Feb 13, 2024

The Founder’s Guide to Finance: 20+

Metrics to Track in 2024 STAY UP TO DATE
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As a founder, you could track virtually a million metrics to determine whether your
startup’s performance is positive, but as with most things in life, 80% of the results come
from just 20% of the inputs. To help, we've cut through the noise and outlined the twenty
or so metrics you’ll want to track to ensure you’re heading in the right direction. To be
honest, some of these are pretty basic while others are fairly complex, also, some only
apply to startups with specific business models—that’s why there’s no such thing as a SHARE THIS POST
“one size fits all” dashboard. We’ve also bundled them into categories, so you can address
them with the functional leaders in your organization that are responsible for them.
Ready? Let’s dive in!

An overview of revenue-related metrics

Revenue
Let’s start at the top, with revenue. This is by far the simplest metric and arguably the
most important for early-stage startups. While there are a virtually unlimited number of
revenue models, revenue itself is a standard metric across the board. It's the total sum of
money that your startup generates during a given period from the sale of products or
services. That said, not all revenue is created equal, recurring revenue is often treated as
the “gold standard” in venture, e.g. the more recurring revenue you have, the higher
valuation your startup will have (all things equal).
Monthly recurring revenue (MRR)
As mentioned above, this is the gold standard when it comes to revenue. It's the total
amount of revenue you consistently generate month over month from the same pool of
customers. This can take multiple forms, e.g. subscriptions, memberships, recurring
services, and even usage-based charges (such as AWS). MRR is important because it's a
predictable and standardized measure of growth over time.
Average revenue per account (ARPA)
As the name suggests, average revenue per account measures the amount of money your
startup makes per paid account. ARPA provides insights into your pricing strategy,
customer retention, and overall revenue growth and can be used to compare yourself
against peers. ARPA is particularly useful for businesses with multiple users per account
or where the pricing structure varies based on the features or usage levels associated
with each account. Calculate your ARPA by dividing your MRR by your total number of
accounts.
Average revenue per user (ARPU)
While ARPU is similar to ARPA, the average revenue per user looks at the average revenue
generated from each user (rather than account). It is commonly used in software
businesses that charge for individual seats or licenses. In this case, the ARPU is the cost
per seat, whereas the ARPA is the total value of the umbrella account that houses the
individual seats. Examples of businesses that look at both ARPU and ARPA, include
Salesforce, Slack, Outreach, Asana, and Notion. Calculate your ARPU by dividing your
total MRR by your total number of paid users.
Revenue growth rate (RGR)
Revenue growth rate describes the rate at which a startup’s revenue is growing over a
specific period compared to the prior period. It indicates the startup’s ability to increase
sales over time. A positive revenue growth rate indicates that the startup is increasing its
revenue over time, which is generally considered a positive sign of business health and
expansion. Conversely, a negative growth rate suggests a decline in revenue, which could
indicate challenges or problems within the startup’s operations or its market. To calculate
your revenue growth rate, take your total revenue in the current period minus your total
revenue in the previous period, divided by the total revenue in the previous period. Then
multiply that number by a hundred.​
Revenue concentration (RCR)
Revenue concentration refers to the distribution of a startup's total revenue across its
various customer segments, products, or geographic regions. It measures the extent to
which a startup relies on a small number of customers, products, or markets for a
significant portion of its revenue. The greater the concentration, the more vulnerable a
startup’s revenue streams are to regulatory changes, currency fluctuations, economic-
environmental changes, and geopolitical instability. To mitigate the risks associated,
startups typically diversify their customer base, expand their product offerings, and open
up new markets. To calculate the revenue concentration rate of a particular product, or
market, take the revenue you generate from that segment divided by your total revenue,
and multiply that by 100.

An overview of margin-related metrics

Gross margin
Gross margin measures the percentage of revenue retained after deducting the cost of
goods sold (COGS). It reflects the efficiency of production and pricing strategies and
indicates how well the company is controlling direct production costs. The higher your
gross margin, the better. Software companies typically have higher gross margins
because they have very low COGS. To calculate your gross margin, take your revenue
minus your cost of goods sold, and divide that by revenue. Then multiply the result by one
hundred.
Operating margin
Operating margin measures the percentage of revenue that represents operating income
after deducting operating expenses such as salaries, rent, utilities, and marketing
expenses. It reflects the startup’s ability to generate profits from its core business
activities. To calculate your operating margin, take your operating income divided by your
revenue, and multiply the result by one hundred. The higher your operating margin, the
better.
Contribution margin
Contribution margin measures the percentage of revenue available to cover fixed costs
and contribute to profit after deducting variable costs. It helps assess the profitability of
individual products, services, or business segments. To calculate your contribution
margin, subtract your variable costs from your revenue, divide by your revenue, and then
multiply by one hundred. The higher your contribution margin, the better.
EBITDA margin
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margin
measures the percentage of revenue that represents EBITDA, which is a measure of
operating profitability before non-operating expenses. It provides insight into the
startup’s core operating performance. To calculate your EBITA margin, divide your EBITA
by your revenue and multiply by one hundred. The higher your EBITA margin, the better.
Net profit margin
Net profit margin measures the percentage of revenue that represents net income after
deducting all expenses, including COGS, operating expenses, interest, taxes, and other
non-operating expenses. It reflects the overall profitability of the business. To calculate
your net profit margin, take your net income divided by your revenue, then multiply the
result by one hundred. Again, the higher your net profit margin, the better. Note: most
early-stage startups do not generate net income, so this metric may not be relevant.

