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Intro
I walked through two of the most important narratives you can tell investors about your traction in my previous post. Now it’s time for the third and last one. This time it's all about customer acquisition.
One of the most impactful things you can convince a VC of is that you are great at acquiring customers. If investors believe this, they will readily accept that you can take their money and grow your customer base rapidly. Which in turn allows them to believe 1) that you'll be able to raise the next round of funding and 2) that you can actually build the billion dollar businesses they are looking for.
While you can spend time talking about how you plan to run ads, hire influencers or launch a referral scheme. Investors will take these plans with a pinch of salt. Instead they will pay 100x more attention to how you've acquired customers in the past. It's far more persuasive than your ramblings about untested channels.
As a founder, it's in your best interests to frame your track record of acquiring customers in a way that makes VCs think you can continue doing so effectively. This unfortunately isn't as simple as stating that you acquired a bunch of them.
VCs will only take your traction on the customer acquisition side as evidence of future success if it meets certain criteria. Not only does your approach need to work but you also need to show that it is:
- Scalable & Repeatable
- Quick
- Cost effective
Let’s break down what each of these means.
Scalable & Repeatable - This means that you could expand your approach significantly without losing efficacy. If you acquired your first 10 customers by calling your friends - this isn't scalable as people don't have millions of friends. Meanwhile if you have only made one sale via cold calling, nobody would see this as repeatable. There’s no reason to believe that your single success was anything other than luck. Whereas if you had made 100 sales through cold calling, that would be a different story.
Quick - In general investors like fast sales. There is, however, some nuance. There is no magic number of days, weeks or months that separates the fast or slow. In reality whether you are seen as quick or slow is judged based on how big the sale is. It makes sense to spend a year selling a million dollar contract, it makes no sense if that contract is worth $5k. Therefore your job is to show that you are quick versus other companies that make sales of a similar value to yours.
Unsure how long sales cycles are for deals of your size? SaaStr has helpful benchmarks.
- Deals < $2,000 in ACV should close on average within 14 days.
- Deals < $5,000 in ACV should close on average within 30 days.
- Deals < $25,000 in ACV should close on average within 90 days.
- Deals < $100,000 in ACV should close on average within 90-180..
- Deals > $100,000 in ACV will take on average 3–9 months to close...
- Deals > $500,000 in ACV are almost always budgeted annually. This means then can take from 6-18+ months to close...
In any case the quicker the better.
Cost effective - Showing that you can acquire customers quickly, scalably and repeatedly is pointless if it costs you more money to acquire customers than they are worth to you. In exuberant markets like those we saw in 2021 or during the dotcom bubble, VCs pay less attention to this. However, for the foreseeable future it's not enough to show you can acquire customers, you need to show that you can do it profitably.
Making VCs think your track record is good
For obvious reasons nobody is going to believe you if you simply say that your historical customer acquisition efforts are scalable, repeatable, etc... You have to use data.
The challenge for founders is that there are many different ways of acquiring customers so there’s no universal slide or metric you can use. This, however, doesn’t mean that there's no advice to give - some things can be generalised.
In this post I will attempt to go through three of the most common acquisition approaches and show you how to use data to get VCs excited.
The post will cover the following channels:
- Sales driven acquisition
- Paid acquisition for a self-serve product
- Organic acquisition for a self-serve product
To do this succinctly the best approach is to think in questions. I’m going to present the questions that investors silently ask themselves about each of these acquisition channels when founders mention them. I’ll then show you what a good answer to these hidden questions looks like and finally I’ll point you to the type of data you can use to back up your answer. Because in practice VCs won't actually ask you these questions, it is your job to pre-emptively answer them in your materials and voice over. Otherwise they won’t take your track record of user acquisition as seriously as they should. Let's start.
Channel 1: Sales driven acquisition
Sales driven acquisition is one of the most common acquisition methods that we see. By sales driven here I am covering all sales processes which need a human in the loop for them to get the customer to pay. This includes processes where your leads are coming from cold calls as well as processes where your leads reach out to you because of some marketing or even your website. The main thing that investors will focus on it is how the leads that you get (however you get them) progress once they have entered your sales funnel, and how scalable your process of getting new leads is.
Proving channel scalability
| Question |
Model answer |
Supporting data |
| What does your ideal lead look like and can you get more of them? |
“Our sales team targets firms with characteristics A, B & C.
We have found that these convert 5 times better than generic firms in the same industry
We’ve only reached out to 100 of this type of firm so far - however, we have a list of 10k firms with these exact characteristics in the UK alone” |
The characteristics of the leads you target.
- Shows you are doing the same thing repeatedly.
Stats showing these characteristics make targets more likely to sign than leads without them.
- Shows you’re repeating something effective.
Stats showing that there are many more customers with these characteristics that you can find and target.
