Imagine you could pick between two investment strategies for your money. One investment will triple your money in five years; the second will double your money in two years.

Intuitively, everyone knows the second investment strategy is the better pick, because your money will increase more quickly over a constant period of time. We understand this when it comes to our own money. Yet if you relabel “investment strategy” to “marketing strategy”, and pose the same comparison to a growth company, they might well pick the first option because it ‘generates a higher LTV to CAC’.

This distinction makes no sense.

All great late-stage companies are defined by one thing: their ‘go-to-market engine’ – their motion of acquiring, retaining, and upselling customers. These engines have an input and an output: money goes in (“CAC” or “S&M” spend), a cohort of new customers is acquired, and over time, that cohort generates money. Once a company reaches product-market fit, its GTM engine is responsible for substantially all of the company’s value, and (ideally) that GTM machine is scalable and repeatable.

Companies and investors evaluate the effectiveness of GTM engines today with a combination of often-misleading metrics (LTV to CAC, CAC payback time) and borderline astrology (the so-called “rule of 40” or the “magic number”). But arguably the only metric that matters for a GTM engine is the yield it generates on CAC spend.

Yield is the ability of an operation to generate cash. It is always measured on actual cash remittances (not on revenue or accruals) and compares the return on an investment with how quickly that return occurs, to generate an annualized effective interest rate. A dollar invested at a particular yield will, if reinvested, compound at that same percentage through time.

Unlike LTV to CAC, yield adjusts for the most important principle in finance: time value of money. Dollars of LTV collected today increase your yield much more than dollars earned long into the future. Yield on CAC is a consistent and un-gameable way to evaluate and compare a company’s GTM engine.

To many, this point feels like a technical one, an only incrementally more precise calculation than using the heuristics of LTV-to-CAC and CAC paybacks together. But we see this assumption as epically wrong. Existing CAC payback heuristics cause investors and companies to make incorrect decisions and sacrifice hundreds of millions of dollars in gains.

Say you could invest in either of the below two companies. Both have the same CAC, but Company A has a higher LTV/CAC and a shorter payback time. VC heuristics would tell you that Company A’s GTM engine is better – and would be wrong.

In this example, Company A charges $100 a month to their customers, where Company B charges $1,000 a year, upfront. The difference is dramatic: A dollar consistently invested in Company A’s GTM machine generates $1.45 a year; a dollar invested in Company B’s GTM machine generates $2.71.

Put another way, traditional VC heuristics would cause an investor to reject a GTM machine that is almost twice as effective as the one that ‘wins’ on their metrics. That difference grows every year – assuming both companies keep compounding, an investor would be 6.5x worse off picking company A after just three years. Over the typical life of a VC fund, the difference is two orders of magnitude.

The reason that yield is so compelling to measure GTM effectiveness is because it captures a critical feature of operating companies, which is their ability to reinvest (and compound) their profits. A key feature of any good growth company’s GTM machine is its ability to scale, i.e. to consume more dollars every month than the month before, and to output more new customers in return.

A higher yield on CAC isn’t a theoretical ‘on a page’ illustration – it directly illustrates how quickly you can reinvest the winnings from any round of GTM into the next round. That is the real-world version of ‘time value of money’.

The effect is that your company can compound its gains faster, and generate a much larger pile of cash just by focusing on yield metrics.

To make this real: Imagine the same Company A and B as above each start with $100mm in cash and spend $10mm a month on sales and marketing, roughly doubling their growth every year (with constant unit economics as they scale). Company A will have run out of money after barely a year; Company B will never fall below $50mm in cash. Two and a half years in, Company B will have more than $200mm more cash on its balance sheet than Company A.

What are the ramifications of this point for companies and their investors?

First, you should benchmark companies and GTM programs based on their yield. Stop using other metrics for assessing your GTM engine, and begin evaluating your company (and individual GTM programs) using yield on CAC spend.

