Startup Metrics and Finance
Metrics are how a company describes itself in numbers, and finance is what those numbers mean for how long you get to keep going. This is the domain where being approximately right in public matters more than being precisely right in private: an investor will forgive an estimate and will not forgive a founder who cannot say how the estimate was reached. The concepts here cover the standard measures, how they relate to each other, and the ones that are routinely reported wrong.
18 concepts in Startup Metrics and Finance
- Burn Rate and RunwayBurn rate is how much cash you lose per month; runway is how many months of it you have left before the money runs out.
- Gross MarginRevenue minus the direct cost of delivering the product, as a percentage of revenue, the share of each dollar left over to fund everything else.
- Unit EconomicsWhat it costs to acquire and serve one customer versus what that customer is worth. The question of whether the business works at the level of a single customer.
- Lifetime Value (LTV)The total gross profit you expect from a customer across their whole relationship with you, a projection, not a measurement.
- ARR, MRR, and ACVThree ways of counting recurring revenue: annualized run rate (ARR), the monthly equivalent (MRR), and the average value of one contract (ACV).
- Gross Burn vs. Net BurnGross burn is total cash spent in a month with revenue ignored; net burn subtracts what came in, and the gap between them is exactly the part of your runway that depends on revenue holding up.
- Default Alive vs. Default DeadA company is default alive if its current growth and spending trends reach profitability before the cash runs out without raising again; default dead if they do not.
- Net Revenue Retention (NRR)The percentage of revenue retained from an existing customer cohort over a period, including expansion and contraction, but excluding any revenue from new customers, above 100% means existing customers are growing your revenue even with zero new sales.
- Runway Extension LeversThe specific actions available to make cash last longer (cutting burn, raising a bridge, growing revenue, or renegotiating spend) evaluated for how much runway each buys and how fast it can be pulled.
- Quality of Earnings (QoE) ReportAn independent analysis, commissioned by a buyer during diligence, that normalizes a target's reported earnings to reveal what is actually recurring and sustainable, stripping out one-time items, accounting choices, and related-party transactions that inflate the headline number.
- Financial Statement Audit vs. Review vs. CompilationThree escalating levels of assurance an outside accounting firm can provide on financial statements, a compilation organizes management's numbers with no assurance, a review offers limited assurance, and an audit independently verifies the underlying transactions.
- Equity Value CreationThe increase over time in what a company's ownership is actually worth, driven by building a business a buyer or public market will pay for, rather than by the price of the most recent financing round.
- Financial ModelA spreadsheet that connects the decisions you are weighing to the cash they produce and consume, so you can see what a plan costs before you commit to it.
- Burn MultipleNet burn divided by net new recurring revenue over the same period. The number of dollars the company consumes to add one dollar of recurring revenue.
- Rule of 40A benchmark for software businesses: revenue growth rate plus profit margin should sum to at least 40, so losing money is acceptable in proportion to how fast the company is growing.
- Cash Flow vs. ProfitProfit is what the accounting says you earned in a period. Cash flow is what actually moved in and out of the bank. A company can be profitable on paper and still run out of money.
- Revenue RecognitionThe rules that decide when money you have been promised or paid counts as revenue, which is as you deliver the service rather than when the contract is signed or the cash arrives.
- Deferred RevenueMoney a customer has paid for service you have not delivered yet. It sits on the balance sheet as a liability rather than as revenue until you earn it.
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