate for the company.

Check the LTV:CAC rate of a startup to determine its growth prospects.

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let's go startup something today.

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