Discover the 5 financial metrics every startup should track depending on their stage of funding: runway, CAC payback, Net MRR retention, gross margin, and the ‘Rule of 40’. Straight to the point – for founders who want to speak the language of numbers.
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1. Runway (Pre-seed / Seed Rounds)
Runway is the number of months a startup can continue operating before running out of cash.
How to calculate runway?
To calculate it, we need the following data:
- the average monthly expenses of the startup (e.g., salaries, operational costs, hiring),
- and revenues, if any exist.
If the startup already generates revenue, subtract the average monthly costs from the revenue. The result is the burn rate.
If there is no revenue yet, then the burn rate is simply the total monthly costs.
To determine the runway, divide the total amount of funding received from investors by the burn rate.
The result tells you how many months the startup can continue to operate at its current cost level before exhausting the funds raised in the pre-seed or seed round.
Why is runway so important?
1. Runway tells us, first and foremost, that we need to survive.
At the pre-seed and seed stage, the most critical priorities are:
- building an MVP,
- potentially finding product-market fit,
- refining the product,
- identifying the target customer group.
In reality, most activities at this stage generate costs, which is why actively managing your runway is essential.
2. How to interpret runway?
- Runway = 12 months
A relatively safe scenario. You have time to develop the product and search for product-market fit without pressure.
- Runway = 9 months
A signal that, as a founder, you should start preparing for the next funding round, because:
- the average time to raise a round is about 9 months,
- you’ll need to prepare a shortlist of potential investors,
- create a pitch deck and financial model,
- begin investor outreach and conversations.
- Runway = 6–3 months
This is a red alert. Immediate actions should include:
- reducing costs,
- considering team downsizing,
- reassessing founders’ and leadership salaries,
- doing everything possible to avoid a cash crunch.
3. Quick reference summary:
- 9 months – start fundraising prep.
- More than 9 – more breathing room, but still plan ahead.
- Less than 9 – urgent cost optimization and fundraising action needed.
Two types of startup scenarios:
- Startup has customers and revenue.
If the burn rate isn’t decreasing despite having paying customers, it may indicate there’s no product-market fit — customers are not yet willing to pay enough.
- Startup is still developing the product.
Product development often consumes significant resources. This can delay future funding rounds and force founders to accept poor investment terms just to survive.
Key takeaway:
The longer it takes to deliver an MVP after raising a round, the lower the chances of securing the next one.
That’s why in pre-seed and seed rounds, delivering the product quickly is critical — it builds momentum, attracts the first customers, and significantly improves the chances of raising further capital.
2. Net MRR Retention (Series A Stage)
A key metric for startups at the Series A stage is Net MRR Retention.
At this point, the business is more mature — it has secured more funding, established market presence, and acquired a group of customers who pay regularly for the product. The next objective is scaling.
What is Net MRR Retention?
Let’s start with the basics: MRR (Monthly Recurring Revenue) refers to the recurring monthly revenue generated by the company.
When we add “retention” to this, we get Net Monthly Recurring Revenue Retention — a percentage-based metric showing how much recurring revenue from existing customers (or subscriptions) has been retained over a given period, including:
- Losses: cancellations or plan downgrades from existing customers,
- Gains: plan upgrades, upselling additional modules, or increased usage by existing customers.
What does this metric measure?
Net MRR Retention indicates whether the business is growing organically based on its existing customer base — without the constant need to acquire new users. This is especially critical in subscription-based models like SaaS.
How to calculate Net MRR Retention?
Use the following formula:
- Start with MRR at the beginning of the period (Starting MRR),
- Add Expansion MRR — revenue added by existing customers,
- Subtract Downgrade MRR — revenue lost due to smaller plans or decreased usage,
- Subtract Churn MRR — revenue lost from customers who fully canceled,
- Divide the result by Starting MRR,
- Multiply by 100% to express it as a percentage.
Detailed formula components:
- Starting MRR: Total recurring revenue from all active subscriptions at the beginning of the period.
