Startup Finance Fundamentals

Startup finance builds on universal corporate finance concepts but faces unique challenges. Early-stage companies operate with limited capital, uncertain revenue timing, and constant fundraising pressure. This primer assumes knowledge of NPV, IRR, budgeting cycles, and working capital from Corporate Finance Primer and focuses on what's different for startups: burn rate management extends runway until next fundraising, unit economics validate business model before scale, and fundraising timing connects financial metrics to investor readiness. Mature companies don't worry about runway—they worry about optimizing returns. Startups don't have that luxury.

Burn Rate and Runway

Burn rate measures monthly net cash outflow—how fast a startup consumes capital. Gross burn equals total monthly expenses. Net burn equals gross burn minus any revenue (for pre-revenue companies, net burn equals gross burn). Burn rate calculation requires careful categorization: fixed costs (salaries, rent) vs variable costs (marketing, commissions), one-time costs (legal fees, equipment) vs recurring costs, and cash expenses vs non-cash expenses (depreciation, stock compensation). Accurate burn rate tracking enables runway calculation and fundraising timing decisions.

Runway equals remaining cash divided by monthly net burn rate—months until cash runs out assuming no additional funding. Formula: Cash Balance / Monthly Net Burn. Runway isn't fixed—burn rate changes as companies hire, scale operations, or cut costs. Runway planning requires projecting burn rate changes over time, not just current burn rate. Runway below 6 months creates urgent fundraising pressure. Runway above 18 months suggests inefficient capital use or premature fundraising.

Burn rate management extends runway through cost optimization, revenue acceleration, or funding. Cost optimization strategies: reduce headcount, renegotiate vendor contracts, defer non-critical expenses, move to cheaper office space. Revenue acceleration: shorten sales cycles, improve conversion rates, launch new revenue streams. Funding: raise additional capital before runway expires. Most startups use combination—optimize costs while fundraising to extend runway.

Gross vs net burn distinction matters when revenue exists but doesn't cover expenses. Gross burn shows total cost structure. Net burn shows capital consumption after revenue. Companies with $500K gross burn and $200K revenue have $300K net burn—that's the runway calculation basis, not gross burn. Growing revenue reduces net burn without changing cost structure, extending runway automatically.

Burn rate trends reveal operational health beyond absolute numbers. Increasing burn rate with stable revenue indicates operational inefficiency or unplanned spending. Decreasing burn rate with growing revenue shows improving unit economics and operating leverage. Flat burn rate with growing revenue suggests sustainable scaling. Trend analysis helps forecast future burn rates for runway planning.

Unit Economics

Unit economics measure profitability per customer or transaction. Key metrics: Customer Acquisition Cost (CAC), Lifetime Value (LTV), and LTV:CAC ratio. Unit economics validate business model before scale—profitable unit economics enable profitable growth; unprofitable unit economics mean scaling loses money faster. Investors require positive unit economics before funding growth investments.

Customer Acquisition Cost (CAC) equals total acquisition spending divided by customers acquired over a period. CAC includes: marketing costs, sales commissions, onboarding costs, allocated overhead. CAC should exclude one-time branding or product development that benefits all customers, not just new ones. CAC trends reveal efficiency—rising CAC suggests channel saturation or increased competition; declining CAC suggests scaling efficiency.

Lifetime Value (LTV) equals average revenue per customer over customer lifetime minus variable costs to serve. LTV calculation requires: average revenue per customer, gross margin (revenue minus variable costs), retention/churn rate, and discount rate for time value. LTV represents profit generated per customer, not just revenue—revenue without profit doesn't create value. LTV should reflect realistic retention assumptions, not optimistic projections.

LTV:CAC ratio measures return on acquisition investment. Ratios above 3:1 typically indicate healthy unit economics—each dollar of acquisition spending generates $3+ in lifetime profit. Ratios below 1:1 mean losing money on each customer. Ratios 1:1 to 3:1 require careful analysis—profitable but may need optimization before scaling. Higher ratios enable faster payback and lower risk.

Payback period measures months until customer revenue recovers acquisition cost. Formula: CAC / (Average Monthly Revenue × Gross Margin). Shorter payback reduces risk—companies recover acquisition costs faster, reducing capital requirements and increasing flexibility. Typical targets: under 12 months for SaaS, under 6 months for e-commerce. Payback longer than customer lifetime means losing money.

Cohort analysis tracks unit economics by customer cohort (month/quarter acquired) to reveal trends masked by aggregate metrics. Cohort analysis shows: improving or deteriorating unit economics over time, impact of product/market changes, and retention patterns by acquisition period. Early cohorts may have different economics than recent cohorts—understanding why informs strategy.