As an operator, if you use yield as your north star:

• Payment terms will suddenly matter again (e.g. it may make sense to accept a discount to be paid annual upfront instead of monthly, or net 30 instead of net 180)
• You will spend more on marketing programs with a lower absolute return but a fast payback time (which are often disregarded because of ‘low returns’)
• Time to response (i.e. urgency) should matter more: if you can engage an interested prospect today instead of next month, it is highly yield-accretive to do so

As an investor, you can normalize comparisons between companies’ GTM machines by yield. Companies that exhibit higher yields should be more attractive – especially companies that look undervalued by lazy LTV/CAC analysis. For example, enterprise companies with low ‘magic numbers’ but high NDR and excellent retention will likely exhibit a strong yield, and traditional payback period will understate that yield because many such companies are paid annually upfront. Likewise, many consumer companies have low LTV/CACs but highly front-loaded payback profiles, which typically implies a high yield.

Second, your GTM yield is the only constraint on your maximum growth rate – the more your GTM yields, the faster you can grow. Looking at your yield on CAC allows you precisely to understand how fast your business can grow, without needing to listen to investor platitudes of “burn burn burn” in 2021 and “cut cut cut” in 2023 that are unhelpful and unanchored to reality.

The relationship is simple and beautiful: a company’s maximum ‘cashflow-neutral’ growth rate is exactly equal to its yield on CAC. The logic behind this link is intuitive: your growth rate is just how much extra cash your GTM machine is spending every year. Your yield on CAC is how much extra cash your GTM machine is generating every year. When the two rates are exactly equal, they balance out – your GTM machine is generating precisely the amount of incremental return needed to fuel the requested increase in input cash.

If your growth rate exceeds your yield on CAC, then your company will consume more money than it generates (negative cashflow). This might be a good thing for your business, but you will need more capital in order to grow at that rate. If your yield on CAC exceeds your growth rate, like Company B above, then your business will print cash.

This relationship allows a company to anchor its growth plans in reality – “our GTM machine yields 50%, so we can grow at 50% a year without burning cash, but we would consider slowing to 25% growth in order to build up a fortress balance sheet, or increasing to 75% growth with XYZ capital raised”. This process stands in stark contrast to the wild gesticulation to arbitrary metrics that you see today from growth investors and growth companies. And it lets companies give their GTM teams a tight feedback loop – the more effective they are at generating yield from S&M spend, the more they are allowed to spend.

Third, the yield on your CAC spend makes up the ‘fundamental’ return on a VC’s investment, as opposed to the ‘speculative’ component. Today, when a VC calculates the return on investing in a business, they enter numbers in a pseudoscientific spreadsheet to model dilution, underlying company growth, and an M&A or IPO exit at different valuations. To call it approximate is an understatement. It’s difficult to translate “LTV to CAC” into a yield-on-investment – investors make very little link between the fundamental cash-in-cash-out dynamics of the business, and the return that a VC thinks they’ll make from an investment.

But when a company starts calculating its yield on CAC, the link becomes clear. The yield on a VC’s late-stage equity investment should be equal to the yield that the company can generate for itself on the money the VC gave it. This is just the yield on a company’s GTM machine – the place where the vast majority of a company’s raised capital is invested.

Using yield on CAC gives businesses a clean metric that explains and defines their business – but it also tells VCs what return the company can actually generate on their dollars.

Yield on CAC also creates a ‘hype-meter’ for limited partners and investors. If a company is generating 30% yield on its CAC spend, but a VC has marked their investment at an IRR of 45%, then 15% of that IRR is speculation. The cash that the company gained from the investment will yield 30% if it is put into the GTM engine. To get to 45%, you need someone to underwrite their purchase to a ‘multiple increase’, perhaps speculatively, or perhaps more charitably on the basis of product enhancements or GTM efficiency improvements, either of which might ultimately push up a company’s yield on CAC.

The converse can also be true. Sometimes, a VC might have their IRR on an investment lower than a company’s fundamental yield on CAC, perhaps because they expect their ROI on sales and marketing to deteriorate over time. Either way, by reporting yield on CAC, you can separate a VC’s expected yield on investment into fundamental gain (the company’s yield on the money it receives) and speculative gain.

These implications barely scratch the surface of what changes once you make yield on CAC your performance yardstick. At a deeper level, using yield on CAC is the first step towards understanding your GTM engine as a separate business. Every growth-stage company is really two companies in disguise: an R&D and G&A machine, taking unstructured but high-reward risks that are paid for by your stable and existing customer base; and a GTM machine, consuming cash to acquire new customers in a structured, predictable, and high-yielding fashion.

If this clicks, you’ll start thinking about the right way to capitalize each of these underlying companies, too. And you might be surprised by what you realize.