- Expansion MRR: Additional revenue from current customers. This may include:
- Upsells (moving to higher plans),
- Cross-sells (purchasing add-ons or extra features),
- Usage-based increases (heavier product use driving higher charges).
- Downgrade MRR: Revenue lost from customers reducing their plans or usage.
- Churn MRR: Revenue lost from full customer cancellations.
Why is Net MRR Retention important?
Because it:
- Reflects the scalability of your business model,
- Demonstrates that the startup can not only acquire, but also retain and expand revenue from its customer base.
A high Net MRR Retention, especially above 100%, shows that:
- The business model is scalable,
- The company generates recurring revenue,
- Growth comes from within the current customer base — thanks to upselling or cross-selling — even without acquiring new clients (known as negative churn).
What does this tell investors?
At this stage, investors want to see:
- A “sticky” product — one that keeps users engaged long-term,
- A business with strong potential for sustainable, organic growth.
A high Net MRR Retention is also a strong signal of:
- Product-market fit,
- Effective Customer Success operations.
Companies with negative churn are typically valued higher, as they show a strong retention engine and revenue growth potential.
Practical example:
Imagine a startup with a great product. More and more users sign up for demos, showing strong interest.
The company has a few dozen recurring customers, but revenue per customer doesn’t grow — they aren’t upgrading plans, and some are even:
- Downgrading,
- Or canceling altogether.
If this trend repeats month over month, it raises a critical question:
Has the product truly achieved product-market fit?
What does a low Net MRR Retention indicate?
It may suggest:
- The product is promising and sparks initial interest,
- But over time, customers are unwilling to keep paying.
This is a clear sign to revisit the business strategy. The team may need to:
- Improve the product,
- Strengthen perceived value,
- Or rethink the business model altogether.
3. CAC Payback Period (Series B Stage)
At the Series B stage, one of the most critical metrics becomes the CAC Payback Period—the time it takes to recover the cost of acquiring a customer through the revenue they generate while using the product.
In simple terms, it’s about knowing how many months it takes for the cost of acquiring a customer to be recouped via their usage of your product.
Founders often confuse key terms like revenue per customer and profit margin per customer in analyses such as Lifetime Value (LTV) or Client Lifetime Value. It’s crucial to distinguish between the two:
- Lifetime Value should take into account the gross margin generated from serving the customer—not just revenue.
- Client Lifetime Value, on the other hand, only refers to revenue.
To properly calculate the CAC Payback Period, we should not rely solely on revenue, as this is insufficient. What truly matters is the gross margin, which reflects the real earnings after accounting for servicing costs like support, servers, or infrastructure.
The formula:
- Take the average gross margin.
- Multiply it by the Average Revenue Per User (ARPU).
- Divide the result by the Customer Acquisition Cost (CAC).
This gives you the number of months required to recover the cost of acquiring a customer.
Components needed to calculate CAC Payback Period:
- Customer Acquisition Cost (CAC) – the total monthly cost of marketing and sales,
- Number of new customers acquired in that period – CAC is calculated as the total cost divided by this number (can be averaged over a longer time frame),
- ARPU × Gross Margin – the actual profit from serving the customer per month.
Why is this metric so important?
Primarily, it tells us whether we are investing in sales and marketing efficiently.
- If the CAC Payback Period is high (e.g., 12 months), it means it takes a long time to recoup acquisition costs. This usually signals one of two issues:
- Low gross margins,
- High customer acquisition costs.
At the Series B stage, investors expect this payback period to decrease—i.e., the business should be recovering CAC more quickly over time. Therefore, it’s important not just to monitor the value itself but also its trend.
In general:
- A 12-month CAC payback is quite long.
- In SaaS models, an ideal payback period is around 3–4 months.
What influences CAC Payback Period?
Several factors impact the final payback length, including:
- Product type,
- How customers interact with it,
- Pricing model.
If the CAC payback remains long despite improvements, the issue likely lies in:
- Poor gross margins,
- Or inefficient sales and marketing spend.
Why is this the most important metric at this stage?
Because it gives insights into two critical business levers:
- Sales and marketing efficiency – high CAC may require a change in strategy, structure, or channel.
