“What’s your CPA?” is a trick question

If you’re an early stage company, you care about two numbers: cash and burn rate. How much money do you have (cash)? When do you run out (burn rate)? CPA and LTV are overrated.

In today’s competitive, crowded, aggressive fundraising environment, traction has become more and more important to a company’s story. One of the ways that I’ve seen founders display traction is by showing some sort of growth (revenue, # of deals, # of customers, etc) alongside CPA and LTV numbers for context. But here’s the thing- until you’re at massive scale, your CPA and LTV are pretty meaningless as standalone numbers. However if understood properly, CPA and LTV can be indicators of the health of the business – demand for your product, your effectiveness at targeting early adopters, your future customer acquisition strategy, etc.

Investors rarely ask early stage companies about LTV because it’s usually too early to tell. They may ask for cohort analysis, engagement metrics or repeat purchases, but those aren’t really LTV; they’re ways to gauge how well you understand your customer’s behavior.  Secondly, LTV is largely out of the control of the entrepreneur at the early stage. Sure, LTV is a function of product, pricing and positioning  (which are set by founders), but there’s so much customer- and market-related uncertainty for seed-stage products, that I find it silly to hold a founder accountable for LTV.  Most early investors that I know feel the same way and don’t get wrapped up in LTV on its own.

But for some reason, investors and founders both like to talk about CPA throughout the entire life of a company. The rationale is this: you control the purse strings, so you should know how much you need to spend to see some growth. I get it- it’s tempting to look at data if data exists. And if the data is in a format that the market is used to seeing, even better. But that data is generally meaningless and muddled, for a bunch of reasons (untested sales cycles, consumer psychology around new products, attribution issues, very small numbers/sample sizes, differences between early adopters vs mass market, depth of early acquisition channels/strategies/customer bases, etc, etc, etc). Rather than expand on why CPA is meaningless, let’s discuss how to handle the CPA question, which will definitely come up.

Think of “what’s your CPA?” like one of those consulting interviews: there is no right or wrong answer. In fact, investors don’t really even want an answer, they just want to see that you’re thoughtful. If a consultant asks a job candidate how many golf balls are hit into the water in the United States per year, the answer is not “3.6 million.” The answer is “well, let’s think about the addressable market of golfers in the US… and adjust for X… account for Y… learn more about Z… make some assumptions about A using logical, sound rationale B and dig deeper into assumption C. I’d say the answer is somewhere between X and Y, but I’d need to know more about Z.” Great answer. Not actually an answer, but great answer.

Why is that a great answer? Because (just like consultants) the answer that investors are looking for isn’t the answer to the question that they just asked. The question for early stage investors is not “what have you done?” it’s “what will you be able to do?” Showing that you’re thoughtful about your customer’s buying behavior, your market’s dynamics and why your product fits right in the middle is how you can nail the CPA discussion.

At Dozen Digital, we help our clients acquire customers on the web. Often, our clients are simultaneously in discussions with investors about their customer acquisition / growth strategies. For seed- and A-stage founders, a customer acquisition strategy is fluid- it requires a ton of tests, tweaking, hypotheses, optimization, pivoting, dead ends, false starts, feedback and more testing. When a client comes away from a few months of marketing (and spend) with a clarity about his/her customers, market and/or product, that’s a win.

To take that spend number, and ignore those invaluable learnings and insights, and use it as the numerator for a single ratio and assign any meaningful value to that ratio just seems short-sighted. Even if you come up with a “great” CPA, you’re still oversimplifying and undervaluing all of the learning you did to come to that number.  After all, early stage investors are buying your potential, not your historical financials.

On the flip side, using all of those tests, insights and learnings as the foundation to your pitch is a great way to show that you’ll be thoughtful with an investor’s money. Those anecdotes, questions and insights will help you build a company with a great CPA thats way less than your LTV.  But don’t worry about that quite yet- just focus on making progress and learning.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s