Startup finance, defined

Runway is the most consequential number in an early company, because it converts every other decision into a deadline. A hire, a tool, a marketing budget: each one shortens it, and the question is always whether the thing bought moves the company further than the months it cost.

It is computed from net burn, not gross spending. A company spending €52,000 and collecting €28,000 burns €24,000, and its runway reflects the €24,000. Companies that quote runway off gross spend understate it, sometimes badly.

The figure is only as current as its inputs. A runway calculated from a spreadsheet last updated six weeks ago is not a runway, it is a memory.

Net burn is the honest measure of how fast the bank balance falls. If it is zero or negative the company is cash-flow positive and runway is not the binding constraint.

It moves with revenue, which makes it flattering in a strong month and alarming in a weak one. Watching it alongside gross burn separates a spending problem from a revenue problem.

Gross burn is the cost of running the company as it currently exists. Because it ignores revenue, it answers a different question from net burn: not how fast are we losing money, but how much does this machine cost to operate.

It is the number to look at when planning cuts, since it is the side of the equation you control.

Negative cash flow is a state, not a verdict. A funded startup spending ahead of revenue is negative by design, and so is a seasonal business in its quiet months. What makes it fine or fatal is whether it is chosen and financed: chosen means the shortfall buys something specific, financed means the reserves cover the months until it stops.

The moment cash flow turns negative, runway becomes the number that matters, because cash divided by the monthly shortfall is the count of months the situation can continue. A company that knows that number is managing; one that does not is drifting.

The dangerous version is structural: costs above revenue with no mechanism that closes the gap, where each month simply repeats the last one with less cash. The test is to name the specific thing that ends it, a launch, a price change, a cost cut, and the date by which it must. If neither exists, the negative cash flow is not a phase, it is the trajectory.

The method comes from turnaround and restructuring practice, where it is the standard document lenders and advisors ask for when cash is tight, and it earned that role for a reason: 13 weeks is one quarter, far enough out to act on and near enough to predict honestly.

The weekly grain is the point. A monthly forecast can show a positive month that hides a fatal week inside it, because payroll leaves on the 25th and the big invoice arrives on the 30th. Weekly resolution surfaces exactly those timing collisions, which are how businesses that are profitable on paper still bounce payments.

It works as a discipline, not a document: each week the oldest week drops off, a new week is added, and last week's forecast is compared with what actually happened. The forecast-versus-actual gap is where you learn whether your assumptions about customer payment behavior are true.

The phrase is only useful when it is arithmetic rather than intent. A real path names the revenue level required, the cost base assumed, and the date at which the two meet.

It is closely related to being default alive, which is the same question asked as a yes or no.

Customer churn counts logos, revenue churn counts money, and they diverge when accounts differ in size. Losing small accounts puts revenue churn below customer churn; losing large ones does the reverse. Watching both tells you which customers you are losing.

Churn compounds, which is why small differences matter so much. Five percent monthly churn loses roughly 46 percent of customers in a year.

Expansion is the cheapest revenue a company can earn, because the customer is already acquired, onboarded and paying. It carries no acquisition cost.

It is what pushes net revenue retention above 100 percent, and its absence is why some products with low churn still struggle to grow.

NRR above 100 percent is the strongest signal in subscription economics: it means the company would grow even if it never won another customer.

It is also the metric investors use to separate genuine product-market fit from acquisition spending. Heavy new-customer growth masks poor retention for a while, and NRR is where the mask slips.

Concentration turns recurring revenue into conditional revenue. The contract may be signed, but the company's survival now depends on a decision made inside someone else's business.

It is worth computing before it becomes urgent, because the remedies, spreading revenue or lengthening contracts, take quarters rather than weeks.

Gross margin decides how much of each euro of revenue is available for everything else: sales, engineering, and eventually profit.

It also belongs inside lifetime value. Computing LTV on revenue rather than gross profit overstates what a customer is worth, often by a third or more.

