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I asked that ^^ question on Twitter, because I see it all the time.
B2B seed stage companies with a bit of traction:
Touting a really low CAC (Customer Acquisition Cost).
When it comes up, it will sound like:
or
or
It’s tempting to get excited about that as an investor.
But what should you do with that data during diligence?
At seed stage — nothing.
When evaluating a seed stage company, current customer acquisition cost is meaningless.
Why?
The data set is too small to make a call.
When a seed stage company has closed a few deals:
It’s a huge positive signal.
Because they went from “Zero to One.”
But you can’t get wrapped up in the metrics related those sales.
There’s not enough statistical significance there to draw a conclusion about sales efficiency.
Because they’re just getting started on the sales learning curve.
The CAC doesn’t actually include ALL of the costs.
Yeah, yeah. I know the lead ONLY cost $5.
But:
- The intern made some custom slides for the first meeting with the prospect.
- The founder needed 3 Zooms to close the deal.
- And the CTO had to join two of them!
You gotta bake all of that into your CAC calculation.
And speaking of those founder Zooms…
Founder-Led Sales CAC Beats Sales Rep CAC (Every Time)
Unless a seed stage startup is prematurely scaling:
A founder is doing all of the sales.
That founder is going to be way more effective in selling their product …
… than almost any salesperson.
This “founder premium” isn’t typically counted in the CAC calculation, either.
So where should you focus your diligence at seed, then?
Here are some questions I recently asked an investor who sent me a post revenue seed + company.
I came up with these questions based on what I saw in their deck.
So don’t take these as “must ask” — but consider adding them to your toolkit.
- What’s the monthly MRR growth, month over month, for the last N months? For SaaS at seed, consistent 5-10% growth is pretty good evidence that there’s the beginnings of product market fit. Unfortunately, that’s not very common at the seed stage. But if you see it, run towards it 🙂
- How many of the logos were won through founder-led sales vs sales team led sales? Like I said, founders are the best salespeople in the early days of a startup. But can they make the model repeatable, and scale it up? If the balance is swaying towards sales team led sales, that’s a good sign.
- Who are the ideal investors to fill out the round? This helps me help the company, because I can send more investors their way. Those investors will form an opinion about the company, and that opinion is helpful to me as I think about potentially participating (or not), too.
- Is this competitive with
? I’ll ask the company, and the existing portfolio company. And if I get a ‘Yes’ from either one, I’ll step back.
