CLTV/CAC ratio

Every start-up can grow if it is willing to lose enough money per customer. The CLTV/CAC ratio is the single number that says whether growth is a business or a subsidy.

It divides what a customer is worth over the whole relationship by what it cost to win them. A ratio of 5x means Rs 5 of lifetime revenue for every Rs 1 of acquisition spend. A ratio near 1x means the company is handing money to advertising platforms and calling it revenue.

The workbook's reason for preferring the ratio to either number on its own is comparability: it lets you set two different companies in the same industry side by side, whatever their scale.

Both inputs come from Chapter 11's metric list. CLTV is average purchase value times average number of purchases. CAC is the average cost of acquiring a new customer, and the workbook notes that a lower CAC signals efficient marketing and sales, which in turn supports long-term sustainability and scalability.

The ratio is where the two meet, and the workbook gives the worked shape directly: a company with a customer acquisition cost of 50 and a lifetime value of 250 per new customer has a CLTV/CAC ratio of 5x.

Where it bites in the AIF syllabus is in diligence. Angel investors, who invest at the idea and product-market-fit stages, look at CAC and CLV to see how much the start-up spends per customer to get its revenue from that person — and the workbook states plainly that if CAC is very high, there are high chances the start-up will not be able to make profits from its operations. Venture capital investors, one stage later, are described as "very cautious" about companies with a high Customer Acquisition Cost, because it hampers long-term growth and sustainability.

The comparison only works within an industry. Acquisition costs in enterprise software, lending and food delivery are not the same animal.

CLTV/CAC ratio = Customer Lifetime Value ÷ Customer Acquisition Cost

where  CLTV = Average purchase value × Average number of purchases
       CAC  = Total acquisition spend ÷ New customers acquired

Two lending-technology start-ups come to the same Category II AIF in the same quarter.

A is four times B's size and, on this test, three times the business: every rupee of acquisition spend buys Rs 12.60 of lifetime revenue against B's Rs 4.20.

But notice what the ratio hides. B's customers buy twice as often — its CLTV is 67 per cent higher than A's. B is paying five times as much to acquire each one, and that is the whole of its disadvantage. If B can halve its CAC to Rs 2,500 without damaging retention, its ratio goes to 8.4x and the gap nearly closes; if A's CAC drifts up to Rs 2,500 as its cheap channels saturate, A falls to 5.0x.

That is why the fund treats the ratio as a diligence question rather than a score: which of the two numbers is moving, and in which direction?

Chapter 11 (Valuation), section 11.8.1, item E in the start-up metrics list, with the 5x illustration; and Chapter 9, section 9.1.2, where angel and venture investors apply CAC and CLV in diligence. Expect a computation of the ratio from four inputs, and a conceptual question on what a high CAC implies — that the start-up may not be able to make profits from operations.

• Compare only within an industry. The workbook adds the ratio specifically so two companies in the same industry can be compared; across industries the number is noise.
• The numerator is revenue, not margin. A 3x ratio on a 30 per cent gross margin product is a loss-making customer. The exam wants the workbook's computation; the investment committee wants the margin version.
• The ratio can improve for a bad reason. Cutting marketing spend raises it while the business stops growing.
• CAC is total acquisition spend divided by new customers — not by total customers. Dividing by the whole base understates CAC dramatically.
• A high CAC is read as a sustainability problem, not merely a cost problem. That is the workbook's framing at both the angel and the venture stage.
• The workbook's own illustration is denominated in dollars (50 and 250). The arithmetic is currency-neutral; the ratio is 5x whatever the unit.