Capital Fit is the new VC filter for startups.


VC landscape Last year it underwent a tectonic shift. A year ago, 90% of VC meetings with startups would be about growth, with little regard for how growth is achieved.

It doesn’t matter if you’re burning money left and right: as long as you have aggressive growth numbers, a solid track record and appeal, your round is pretty much guaranteed.

But as money becomes more expensive, investors are paying more attention to wealth-focused, savvy founders who can weather the tough times ahead. In 2023, most VC meetings will focus on whether a business can deliver sustainable, efficient growth during a downturn. And, according to our anecdotal evidence, most founders haven’t fully adapted to the change.

Time and time again, we see startups at all levels fail to scale at the multiples and speeds they used to because they are extremely capital inefficient by current standards, and they may not even know it.

In this article, we explain why that happens and what metrics are used to understand where you stand on the capital efficiency scale. We also explore solutions that have proven helpful for companies we’ve worked with.

But first, let’s talk about how you are Shouldn’t Measure your capital efficiency.

The biggest mistake to measure the effectiveness of your capital

Understanding where you stand as a business depends on the metrics you use and how accurately you can translate them. In this regard, capital efficiency remains a blind spot for most founders, relying on a single metric to draw conclusions. This figure can be found by dividing the customer lifetime value by the customer acquisition cost (LTV:CAC ratio).

LTV: The biggest problem with treating CAC as capital efficiency comes down to its convoluted and often straightforward misleading nature. In fact, the rate at which this metric has been misconstrued by SaaS companies has even started conversations about the need to retire the metric altogether.

LTV: The biggest problem with treating CAC as capital efficiency comes down to its convoluted and often straightforward misleading nature.

In order for this method to be foolproof, you must use reliable retention data, which can come in handy for beginners with little historical data. For example, we’ve worked with several startups that based their CAC or LTV calculations incorrectly on a lack of historical data. This also showed “falsely good”, false LTV:CAC ratio numbers.

Whether or not SaaSs should issue the LTV:CAC metric is debatable, but the point remains: you can’t measure your capital adequacy. Only Like that. Today, investors leverage other performance metrics that paint a more reliable and comprehensive picture of a startup’s capital efficiency, and so should you. Let’s see what they are.

View your CAC payment refund

CAC Payback is one of the most focused and important metrics you can call upon if you need to understand how efficiently you are using your capital. It shows how long it takes to pay off customer acquisition costs.

CAC Payback = Average CAC per customer / Average ARR per customer

How long should your turnaround time be? Ideally – as short as possible, with specific ballparks based on your industry and business model. According to Bessemer Venture Partners, here are the B2B SaaS metrics by which investors will measure your payoff:

B2B SaaS CAC return metrics
SMB Middle market Organization
cool 12 18 24
better than 6 – 12 8-18 12 – 24
The best < 6 < 9 <12

The importance of staying within these parameters is critical when competing with companies in the same niche. For example, while Asana took nearly five years to recover its CAC, Monday achieved this 2.3 times faster, with a CAC payout of 25 months.

Unfortunately, we see many startups falling outside these criteria. One of the startups we worked with got a CAC refund More than 35 months. Think about it: almost. three years To break even on one customer’s purchase!

How to fix this situation? There are a few key steps you can take to reduce your turnaround time:

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