Tokens are the paid customer acquisition channel of web3. By analyzing how web3 companies invest tokens, we can calculate the cost of customer acquisition (CAC) for a crypto company.

When a user spins up a validator to verify transactions on a blockchain, stresses the testnet and is rewarded with tokens, stakes tokens to generate yield, burns tokens to transact, or receives an airdrop for tweeting, a cryptoco expends tokens to acquire a customer.

Hence tokens, which have value, constitute the business’s CAC.

Web2 sales and marketing techniques pervade our inboxes, plaster our browsers, and percolate in our voicemails. In their own way, web2 companies spend dollars to acquire customers and partners and build an ecosystem. The profit and loss statement of a business records the quantum on the Selling & Marketing Expenses line.

Let’s contrast the sales and marketing investments of web2 companies to web3 companies. We can benchmark them relative to their corporate value. This analysis should imply something interesting about the fraction of tokens ought to be offered to a community.

Typical enterprise software companies spend approximately 7-15% of their enterprise value on customer acquisition. L1 Web3 companies spend 29-95%.

The comparison between web2 and web3 is stark, 3-7x higher CAC relative to corporate value. Even if the estimates are off by a factor of 2 or more, this math suggests crypto companies acquire customers less efficiently than their older brothers.

It also suggests future token cap tables may not be so community focused in the future, a phenomenon we’ve already observed in L1 token allocations.

In all fairness, the web2/3 CAC comparison is somewhat clementines and satsumas for a few reasons.

• equity and tokens are different instruments
• web2 companies have been highly optimized after two decades of refinement
• the valuation frameworks between web2 & web3 companies aren’t identical
• this calculation doesn’t include testnet incentives
• it excludes ecosystem funds raised by cryptocos to develop their ecosystems

Nevertheless, the concept of CAC will permeate crypto go-to-market strategies at some point.

But not today. I haven’t met a crypto company that talks about CAC. Or sales and marketing spend. Or ROI. It’s too early in the development of the ecosystem for most businesses to concentrate on customer acquisition funnel optimization.

We’re still focused on discovering to which of the 6,000 filaments is the ideal chemistry to sustain the crypto light bulb and bring NFTs to millions of homes. For Edison, Tungsten worked best. Uncannily, cryptoland has decided Tungsten cubes might just be our thing.

Plus the $38b of venture capital invested in crypto year-to-date doesn’t ask many questions. 1000x returns have a way of pacifying hesitation and silencing skepticism

At some point, though, we’ll examine the costs of customer acquisition via token and ask whether tokens do fundamentally change the economics of growth. Until then, buidl and hodl.

–
Footnotes

[1] The base data is the basket of publicly traded cloud companies as of the date of writing. Multiply the selling & marketing expense by 1/3 over 10 years for a rough estimate of lifetime selling and marketing expense. Then divide by enterprise value.

One could argue 15 years is a better estimate for lifetime, but the S&M expenses in the early years are de minimus relative to the outer years.

Why multiply by 1/3? Take an imaginary company that spends the following on selling and marketing, and assume it maps linearly to ARR of a high growth business, the average is roughly 1/3 the value of the current spend. Another way of thinking about it: it’s the area of a triangle with a roughly 60 degree interior angle, proxy for 60% annual growth over these years. It’s an approximation: let’s go with it for now!

[2] I’m using the estimated sum of the public presale and community allocations using data from L1s via Messari.