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Comment by stanleydrew | Hacker News Reader

Interesting exercise. I'd like to see the justification for the "3" on the right side of the equation though. Does anyone know where that came from or have a reference?

A lot of the estimates are really bad and completely ignore sensitivities due to assumptions, especially with CAC in the denominator which can have a massive effect when the range of ratios offered in the article is 0 < r < 3.

The difference between a LTV / CAC ratio of 2 and 3 is 50%. If CAC is assumed to be $3000 when the ratio is 2, then it only needs to drop by 33% to $2000 to get the ratio up to 3.

The author appears to consistently guess at CAC and then completely ignore the fact that a slight shift in the right direction would quickly put a company back in unicorn territory.

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At the end of the day it's all hand-wavy bullshit. You don't actually know either of those numbers with exactness if you're in the company, let alone if you only guess by looking at it from the outside.

What this type of analysis turns into is, "I like this company, so I think their LTV would be very high."

Someone should do an analysis of past companies on these metrics. It would be interesting to know how Microsoft and Google's business comes out of the equation. On the flip side, we should also look at companies that have folded as well. We might find a minimum threshold of viability in terms of business models.

You beat me to it by 60 seconds, but you made the point in a for more general way:-

The sensitivity of LTV/CAC to the assumed CAC is supremely important here.

The method is in the madness here. As the author himself suggests, estimating the LTV isn't easy and is actually a whole new discipline in itself.

The lesson that needs to be taken from here is the general idea of always being careful about the pitfalls of falling into the latest frenzy, and instead, focus on the REALISTIC value an investment is going to return us in the long-term.

And this "Latest frenzy vs Being realistic" concept isn't anything new, it has been going on since the era of Tulip Bulbs in the 1800s right up to the Home Loan crisis of 2008. What keeps changing and improvising, of course, are the methods of evaluating the "frenzies", or as the author suggests, "distinguishing donkeys against the unicorns"!

Furthermore CAC can change depending on acquisition/marketing channel, and also, very quickly over time. It's probably the most dynamic value in this equation and any investor that treats it as a constant is asking for trouble. Examples: Spotify and Zynga using Facebook for customer acquisition.

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