3x LTV:CAC is the golden rule for consumer startups… but why?
@aleximm
and I explore why going from 2x to 3x empowers greater reinvestment to build a compounding long-term advantage.. and more than triples your valuation! 👇👇
1/ For the avg consumer internet company:
1x LTV:CAC = unprofitable
2x LTV:CAC = 16% operating income as % Gross Profit (GP)
3x LTV:CAC = 33% operating income as % Gross Profit
5x LTV:CAC = 46% operating income as % of Gross Profit
2/ For consumer internet companies, opex margins vary as % of revenue across different gross margin buckets. But if you adjust the denominator from revenue to gross profit, the cost margins look similar across company types.
3/ Therefore, S&M% (and LTV:CAC), is the most important determinant of operating income margin as a % of GP.
Revenue & GP multiples are coupled with long-term op income margins. As op income is a derivative of LTV:CAC, valuation multiples are also correlated with LTV:CAC.
4/ Consumer internet public companies with ~16% margins (the derived margin in our 2x LTV:CAC example) trade at 1.5x gross profit.
Those with ~33% margins (~3x LTV:CAC) trade at 5.3x GP.
Those with ~46% margins (~5x LTV:CAC) trade at 8.4x GP
5/ In other words, increasing your LTV:CAC from 2x to 3x more than triples your valuation! Increasing from 3x to 5x is another 60%, or more than five times the valuation of a 2x LTV:CAC business.