- Gross margin strength – if margins are too low, the unit economics become unsustainable.
What are good benchmarks?
In SaaS:
- Gross margins of 70% or more are typical for top-performing companies.
- Margins of 50% or lower are considered weak and can hinder profitability.
As for CAC itself, there’s no universal benchmark—it depends on:
- Sales channels (e.g., inbound vs. outbound),
- Sales model (e.g., self-serve vs. enterprise),
- Target customer segment,
- Niche,
- Product complexity.
Summary:
This metric boils down to two critical questions:
- Are we investing efficiently in customer acquisition?
- Is our business generating enough profit per customer?
At the Series B stage, CAC Payback Period becomes essential for shaping your business model and cost structure—and for proving to investors that your growth is economically sustainable.
4. Gross Margin (Series C Stage)
At the Series C stage, one of the most important metrics becomes Gross Margin—often referred to as the “queen of metrics.”
What is Gross Margin?
Gross Margin is the percentage of revenue that remains in the company after deducting the direct costs associated with producing the product or delivering the service. It’s a critical indicator not just at Series C, but across many phases of a company’s growth.
Tracking gross margin helps assess how profitable the company’s core operations are, before accounting for other expense categories such as:
- operating costs,
- marketing,
- sales,
- administration,
- research and development (R&D).
In essence, gross margin is the foundation on which overall profitability is built.
How to calculate Gross Margin?
- Subtract direct costs (so-called “COGS”) from total revenue generated in a given period.
- Divide the result by total revenue.
- Multiply by 100% to express it as a percentage.
What counts as direct costs?
Direct costs are expenses tightly linked to the production or delivery of a product or service. For example:
- In a manufacturing business: material and labor costs necessary to make the product.
- In SaaS or service-based companies:
- developer salaries (for platform maintenance),
- hosting costs (e.g., Azure, AWS),
- infrastructure costs,
- customer support,
- software licensing (if directly tied to the product),
- AI-related costs (if used directly in service delivery).
Why is Gross Margin so important?
1. It shows the profit potential of your core business.
By the Series C stage, a company typically has scale and generates significant revenue. Investors begin focusing on the company’s long-term ability to:
- generate profit,
- and produce positive cash flows.
A high gross margin gives the business room to cover other operational costs like marketing, sales, and R&D—while still being able to generate net profit.
2. It reflects operational efficiency and scalability.
If your direct costs grow linearly with revenue, achieving profitability at scale becomes difficult.
A high gross margin means your company can grow revenue without a proportionate increase in variable costs—indicating a scalable and efficient business model.
3. Companies with high gross margins are valued higher.
Such businesses are more resilient to market fluctuations and have a stronger profit-generating potential—factors that directly impact valuation and investor interest.
What if Gross Margin is low?
A gross margin of around 40%, as referenced before, may be a red flag. It can signal that:
- the product is expensive to produce or operate,
- which makes it harder to achieve long-term profitability.
If your company is growing but gross margin remains below 40%, you might face:
- challenges in scaling,
- difficulties during exit planning.
What are considered healthy gross margin levels?
In SaaS models:
- A minimum of 50% gross margin is expected,
- Top-performing companies reach 70% or higher.
Expectations are increasing, especially as:
- customer support and product delivery costs are dropping,
- largely due to automation and AI-based solutions.
Final Thoughts
While AI costs are currently relatively low, it’s still uncertain how this will evolve in the long term.
One thing is clear: a strong gross margin is among the most vital indicators of operational health at the Series C stage—for both management and investors.
5. Rule of 40 (Series D Stage)
At the final stage — Series D — one of the most important metrics to track is the Rule of 40.
This is typically the point where many founders begin considering a partial or full exit from the company. And because investors at this stage have clear expectations regarding financial performance, the Rule of 40 becomes one of their key tools for assessing business quality.
Where did the Rule of 40 come from?
Back in 2017–2018, this metric was rarely mentioned. It likely became “official” later, as investors increasingly demanded a clear, objective indicator of business performance and return on investment potential.