It is not the same as contribution margin: gross margin looks at the product as a whole and subtracts only the cost of delivering it, while contribution margin follows a single sale and subtracts everything that varies with it, commissions and payment fees included.

In support- and service-heavy businesses, most of the cost of revenue is people, so the margin depends on fully loaded employee cost (salary plus employer taxes, benefits and equipment) rather than the payslip figure. Costing delivery headcount at base salary alone overstates gross margin by several points.

Once fixed costs are covered, contribution margin becomes profit. Before that point, it is the only thing working against them.

Raising the price moves it more than cutting variable cost by the same amount, because price sits on the gross side of the subtraction.

It is often confused with gross margin, and the difference is scope: gross margin subtracts only the direct cost of delivering the product, while contribution margin subtracts every cost that varies with the sale, such as payment fees, commissions and shipping. That makes contribution margin the stricter test of whether one more sale actually helps.

If variable cost per unit is at or above price, there is no break-even point at any volume: each sale loses money before fixed costs are considered, and selling more makes the loss larger.

Break-even moves every time a fixed cost is added, which is why a figure worked out once in a spreadsheet stops being true within a quarter.

It is the more useful of the two figures month to month, because it states the size of the cushion rather than the location of the cliff.

It shrinks with every fixed cost added, which makes it a quiet early warning that break-even analysis alone does not give.

The metric answers one question: when this company puts a euro into sales and marketing, how much recurring revenue comes back out? A magic number of 1 means a quarter's spend recreates itself as annualized revenue within a year, which is the intuition behind the 0.75 threshold: at that level the spend pays back in about 16 months, close enough to justify continuing.

The one-quarter offset is deliberate. Money spent on sales and marketing takes at least a sales cycle to show up as revenue, so this quarter's growth is credited to last quarter's spend. Companies with long enterprise cycles sometimes need a two-quarter lag for the number to make sense.

One honest caveat: the formula runs on revenue, not gross profit. A company at 60 percent gross margin recovers its spend noticeably slower than its magic number implies, which is why the ratio reads best next to CAC payback rather than instead of it.

The ratio exists because headline growth hides its own cost. Two companies adding €10,000 of net new MRR look identical until you see that one added €12,000 and lost €2,000 while the other added €40,000 and lost €30,000. Same net result, and the second company is running much harder to stand nearly still.

It reads best alongside net revenue retention rather than instead of it: NRR watches only the existing customer base, while the quick ratio includes new business, so together they separate an acquisition problem from a retention problem.

The purpose is to test the model at its smallest repeatable size. If one customer loses money, more customers lose more money, and growth makes the problem larger rather than smaller.

For subscription businesses the core pair is lifetime value against acquisition cost, read alongside payback period.

At the single-customer scale this is arithmetic a founder can own. Tracking it continuously, cohort by cohort and plan against actuals, is the job FP&A tooling exists for, and it becomes worth buying only once someone owns finance as a job.

Churn does the heavy lifting. At 3 percent monthly churn the average customer stays about 33 months; at 6 percent it is 17. Halving churn does more for lifetime value than almost any price rise.

Use gross margin rather than revenue. Counting the full subscription price ignores hosting, support and payment fees, and produces a number that justifies spending the business cannot afford.

The denominator has to be new customers only. Including renewals or expansions flatters the number, sometimes dramatically.

CAC on its own says little. It is meaningful against lifetime value, which says whether a customer is worth acquiring, and against payback period, which says whether you can afford to wait.

The ratio judges whether acquisition is economically sound, but it says nothing about timing. A 4:1 ratio built on a five-year payback is not fundable by a company with ten months of runway.

That is why CAC payback usually matters more to an early company: it is measured in cash and time you actually have.

Payback is the cash-flow view of acquisition. Until a customer has paid back their acquisition cost, growth consumes runway rather than creating it.

For a company without deep reserves this constrains growth more than the LTV:CAC ratio does, because it is denominated in months rather than in a multiple.