- Shows you can scale it up aggressively post the round and expect the same success rate. |
| What’s the sales process like? Is there a set process that you take leads through to make a sale? How effective is it? |
“Our sales process involves the following 4 steps:
- We reach out to a customer asking to have a 15 min call
- Our SDRs have a 15 min call to a) qualify leads and b) book a demo with those we want
- We have a demo with the customer and if they like it we book a meeting to discuss final steps
- We have a final meeting where we discuss pricing and timeline. After this call they decide whether to sign or not
Historically 10% of the leads we send emails have a qualification call → 50% of these agree to have a demo → 70% the demos go to the final meeting → 90% of the final meetings result in sales.
Once a company gets on the phone with us there is a ~30% chance they will buy our product.” |
Tell them the steps in you sales process
- Shows that there is a method that works which you can give to new staff and that they can expect to work. Which means repeatability.
Provide stats on what percentage of customers progress from each stage of the funnel to the next.
- Shows that you’re data driven and gives VCs confidence that you are actually trying to optimise each stage of the process.
State what % of people who you manage to speak to close.
- Shows that your historical sales aren’t coming from beating the market into submission - which indicates scalability. In general less than 10% is worrying > 30% is best in class. |
| How many people have gone through your sales process? |
“We’ve had discussions with 50 qualified companies resulting in 10 sales” |
Stats on how many companies have actually gone through your funnel.
- Shows that there have been enough calls to draw conclusions from the data that you can expect to hold. AKA repeatability |
| Can the people you’ve recruited sell it also? |
“Our first dedicated sales team members joined 6 months ago and they are now at a ~30% win rate on qualified leads. This is as high as our success rate as founders” |
Stats on how efficient your employees are at converting leads to sales.
- Shows scalability because sales success isn’t linked to ‘founder magic’. You could add more people and expect them to succeed. |
| Were your customers cold or known to you previously? |
“Our first 2 sales were to people in our network, however, the following 8 were from companies that we have no connection with.” |
Stats on the proportion of sales you’ve made that were with strangers.
- Shows that you can sell where you don’t have a personal connection. Implies scalability and repeatability. |
Proving channel speed
| Question |
Model answer |
Supporting data |
| How long does the average sale take? And does that correspond to the value of the contract? |
“Our average customer is worth ~$5k p.a. Typically we are able to get a customer from the first call to a sale in 14 days. This is faster than the typical sales cycle for deals of that value which is usually four weeks” |
How large your average deal is.
- Needed to contextualise whether you are fast or not.
Stats on the length of your average sales cycle.
- Shows you are tracking it and allows VCs to have an objective measure of speed.
Benchmarks on what normal speeds for deals of your size.
- Allows people to compare you versus a benchmark - quickness is determined by comparison to the norm. You can find benchmarks here. |
Proving channel affordability
| Question |
Model answer |
Supporting data |
| How much does it cost to acquire a customer and do they generate enough value for it to be worth it? |
“Accounting for the salaries of our sales people, SDRs and sales related travel it costs us $3k to acquire a customer. Given that the average customer stays for 3 years paying $5k p.a., we have a 5:1 LTV:CAC ratio” |
How much the average sale costs you to make.
- Input for comparison with LTV.
How much the average customer is worth to you over their lifetime.
- Input for comparison to CAC.
LTV:CAC ratio
- Mathematically shows you whether customer acquisition is profitable or not. 3:1 is considered acceptable but the higher the better. |
| How long does it take for you to recoup your spend on acquiring customers? |
“Our customers subscribe annually and they pay up front. Given that is costs us $3k to make as sale and we bill $5k per year we recoup our CAC in 0 days” |
‘Payback Days’ → how long it takes for you to recoup CAC spend from a customer.
- While having a positive LTV:CAC ratio shows that your sales are affordable - the shorter your CAC payback period the better your business is able to recycle cash to make new sales. It's the reason why companies like Zapier didn’t need to raise more money to keep growing. |
Channel 2: Paid acquisition (assumes a self-serve product)
When it comes to paid acquisition there’s no need to spend time defending how quick your sales cycle is, as typically self-serve motions will be quick. Moreover, if there is no human interaction required from your staff to make a sale, VCs will pay even less interest in this because customers who are slow to convert won’t cause you to incur additional costs.
Proving channel scalability
| Question |
Model answer |
Supporting data |
| What does your ideal marketing target look like and can you get more of them? |
“We’ve seen success with ads targeting customers with characteristics A, B & C. So far 1000 customers (90% of our base) have come through this channel.
We’re only spending $1k p.w. on ads but we’ve tested up to $10k and saw no change in cost or efficacy. Moreover we haven’t run ads anywhere outside London.” |
The characteristics, keywords you target.
