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Why Do Investors Care So Much About LTV:CAC?

Andreessen Horowitz (a16z) · a16z.com Free Intermediate

A focused a16z piece on the single ratio that most captures a business's efficiency and drives its valuation. Great for founders who need to understand the 3:1 benchmark and its limits.

  • 3x LTV:CAC is a common rule-of-thumb benchmark for healthy unit economics
  • Higher LTV:CAC drives higher margins and therefore higher valuation
  • The ratio can mislead, CAC payback period matters just as much for cash
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It answers 5 questions

  1. What are unit economics and why do they matter?
  2. How do I calculate CAC (customer acquisition cost) and LTV?
  3. What is a good LTV to CAC ratio?
  4. How does a marketplace actually make money and solve the chicken-and-egg problem?
  5. How do I build a simple financial model or revenue projection?

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