Why VCs Look for Startups With Low Customer Acquisition Costs
When I first started in venture capital, I came across this company I thought was amazing. Their product was powerful, it had a lot of great features, and I thought it could certainly be useful to any customer who took the time to learn how to use it. But their customer acquisition cost (CAC) was incredibly high, and we ultimately had to pass. I saw this scenario play out over and over again with great products built by great teams.
A common theme with all these companies is that they had to “push” themselves onto customers through marketing and other sales tactics more than they were “pulled” by interested users. The push-versus-pull concept is not one that I came up with on my own; it is a signal many VCs look for in the companies they are analyzing. So how do we determine if a company is being pulled more than pushed? And how do you build a company that is best positioned to be pulled?
How to Know If You’re Pushing Customers
A great way to determine if a company is being pulled more than it is being pushed is to look at marketing spend and growth. There is no exact ratio to shoot for here, but if growth is taking off and the marketing budget is pretty low — or in some cases non-existent — then you are likely being pulled by your consumers.
One great example is Aryeo, a platform that helps real estate listings manage their photography and marketing content. (Full disclosure: It’s one of Amplo’s portfolio companies, but it’s “pull” is a big part of why we invested in it.) With almost no marketing budget and nobody actively going out and selling the product, they were able to get 1 percent of all real estate transactions in the U.S. onto their platform. When this occurred, the startup had yet to even close the seed round it was raising.
The team pulled this off by making a product that was so well suited for real estate photographers that it spread rapidly through word of mouth. As photographers came in droves, so did the parties who work with them — like agents and brokers.
If there is a substantial sales and marketing spend, that means there’s a huge amount of customer education that has to happen before a sale is made — and you’re likely pushing this onto customers.
There are some exceptions where a substantial amount of marketing or education can be acceptable — as long as the consumer’s lifetime value (LTV) is extremely high. For instance, a startup selling a niche health insurance package that needs a significant marketing effort would be fine if customers almost always renew so the LTV of a customer is really high once they are signed up on the platform.
How to Position Your Product to Be Pulled
There are a number of ways to best position a company to be pulled, but two stand out:
- Do a significant amount of discovery and build a product that matches your market research.
- Ride a market trend.
Let’s return to our case study. In Aryeo’s case, their market research was well positioned because the entire founding team had extensive experience as real-estate photographers. Further, they kept close track of what customers wanted as they built the product.
When it comes to riding market trends, a great example is the number of remote work companies that sprung up months into the pandemic and have been getting large amounts of traction from employers who need more remote work solutions. However, riding market trends can be a double-edged sword, because you never know what will happen when the trend goes out of style. Fortunately for a lot of the remote work startups, it seems like some form of remote work is here to stay (whereas the staying power of recent trends, like NFTs, is yet to be determined).
Although it is tempting to jump on market trends because they are the most obvious short-term way to show that you are being pulled by consumers, my advice is to always start with the market research first — and to make sure that you are building a product that your customers actually want. If you’re able to connect these sound fundamentals with a trend, that will certainly strengthen your position.
It’s a great strategy to ask the customers you are interviewing, “If I built something with these capabilities, would you pay for it?” Most great companies with true staying power are built like this, and it gives entrepreneurs certainty that their product will be pulled by consumers for the foreseeable future.