- Shows you are doing the same thing repeatedly.
Stats showing that you can deploy much more money into the channel without saturating it.
- Shows you can scale it up if given more money. |
What’s the self-serve funnel like?
Is there a set process that people who click on your ads go through before buying? How effective is it? |
“Our paid acquisition process involves the following steps
- A prospective user sees an ad to one of our lead magnets and clicks on it
- They land on our website and sign up for the 14 day free trial
- They complete the trial and those who want to continue using the features start paying a monthly or annual subscription. The rest lose access to the product
Historically 5% of people who see one our ads visit the website → 30% of these start the free trial → 50% of these end up converting into paying customers post trial.
Overall ~50% of people who try our product will buy it.” |
Tell them the steps in your paid acquisition funnel.
- Shows that you’ve carefully designed a process. More importantly it demonstrates repeatability as the same thing happens to everyone who sees your ads.
Provide stats on what percentage of customers progress from each stage of the funnel to the next.
- Shows that you’re data driven and gives VCs confidence that you are actually trying to optimise each stage of the process. |
| How many people have gone through your paid acquisition funnel? |
“We’ve pulled in 2000 visitors with paid ads in the last quarter of which we converted 300 into paying customers.” |
Stats on how many companies have actually gone through this funnel.
- Shows that there have been enough people to draw conclusions from the data that you can be expected to hold. AKA repeatability. |
Proving channel affordability
| Question |
Model answer |
Supporting data |
| How much does it cost to acquire a customer and do they generate enough value for it to be worth it? |
“Based on our $2 cost per click and our historical conversion rates, acquiring a new customer costs us ~$13.50.
Meanwhile customers pay $10 per month and the average customer stays ~8 months. This gives an average lifetime value of ~$80.
Meaning we have a 6:1 LTV:CAC ratio” |
How much it costs to acquire a customer.
- Input for comparison with LTV.
How much the average customer is worth to you over their lifetime.
- Input for comparison to CAC.
LTV:CAC ratio
- Mathematically shows you whether customer acquisition is profitable or not. 3:1 is considered acceptable but the higher the better. |
| How long does it take for you to recoup your spend on acquiring customers? |
“Our customers have a choice to pay monthly or annually - with annual subscriptions being paid for up front.
If everyone paid monthly then on average it would take 2 months for us to recoup our spend on acquisition.
However, because 30% of users purchase annual subscriptions, in aggregate customer acquisition is instantly profitable for us.” |
‘Payback Days’ → how long it takes for you to recoup CAC spend from a customer.
- While having a positive LTV:CAC ratio shows that your sales are affordable - the shorter your CAC payback period the better your business is able to recycle cash to make new sales. It's the reason why companies like Zapier didn’t need to raise more money to keep growing. |
Channel 3: Organic acquisition (assumes a self-serve product)
In general the same questions as with paid self-serve apply, however, there is added focus on the top of the funnel - i.e. the organic part. As a result I’ve only focused on the organic specific questions. As with paid acquisition - sales cycle speed is not relevant.
Moreover, affordability can be taken for granted as organic acquisition is by definition free. The only exception is perhaps if you have an expensive function such as a premium content factory that you use to actually draw in users. However, in most cases the cost of content is negligible
Proving channel scalability
| Question |
Model answer |
Supporting data |
| What drives your organic traffic? |
Good - “We’ve seen a very strong link between the amount of long form content we put out and user growth. Each blog post we publish generates ~300 additional visitors to our website each month in perpetuity. ~10% of these convert into paying customers.
Better - “We have a strong organic growth loop embedded in the product. When the average user signs up they typically send a message to 3 potential customers via the platform. On average two of these will sign up, starting the process all over again.” |
State the action / event that causes new users to discover you and quantify how it correlates to new users.
- Shows you organic discovery is not random. This tells VCs that it’s repeatable so long as you can continue the driving action / event.
It is typically better if the driver of organic discovery is product usage rather than your actions as it means that your growth will have a loop - i.e. growth will create further growth without you doing anything. |
| If you are driving organic traffic through your actions - i.e. not your product - is it possible to do more of these actions? |
“Our SEO strategy has a lot of room to scale. Most of our organic traffic comes from long tail keywords. We have identified 2000 terms that we want to rank for, however, so far have only built landing pages for 1% of them. We intend to scale this post the round.” |
Provide statistics which show that it is feasible to continue to do much more of the action that drives your traffic.
- Shows scalability and repeatability. Your aim is to show that you are in control of the action that leads to new traffic and there’s room to scale it. |
Conclusion
Now you know how to make VCs take your user acquisition seriously, make sure to check out my other post of making the most out of other aspects of your traction (growth and customer love). As well as the rest of the fundraising bible for posts on all things fundraising - from market sizing to making a blurb.