An overview of acquisition and retention-related metrics

Customer acquisition cost (CAC) and CAC payback
Customer acquisition cost measures the effectiveness and efficiency of a startup’s
marketing and sales efforts in acquiring new customers. To calculate your CAC, take your
total sales and marketing expenditures (including headcount/salaries) in a period divided
by the number of new customers you acquired in the same period. Generally speaking,
the lower your CAC, the better. That said, typically startups have different CAC targets
based on the size of the opportunity: the larger the opportunity, the higher the target
CAC. CAC payback refers to the amount of time (usually in months) it takes to recoup the
costs of acquiring a new customer.
Customer lifetime value (CLV)
Customer Lifetime Value (CLV or LTV) is a metric that represents the total value a
customer brings to a startup over the entire duration of their relationship with that
startup. In other words, it measures the amount of revenue a company can expect to earn
from a single customer throughout their lifetime as a customer. Calculating LTV is a bit
more complicated, as it takes into account factors such as repeat purchases,
subscription renewals, cross-selling, and upselling opportunities, as well as any
associated costs such as customer support and retention expenses. The higher the LTV,
the more you can spend on acquiring the customer and the more favorable your startup
looks to investors.
LTV:CAC Ratio
LTV:CAC Ratio, also known as the customer lifetime value to customer acquisition cost
ratio, measures the efficiency and effectiveness of a startup’s customer acquisition
efforts relative to the lifetime value of those acquired customers. A higher ratio indicates
that the lifetime value of customers exceeds the cost of acquiring them, while a lower
ratio suggests that the cost of acquiring customers is higher than the value those
customers generate over their lifetimes. You should aim for an LTV:CAC of 3:1 or higher,
which indicates strong profitability from your customer acquisition efforts. Note: most
early-stage startups will NOT have an accurate view of their LTV or CAC, because they
have not reached the necessary scale.
Churn rate
Churn rate measures the percentage of customers who stop using a company's product or
service over a specified period, e.g. those who cancel their subscriptions, cease
purchasing products, or discontinue using services. To calculate your churn rate, take the
number of customers you lost during a period divided by the number of customers you
had at the beginning of the period, and multiply that number by one hundred. High churn
rates can indicate dissatisfaction among customers, poor product-market fit, or
ineffective customer retention strategies, thus you want to aim for a low churn rate.
Net revenue retention (NRR)
Net revenue retention measures the change in revenue from existing customers over a
specific period, accounting for factors such as upgrades, downgrades, cancellations, and
churn. It provides insight into the ability of a startup to retain and expand revenue from
its existing customer base. To calculate your NRR, divide your revenue from existing
customers at the end of the period by your revenue from the same customers at the start
of the period, and multiply that result by one hundred. An NRR of over 100% indicates
that the startup is generating more revenue from its existing customers at the end of the
period compared to the beginning, after accounting for churn. This suggests that the
startup’s expansion revenue from existing customers outweighs any revenue lost from
churned customers. The higher your net revenue retention, the better!

