How to raise your series B (even in a down market)

If you are a founder who has recently raised your series A, you can relate to the following story.

As confetti falls from the ceiling and champagne is sprayed throughout the office, a jubilant series A founder’s mind wanders to a terrifying question — how am I going to raise my series B? Like Gregg Popovich after winning the NBA Finals, the founder’s glorious moments of celebration come quickly to a halt and it is time to get to work preparing his company for the even more treacherous series B which is now only 12–18 months away.

We spend most of our time funding series A companies at DFJ and I am always shocked at the opacity that surrounds the series B which is a time when business metrics begin to speak for themselves and knowing where you stand relative to peers is actually easier than at the series A. While most founders have heard benchmarks like, “a LTV:CAC higher than 3 with payback in less than one year is good,” they should know the first principals involved in setting the benchmarks and thinking like a series B investor.

Series B investors know that profitable customer acquisition economics are the only metrics that matter in high-growth companies. This is why series B companies that are light on revenue can raise monster series Bs at sky-high valuations. This was true of Uber, Zenefits and Instacart and it will be true of your company if you turn your series A money into strong customer acquisition metrics.

Customer acquisition decisions are capital allocation decisions and should be thought of as making a bunch of mini growth investments in your business. In each case, and this is true whether you are buying ads or scaling your inside sales force, you are spending some amount of capital up-front with the hope of receiving a future stream of cash flows to compensate for that initial investment. Just as you would have been thrilled to pay $6 (split adjusted) for Apple stock in 2005 to own $115 worth of Apple stock today, series B investors are equally thrilled to spend $6 on your customer acquisition plan to turn that into $115 of gross margin as you run your business for the next decade.

Investors pay very close attention to two metrics when assessing your customer acquisition — the ratio between customer lifetime value and customer acquisition costs (LTV:CAC) and the payback period on customer acquisition spend. These metrics are well known and widely used but are often improperly calculated so let’s dig in and talk through each one.


Lifetime value should be calculated as the amount of gross margin earned from your customers over the lifetime of their relationship with your business. You should conservatively subtract all costs involved in delivering your product (hosting, customer support people, engineers doing maintenance on your product to keep customers happy, etc.) to arrive at gross margin. This will ensure that you are not caught off guard when an unexpected cost scales with customer acquisition. Churn also decreases lifetime value so make sure to include this as well.

Customer acquisition costs should include not just marketing spend but all other costs that are necessary to acquire new customers (sales and marketing salaries, marketing automation software subscriptions, the cost of your PR firm, etc.). Now it can be hard to attribute certain costs (like PR or brand-building) to specific new customers but as with any business decision some conservatism and a margin of safety goes a long way.

Payback period

While it is possible to run an incredibly profitable customer acquisition model with long payback periods, the costs of acquiring customers add up quickly and can lead to a large deficit that builds as a company grows. This is why companies like Box and Salesforce have run up deficits of $500M+ yet still perform wonderfully as investments. Long payback periods do not only consume large amounts of cash, they also require investors to believe that the company will be around for a long time. This explains why business models with faddish products (game companies, movie studios, fitness competitions, etc.) are so highly discounted relative to companies that are seen to be defensible with network effects.

A few scenarios

Investors relate these metrics back to the profitability of investing in your business by looking at the ultimate profitability of the investments you are making in customer acquisition as well as the amount of cash that will be required to execute your customer acquisition plan. Consider a business that invests $1K to acquire customers that generate $100/mo in gross margin.

When a business is showing early signs of success, it often has metrics that look like the first row of this table. Churn is low and although it takes approximately 12 months to pay back customer acquisition costs, the low churn means that the majority of the revenue acquired in year one keeps coming in year-over-year and by the end of year two, the investment has registered a solid 113% IRR (which compares quite favorably to the 7% average return generated by investing in the stock market). As the churn rate increases, however, investments in customer acquisition get less and less profitable to the point where at around 10% monthly churn a company that pays 10x monthly gross margin is no longer breaking even and shouldn’t be acquiring customers at all.

Customer acquisition economics also affect cash flow. Say that our business from above has 1,000 customers, 2% monthly churn and plans to grow 10% month-over-month for the next three years.

You can see that even though all three customer acquisition plans are profitable in the long term, there is a $18.5M difference in the amount of cash the business consumes over three years and in all but the first scenario, the company has to raise significant money to fund its growth.

Connecting the dots

When VCs invest in companies, they are generally looking to return 10x on their initial investment which depending on the time period from initial investment to exit produces the following IRRs:

Customer acquisition metrics should always be better than an investor’s target IRR to account for other operational costs that do not contribute to customer acquisition or COGS (like R&D) as well as to provide a margin of safety. The general rule of thumb that LTV:CAC of greater than 3x is a good benchmark but you should model your customer acquisition plan to have a strong handle over your cash needs as well as how much customer acquisition efficiency you can sacrifice while still conserving your resources and meeting your goals. The following chart shows how different levels of customer acquisition efficiency affect the time it takes to multiply the value of your company and can serve as a guideline when turning the customer acquisition dials.


Now not every company raises its series B off of its customer acquisition metrics. Some companies (like our favorite space investments SpaceX and PlanetLabs) are more capital intensive and require several rounds of financing to get their products to market. Eventually, however, all growth businesses are judged on their customer acquisition metrics and when they are, investors pay careful attention to how efficiently they turn the cash they raise into new business. When a business gets to this stage, it is no longer constrained to investors who are experts in its industry. With metrics and results that are normalized across all growth businesses, it is competing on a much larger and more efficient stage for society’s capital. This is why the series B is so difficult — it is the point at which fundraising begins to standardize and thus becomes hyper competitive. Good luck and onward to the series B!

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