Most Founders Get the Cost to Acquire a Customer Wrong. Here's How to Do It Right

This post was originally featured in INC

One of the most important metrics that venture capital (VC) funds look for when considering an investment is your cost to acquire a customer (CAC). Calculating your CAC seems straightforward, right? Well, it's not as simple as you might think.

Showing the wrong CAC to a potential VC investor could completely derail your conversation. Approach the CAC discussion incorrectly, and VCs may either perceive that you're paying way too much to acquire customers or think you're being disingenuous or omitting key information.

There are actually two CACs, and they're different.

If you ask an accountant to calculate your company's CAC, most of the time they're going to give you the fully-loaded version. This is your CAC with everything included-- your advertising spend, marketing employees and contractors, public relations team, search engine optimization software, etc. It's "the works," everything and the kitchen sink. It's theoretically correct, and it's the number that will show the most information about your business.

But this isn't the CAC you want to show VCs.

Most VCs are being presented with direct ad spend CAC. This is a more simplistic view of your spending to acquire customers. You get there by adding direct advertising spend (think Google and Facebook ad spend) together with your direct marketing spend (for example, affiliate commissions), then divided by the total number of customers you brought on in that period (for example, in your most recent year).

Using the wrong one may get you turned down by an investor-- even if your business is great.

For example, let's say you and another company in your space are presenting to the same VC. You calculated your lifetime value to CAC (LTV:CAC) ratio using your fully-loaded CAC, and you get LTV:CAC of 2.5x. But your competitor calculated their LTV:CAC using direct ad spend CAC, and they show 4.8x. On its face, your competitor wins.

But what if on a fully-loaded CAC, your competitor's LTV:CAC ratio is 2x? That's the problem with apples and oranges. In the short space of a pitch, you likely won't make it far enough to talk through both CACs. That VC will likely go deeper with your competitor, whereas your team might have to keep knocking on more doors for capital.

Know both, but showcase only one.

On your VC pitch deck, showcase your direct ad spend CAC with an asterisk note indicating that you're using direct ad spend but have fully-loaded figures available. This way, you ensure you're being fully transparent but are not shooting yourself in the foot by showing an overweight figure versus what they're used to. You're also giving that VC a reason to want to dive deeper into due diligence with you-- and that's where you'll have more time to discuss what costs you've included, versus which you haven't.

If they ask about it, what do I say?

If a VC asks why you've only shown your direct ad spend CAC, here's your line:

We've calculated it both ways, but a couple of potential leads that we're speaking with indicated that they preferred to see direct ad spend as a starter, and in due diligence we would get deeper into fully-loaded CAC with a view on how we're expecting LTV:CAC to scale as we achieve more efficiencies across our sales stack.

This shows that not only do you know your metrics and understand their importance to investors, but you also know the road-- and you're already talking with other potential lead investors.

Ultimately, you're showing that VC that you're a founder that gets it.