Unit economics by segment reveals hidden profitability differences. Different customer segments (SMB vs enterprise, geographic regions, acquisition channels) may have vastly different CAC, LTV, and payback. Segment analysis identifies profitable segments to scale and unprofitable segments to fix or exit. Aggregate unit economics can hide profitable segments and unprofitable segments.

Fundraising Timing and Milestones

Fundraising timing connects financial metrics to investor readiness. Most startups raise when runway reaches 6-9 months remaining—enough time to complete fundraising (typically 3-6 months) before running out of cash. Raising too early (18+ months runway) suggests inefficient capital use or premature scaling. Raising too late (<6 months runway) creates desperation, weakens negotiating position, and risks running out of cash before closing.

Milestones demonstrate progress that justifies valuation increases. Common milestones: product launch, first paying customers, revenue thresholds ($100K ARR, $1M ARR), customer count milestones, key hires, partnerships, or market validation. Milestones vary by stage: pre-seed focuses on product validation, seed focuses on initial traction, Series A focuses on product-market fit and growth, Series B+ focuses on scaling and efficiency.

Valuation progression connects milestones to funding amounts. Each funding round should increase valuation significantly (typically 2-4x) based on milestone achievement. Raising at same valuation suggests lack of progress. Raising at lower valuation (down round) signals problems and creates dilution issues. Milestone achievement before fundraising enables valuation increases that offset dilution from new funding.

Runway milestones trigger fundraising process. At 12-18 months runway: begin investor conversations, prepare materials, refine pitch. At 9-12 months runway: start active fundraising, schedule meetings, send materials. At 6-9 months runway: accelerate fundraising, consider bridge financing if needed. Below 6 months runway: urgent fundraising with bridge financing or risk of running out of cash.

Financial readiness for fundraising requires: clean financials (accounting accurate, books closed), unit economics documented (CAC, LTV, payback), forecast model showing path to profitability, and clear use of funds (how new capital will be deployed). Investors will scrutinize financials—messy books, missing unit economics, or unclear capital deployment hurt fundraising prospects.

Cash Flow Planning for Pre-Revenue Companies

Pre-revenue cash flow planning forecasts expenses and funding needs without revenue assumptions. Models project: hiring plans (headcount × salary × time), operating expenses (office, software, marketing), capital expenditures (equipment, infrastructure), and one-time costs (legal, incorporation, product development). Models should include buffers for unexpected expenses and delayed fundraising—plans that assume perfect execution often prove optimistic.

Hiring projections drive largest expense component. Models should include: salary costs, equity compensation (non-cash but dilutive), benefits and payroll taxes (typically 20-30% of salary), and recruiting costs. Hiring plans should connect to milestones—hire when milestones require additional capacity, not just when capital is available. Premature hiring burns cash without creating value.

Operating expense forecasting projects costs beyond salaries: office rent and utilities, software subscriptions (SaaS tools add up), marketing and advertising, professional services (legal, accounting, consulting), and insurance. Operating expenses grow with headcount but also independently—software costs scale with usage, marketing costs scale with growth targets. Forecasting requires understanding expense drivers, not just assuming flat rates.

Capital expenditure planning identifies large one-time purchases (equipment, furniture, infrastructure) that require advance planning. Capex differs from operating expenses—it creates assets that last multiple years, but still consumes cash. Startups should minimize capex early (lease vs buy, cloud vs on-premise) to preserve cash for operating expenses and growth investments.

Funding gap analysis compares projected cash needs to available capital to identify when additional funding is required. Gaps should be identified 6-12 months before they occur to allow time for fundraising. Gap analysis should include multiple scenarios: base case (most likely), upside case (faster progress), and downside case (delays, setbacks). Planning for downside prevents crises.

Scenario planning models different futures to understand funding needs under various conditions. Base case assumes plan execution. Upside case assumes faster progress (shorter timelines, better results). Downside case assumes setbacks (delayed milestones, higher costs, slower progress). Understanding funding needs across scenarios prevents overfunding (dilutive) and underfunding (risky).

Startup Investor Reporting

Investor reporting cadence typically monthly for early-stage companies (investors want visibility), transitioning to quarterly as companies mature. Monthly reports provide transparency and early warning signals. Reporting should be consistent, timely, and honest—missed reporting deadlines signal problems, hiding bad news damages trust.

Key metrics for startup investor reports: burn rate and runway (capital consumption and timeline), revenue and growth (traction indicators), unit economics (CAC, LTV, payback), key milestones achieved (progress demonstration), and use of funds (capital deployment). Metrics should be consistent across reports to enable trend analysis. Changing metrics suggests problems or confusion.