Other potentially relevant metrics to track as a startup founder in 2024

SaaS quick ratio
SaaS Quick Ratio, not to be confused with “quick ratio”, looks at the amount of monthly
recurring revenue (MRR) added through new acquisitions and expansion efforts
compared to the amount of MRR lost to account contraction and churn. Measuring the
SaaS quick ratio is important because losing lots of customers while simultaneously
growing, is generally looked down on by investors—you can think of it like filling a leaky
bucket, the more holes in the bucket, the harder it is to keep up or even fill it. To calculate
your SaaS quick ratio, add the MRR added during the period through the onboarding of
new customers with the MRR added during the period through the expansion of your
current accounts. Divide that number by the sum of your churned MRR and non-churned,
but contracted MRR (e.g. customer is on the $299/mo plan at the start of the period and
downgrades to the $199/mo plan). A SaaS quick ratio of 4 or higher is considered good for
early-stage companies.
SaaS magic number
The SaaS magic number looks at the efficiency of a startup’s sales and marketing efforts
in driving growth, more specifically its revenue growth against its customer acquisition
costs. To calculate your magic number, divide your net change in revenue over the period
by your net change in sales and marketing expenses in the same period. A Magic Number
above 1 indicates that the company is becoming more efficient with its sales and
marketing efforts, whereas a number below 1 means it's becoming less efficient. The
higher the Magic Number the more efficiently a startup can grow without needing to
increase its sales and marketing expenses proportionally.
The rule of 40
The Rule of 40 assesses the overall health and growth potential of a startup by evaluating
the balance between its revenue growth rate and profitability (measured by its EBITDA
margin or gross margin). For example, if a company has a revenue growth rate of 30% and
a gross margin of 20%, its Rule of 40 score would be 50%. Investors consider a SaaS
company “healthy” if it has a combined growth rate and profitability rate of 40% or
higher because it shows that the startup can simultaneously capture market share and
long-term value.
Cents on the dollar
Cents on the dollar isn't a widely recognized metric, it looks at the efficiency of marketing
and sales separately and breaks down how efficient each organization is, based on the
dollars spent and related revenue generated, e.g. for every $XXX in sales or marketing
spend, you generate $YYY and $ZZZ of new ARR. Founders can use these metrics to
determine whether to invest more in sales, marketing, or neither and just maintain the
status quo. Consider breaking down the new ARR into two buckets: new ARR from
existing customers (e.g. cross-sells and upsells) and from newly acquired customers in
the same period rather than aggregating the two.
Committed monthly recurring revenue (CMRR)
Committed monthly recurring revenue (CMRR) is a forward-looking SaaS metric that
combines monthly recurring revenue (MRR) with future booked revenue and period-
specific churn data to provide a better sense of recurring revenues. While calculating your
CMMR, you’ll want to look at the value of the executed (signed) software contracts, which
have not been recognized as revenue yet (because no product has been delivered and no
service has been performed). For example, if you sell a contract on September 26th, with
a start date of October 1st, your MRR shouldn’t change until October 1st, but your CMRR
changes on the execution date, September 26th.
Burn Rate
All founders should be familiar with “burn rate”, it's the difference between the gross
revenue collected (inflows) and operating expenses (outflows) in a given period. Most
early-stage startups burn money to grow their operations, thus burn (to a certain extent)
is generally accepted. However, burn without growth, or burn with minimal growth is a
recipe for disaster and should be avoided at all costs. For more information, check out
this guide on burn rate.
Runway
Similarly, “runway” is a concept that all founders should be familiar with and track
religiously. It refers to the length of time a company can continue to operate before it runs
out of funds, typically measured in months. Generally speaking, startups should aim to
maintain a minimum runway of 18 months, which can be accomplished by: (i) increasing
their revenues (or selling them through receivables factoring); (ii) cutting their expenses;
and (iii) raising money from investors (equity financing). This is the preferred order of
operations to increase runway, though some pre-revenue companies skip straight to step
three.

Wrap up - the 20+ Metrics to Track in 2024

If you’ve made it this far, congrats, you’re now a finance rockstar! As you probably
concluded, there are a ton of things that you can track, but as they say: “just because you
can, doesn’t mean you should”. That said, all early-stage startups should track their
revenue growth rate, their churn, their burn, and their runway, the four metrics that make
up the foundation of most dashboards. Founders, you should know those metrics by heart
and track them at least weekly (if not daily). As you progress in your journey, consider
adding a few metrics at a time, especially those unique to your business model,
industry/segment, and stage. Having access to the data is important, more important is
making decisions based on it, do not let analysis paralysis set in. Instead, take swift
action, and if things don’t go as planned, make adjustments on the fly—you’ll thank
yourself later.
If you have questions or want to discuss any of these metrics in detail, get in touch with
us at insights@arc.tech!

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Feb 13, 2024 Jan 31, 2024 Jan 31, 2024

The Founder’s Guide to Finance: “Bad
Boy” Guarantees
“Bad Boy Guarantee”, “Bad Boy Guaranty” and “Bad
Boy Guarantor”… If you've tried raising debt recently,
you likely came across this term and had no idea
what it was. To be honest, when we first saw a term
sheet with this clause in it, we too were a bit taken
aback. But no need to worry, as it's pretty
straightforward and doesn’t apply in most cases. We
outline what it is, in what scenarios it applies, and
what happens if it's triggered in this guide!
Arc Team
Go-To-Market
The Founders’ Guide to Incorporating
in Delaware in 2024
Delaware has long been favored for the incorporation
of startups over the past few decades. It offers a
business-friendly legal system, tax benefits, and
established corporate precedence. However, it also
comes with an elevated risk of double taxation, and
potential non-compliance with local regulations. In
this guide, we explore the benefits and drawbacks of
incorporating in Delaware, how the incorporation
works, what it costs, and more.
Arc Team
Go-To-Market
The Founder’s Guide to Finance: A
Deep Dive on Gross Margin
Gross margin is a cornerstone metric in finance,
providing crucial insights into a startup’s operational
efficiency and profitability. Essentially, Gross Margin
represents the percentage of revenue that exceeds
the cost of goods sold (COGS). In this guide, we
explore what it is, how its used, what a “good” gross
margin is, and more.
Arc Team
Go-To-Market