Finance

ARPU measures the average revenue generated per user or account over a specific period — typically monthly. If your SaaS earns $100K/month from 500 users, your ARPU is $200/month. ARPU is the simplest lever for growth: increasing ARPU by 20% has the same revenue impact as increasing your customer count by 20%, but without the acquisition cost. Slack's ARPU grew from $12 to $18/month per paid user by adding premium features, driving 50% revenue growth without proportional customer growth.

ARPU = Total Revenue ÷ Number of Active Users

Burn rate is the speed at which your company spends cash reserves before generating positive cash flow. Gross burn is total monthly spending; net burn is spending minus revenue. A startup with $50K/month expenses and $20K/month revenue has a $30K net burn rate and needs $30K from savings every month to survive. VCs use burn rate to calculate runway and assess financial discipline — a startup burning $200K/month with $10K MRR will be scrutinized much harder than one burning $200K with $150K MRR.

Net Burn Rate = Monthly Expenses − Monthly Revenue

Gross margin is the percentage of revenue left after subtracting the direct costs of delivering your product (Cost of Goods Sold / COGS). For SaaS, COGS includes hosting, customer support, and payment processing — typically leaving 70-85% gross margins. For e-commerce, COGS includes product costs, shipping, and packaging — typically 30-50% margins. Gross margin determines how much money you have to invest in growth (sales, marketing, R&D). A SaaS company with 80% gross margins has $0.80 per revenue dollar for growth; a hardware company with 30% margins has only $0.30.

Gross Margin (%) = (Revenue − COGS) ÷ Revenue × 100

MRR is the predictable, recurring revenue your business earns every month from subscriptions. It's the heartbeat of any SaaS company. MRR is broken into 5 components: New MRR (from new customers), Expansion MRR (upgrades), Reactivation MRR (returning customers), Contraction MRR (downgrades), and Churned MRR (cancellations). Net New MRR = New + Expansion + Reactivation − Contraction − Churn. ARR = MRR × 12. VCs use MRR growth rate as the primary metric to evaluate SaaS companies — a 15%+ month-over-month growth rate signals a company worth investing in.

MRR = Number of Subscribers × Average Revenue Per Account

Revenue is the total income generated from selling your product or service before any expenses are deducted. It is the top line of your income statement and the first number investors look at. Revenue quality matters as much as revenue quantity: $1M in recurring subscription revenue is worth 8-15x as a valuation multiple, while $1M in one-time services revenue is worth only 1-3x. Slack grew to $12M ARR before raising its Series A because they focused on revenue quality — recurring, low-churn enterprise contracts — not vanity revenue spikes.

Total Revenue = Units Sold × Price Per Unit

Runway is the number of months your startup can continue operating before it runs out of cash, assuming no change in revenue or expenses. It is the countdown clock of your business. Runway = Cash in Bank ÷ Net Monthly Burn. If you have $600K and burn $50K/month net, you have 12 months of runway. VCs expect funded startups to have 18-24 months of runway; anything under 6 months is an emergency. 29% of startups fail because they run out of cash — not because the product failed, but because the clock ran out.

Runway (months) = Cash in Bank ÷ Net Monthly Burn

Cash flow is the actual money moving in and out of your business — not revenue, not profit, but real dollars in your bank account. Revenue is an accounting concept (you 'earned' $100K); cash flow is a reality concept (you 'received' $80K and 'spent' $95K, so you're $15K poorer). Companies die from running out of cash, not from unprofitability. 82% of small businesses fail due to cash flow problems, not lack of demand. The three types: Operating Cash Flow (from business activity), Investing Cash Flow (buying/selling assets), and Financing Cash Flow (debt, equity).

Operating Cash Flow = Cash Received − Cash Paid Out (in a given period)

The break-even point (BEP) is when total revenue equals total costs — the moment you stop losing money and start making it. For a SaaS company: BEP in customers = Fixed Costs ÷ (ARPU − Variable Cost per Customer). If your monthly fixed costs are $50K, ARPU is $100, and variable cost per customer is $20, you need 625 customers to break even ($50K ÷ $80). Below 625 customers, every month burns cash. Above 625, every customer contributes pure margin. Most SaaS companies take 2-4 years to reach BEP, and VCs typically expect a clear path to BEP within the fundraising runway.

Break-Even Point (units) = Fixed Costs ÷ (Revenue per Unit − Variable Cost per Unit)

ARR is the annualized value of your recurring subscription revenue. It normalizes your monthly recurring revenue (MRR) into an annual sum (MRR × 12). For enterprise SaaS companies with multi-year contracts, ARR is the standard metric. If a customer signs a 3-year, $150,000 contract, that is $50,000 in ARR. Investors value SaaS companies based on ARR multiples (e.g., 10x ARR) because it represents highly predictable, compounding future revenue.

ARR = Current MRR × 12 (or sum of all annualized active subscriptions)

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a measure of a company's overall financial performance and is often used as an alternative to net income. It strips out the cost of debt capital (interest), government charges (taxes), and non-cash accounting charges (depreciation and amortization). By removing these factors, EBITDA provides a clearer picture of a company's core operational profitability and cash-generating ability.

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

Valuation is the estimated financial worth of your company. In early-stage startups, valuation is primarily an negotiation based on market comps, team pedigree, and FOMO (Fear Of Missing Out) among investors. In later-stage and public companies, valuation is driven by mathematical multiples on revenue (ARR multiples) or profitability (EBITDA multiples), discounted cash flow (DCF) models, and growth rates. The two key terms for founders are Pre-Money Valuation (what the company is worth BEFORE raising new cash) and Post-Money Valuation (Pre-Money + the new cash raised).

Post-Money Valuation = Pre-Money Valuation + Investment Amount

Dilution occurs whenever a company issues new shares of stock, decreasing the ownership percentage of existing shareholders. If you own 1,000 shares out of 10,000 total shares, you own 10%. If the company issues 10,000 new shares to an investor, there are now 20,000 total shares. You still own 1,000 shares, but your ownership drops from 10% to 5%. Dilution is an inescapable reality of raising venture capital. The goal is not to avoid dilution entirely, but to ensure that the value of the company grows faster than your ownership percentage shrinks—meaning your smaller slice of a much larger pie is worth more absolute dollars.

New Ownership Percentage = Old Shares / (Total Old Shares + New Shares Issued)