When you’re talking to investors about a Series B, Series C or later round, one of the questions that will inevitably come up is “What are your CACs?”. It sounds like a simple question, but from the question of what costs to include and the right way to account for organic traffic to the pandora box of multi-touch attribution, there are lots of devils in the details.
What's more, the real question is not "What are your CACs?" but "What will your CACs be if you invest $10-20 million in sales & marketing?". It’s hard enough to calculate historic CACs for different acquisition channels with a high degree of accuracy. It’s much harder to predict future CACs at bigger scale.
And yet it shouldn’t come as a surprise that later-stage investors are so focused on this question. When you’re raising a Series B or later round, you’ve achieved Product/Market Fit (which is hard to define, see me attempt here) and you’ve got what Jason M. Lemkin calls “Initial Traction” and “Initial Scale”. At that point, the biggest thing standing between you and building a $100M+ business is finding scalable and profitable customer acquisition channels. Obviously you still have to overcome lots of other challenges along the way, but if you’re at $5-10M in ARR and you are confident that you’ve found scalable sales and marketing channels you are in an excellent (and rare) spot.
So how do you know if your customer acquisition channels will scale, that is, if a 10x increase of your sales and marketing spend will lead to a 10x increase in new customers? Consumer Internet startups are sometimes in the fortunate position to have found a profitable customer acquisition channel that offers huge potential for expansion. If ads on TV, YouTube or Facebook work for you, you might be able to increase your spending by 10x (and maybe much more) because these platforms have such a gigantic reach. In the B2B SaaS world this is very rare. Mass-market advertising won’t work because there’s way too much ad wastage, and targeted ads usually don’t give you the volume to easily 10x your spend.