Variance analysis for startups explains differences between plan and actual results. Startup variance analysis differs from mature companies: startups may have no plan (pre-planning stage), plans change frequently (learning and pivots), and "variance" may be from plan changes not execution. Effective startup variance analysis: explains what happened, why it differed from expectations, implications for runway and milestones, and updated forward-looking view.

Narrative construction for startups emphasizes progress and learning, not just numbers. Effective startup narratives: highlight milestones achieved, explain pivots and learnings, acknowledge challenges honestly, present revised plans with rationale, and maintain investor confidence. Narratives should balance transparency (investors need truth) with optimism (investors need confidence).

Use of funds reporting shows how capital from previous round was deployed. Investors funded specific plans—reporting shows execution against those plans. Use of funds should connect to milestones: "hired 3 engineers to build product" (milestone: product launch), "invested in marketing to acquire customers" (milestone: revenue targets). Misuse of funds (spending on unplanned items without explanation) damages investor trust.

Forward-looking outlook updates forecasts based on actual performance and learnings. Startup forecasts change frequently as companies learn—that's expected, not failure. Updated forecasts should: reflect current reality (not wishful thinking), show path to next milestones, identify risks and mitigation, and justify additional funding needs when applicable.

Key Numbers

Burn rate by stage: Pre-seed ($50K-150K/month), Seed ($150K-500K/month), Series A ($500K-2M/month), Series B+ ($2M-10M+/month). Burn rates increase with funding but should increase efficiency (lower burn per dollar of revenue) over time.

Runway targets: Maintain 12-18 months runway normally, begin fundraising at 12 months, accelerate at 9 months, urgent below 6 months. Runway above 18 months suggests inefficient capital use or premature scaling.

LTV:CAC ratios: Target 3:1 minimum for healthy unit economics. Ratios 1:1 to 3:1 require optimization before scaling. Ratios below 1:1 indicate fundamental business model problems.

Payback periods: Target under 12 months for SaaS, under 6 months for e-commerce. Payback longer than customer lifetime means losing money. Shorter payback reduces capital requirements.

Fundraising timelines: Pre-seed/seed (1-3 months), Series A (3-6 months), Series B+ (6-12 months). Timelines increase with round size and investor sophistication. Bridge financing may be needed if timelines extend.

CAC benchmarks: Vary by industry and model. SaaS: $200-500 for SMB, $5K-20K for enterprise. E-commerce: 15-30% of order value. Marketplaces: $50-200 per user. Benchmarks help validate whether acquisition costs are reasonable.

Common Misconceptions

"Revenue solves everything"—Cash management remains critical even with revenue if revenue doesn't cover expenses (negative unit economics). Growing revenue without fixing unit economics accelerates losses. Revenue growth must be profitable to create value.

"Unit economics don't matter yet"—Investors require positive unit economics before funding growth. Scaling unprofitable unit economics loses money faster, not slower. Unit economics validate business model before scale—fix them early, not later.

"Burn rate is just expenses"—Burn rate equals expenses minus revenue. Companies with $1M expenses and $800K revenue have $200K net burn (not $1M gross burn). Revenue reduces net burn and extends runway automatically.

"Runway is fixed"—Runway changes as burn rate changes (hiring, cost cuts, revenue growth). Runway calculations should project burn rate changes over time, not just divide current cash by current burn. Static runway calculations miss reality.

"Fundraising solves problems"—Fundraising provides capital but doesn't fix fundamental business model issues (negative unit economics, poor product-market fit, execution problems). Fix problems, then fundraise to scale solutions. Fundraising without fixing problems wastes capital and time.

"Milestones don't matter if we have cash"—Investors invest in progress, not just plans. Missing milestones suggests execution problems or unrealistic planning. Achieve milestones before fundraising to enable valuation increases that offset dilution.

Related Knowledge

Universal corporate finance concepts (NPV, IRR, budgeting cycles, working capital, capital allocation) apply to startups but in different context. For foundational finance concepts, see Corporate Finance Primer.

Fundraising mechanics (term sheets, valuations, investor dynamics, cap tables) complement startup finance but are distinct domains. This primer focuses on financial planning and readiness for fundraising; fundraising primer (when it exists) focuses on deal structure, term sheet negotiation, and investor relations.

Financial statement basics (income statement, balance sheet, cash flow statement) are essential for tracking burn rate, understanding unit economics, and preparing investor reports. For financial statement fundamentals, see Accounting Primer.