No CAC? No Funding.
When I was going through the LAUNCH Accelerator in 2019, I always thought our pitch needed work. Whether it was my communication style or the how to best angle our traction, there was always something to improve. But still, there was one slide that I was always most proud of; It was the slide that shared that we acquired our customers without spending anything on paid marketing. AKA, we had a $0 customer acquisition cost, or CAC. I flaunted this a lot, thinking this was a strong metric. I thought this showed that we were capital efficient and can grow without relying on paid ads. This is all true, yet having a near $0 CAC is a major red flag for venture capitalists. Here’s three reasons why.
No Customer Comes For Free
First off, customers are never free. Every second a founder spends selling a customer is time spent on sales that could have been spent on something else. Even though no money is being spent, time is being spent, which is more valuable than money in most cases. If I were a better founder back then, I would have calculated a top of market rate for a salesperson and then tracked how long it took for me to close a customer. Then I would have an equation to estimate our CAC. This is what an investor wants to see. An investor doesn’t want the founder to be hustling to to get customers after they invest $1M. They want to see the early beginnings of a growth machine.
You Will Burn Cash Experimenting Instead of Scaling
When an investor gives you money to grow, ideally the founders already know which channels are good for growth and which ones aren’t. The more data they have on these channels, the better. One of the reasons experiments are so popular in startups is to figure out what channels work and which ones don’t. Experiments can be run very cheaply, usually without venture capital. If a founding team gets $1M without having run any experiments beforehand, chances are that they will burn unnecessary money on learning instead of growing.
Hustle Doesn’t Scale
One of the hardest lessons to learn as a founder is that hard work doesn’t scale. At some point, the founder needs to take themselves out of a purely operational role and start building + managing a team. So many founders get stuck in the trap of thinking that they need to do it all, but this is a the wrong mindset for a venture backed startup. I am a culprit of this. Hustle is just one trait that an investors looks for when investing. They look for someone that can scale with a startup, who can learn quickly, and who run a team. Many times, founders over-index on their hustle and under index on these other traits. There is a positive correlation between founders who say their CAC is $0 and founders who over index on hustle.
This concept is not an intuitive one. You think that investors like hustle and want to invest in teams that are getting users for a low (or no) cost. In reality, getting all your customers manually is not capital efficient. And it sure isn’t time efficient. All companies should start this way, but when you go out to raise capital, remember that what got you here won’t get you there.