Article

Why Do Investors Care So Much About LTV:CAC?

Andreessen Horowitz (a16z) · a16z.com Free Intermediate

The canonical investor's-eye view of why LTV:CAC drives valuation, and why 3:1 became the rule of thumb. Read it to understand what a growth-stage investor is really testing when they poke at your unit economics.

  • LTV should be computed on gross/contribution profit, not revenue.
  • Roughly 3x LTV:CAC signals efficient sales-and-marketing returns.
  • Higher LTV:CAC compounds into higher margins and higher valuation.
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It answers 2 questions

  1. How do I calculate CAC, and what's the difference between blended CAC and new-customer CAC?
  2. What's a good LTV:CAC ratio, and when is my D2C brand actually profitable?

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