The Rule of 40 answers a simple question:
Is the company growing fast enough and is it profitable?
In essence, investors recognized that a good business should either:
- Grow rapidly,
- Be highly profitable,
- Or ideally, do both.
How to calculate the Rule of 40?
The formula is straightforward — it combines two percentage-based figures:
- Revenue growth rate (year-over-year or month-over-month),
- Profit margin, which can be either:
- Net profit margin, or
- EBITDA margin (often preferred due to its impact on company valuation).
The sum of these two percentages should be at least 40%.
Examples:
- A company growing 30% annually with a 10% net margin = ✅ 40% total — meets the Rule of 40.
- A company growing 50% annually with a –10% net margin = ⚠ 40% total — technically qualifies, but is riskier and only acceptable in special cases.
At the Series D stage, the expectations are higher:
- The business should already be profitable.
- Therefore, the combination of growth + profitability reaching at least 40% becomes a baseline standard.
Why is this metric critical at Series D?
By this stage, investors are looking for companies that:
- Grow sustainably,
- Demonstrate healthy and consistent revenue growth,
- And simultaneously generate positive profit margins.
This combination of scale, stability, and profitability is what defines a mature startup — and strongly influences both future funding and exit strategies (e.g., IPO or acquisition).
The macroeconomic context
Following the COVID-19 pandemic and the rise of AI-driven innovation, market expectations have shifted:
- Companies are now expected to scale faster,
- While achieving profitability sooner.
As a result, the Rule of 40 has become a simple yet powerful tool for answering the core question:
Is this company financially healthy, well-managed, and capable of delivering investor returns?
Summary
Companies that have no problem acquiring customers and raising further rounds of capital typically:
- Meet or exceed the Rule of 40,
- Or are clearly on the path to doing so.
This principle not only provides a structured way to evaluate late-stage startups — it also clarifies exactly what investors are looking for at the final stages of a startup’s growth journey.
Summary: What Metrics to Track and What Investors Expect at Each Stage
Financial metrics in a startup are not just tools for measuring operational efficiency — they are also reflections of investors’ specific expectations toward founders. Here’s how to understand and apply them across different growth stages:
1. Runway (Pre-seed / Seed)
Can we deliver the MVP before funding runs out?
At this early stage, speed of product delivery is critical. Runway tells you how many months of operations remain before cash runs dry. Investors expect that funds from the round will be enough to build an MVP and validate early market interest — before the company loses liquidity.
2. Net MRR Retention (Series A)
Are our customers growing with us?
At this point, the quality of growth matters most. Investors look for increasing revenue from existing customers — driven by upsells, cross-sells, and low churn. A Net MRR Retention above 100% signals that the company is not only acquiring users but also keeping them and expanding their value over time.
3. CAC Payback Period (Series B)
Can we acquire customers efficiently and recover costs quickly?
Once a healthy customer base and Product-Market Fit have been established, the next focus is optimization. CAC Payback Period shows how quickly the cost of acquiring a customer is recovered. Investors want to see short payback periods and a scalable, profitable acquisition model.
4. Gross Margin (Series C)
Is our core business profitable and scalable?
At this stage, investors want to see operational efficiency. A strong gross margin means the product or service generates profit even after direct costs are subtracted. It’s the foundation for scalable growth and a buffer against strategic missteps or rising operating costs.
5. Rule of 40 (Series D)
Is the company growing fast and profitably?
In the final growth stage, the company must prove it’s a mature, healthy business. The Rule of 40 — the sum of revenue growth rate and profit margin (net or EBITDA) — should be at least 40%. This is a key indicator for investors preparing for an exit, IPO, or share sale.
This “metric roadmap” is not just an internal management tool — it’s a clear blueprint of investor expectations at every stage of a startup’s journey.
Understanding and tracking these metrics is essential not only for successful fundraising, but also for building a healthy, predictable, and scalable business.
At incro, we help founders and CFOs prepare for exits by strengthening financial operations, streamlining reporting, and improving business performance. We act like your internal finance team – without the cost of full-time hires.
💬 Book a free consultation at https://incro.us/contact/
