Unit Economics for Startups: CAC, LTV, Payback, Retention + Burn & Runway
If you're interviewing for VC, this is the 'numbers + judgment' sweet spot: can you translate a startup's financials into growth efficiency and risk fast?
Note
Module Reading: This article accompanies the Startup Financials & Unit Economics module in our Venture Capital interview prep track.
Unit economics is the "numbers + judgment" sweet spot in VC interviews. It's where you prove you can translate raw startup financials into growth efficiency and risk assessment—fast.
What You Should Be Able to Do in 5 Minutes
- Rebuild a simple startup P&L (revenue → gross profit → opex → burn)
- Compute runway, CAC payback, LTV:CAC, retention, and burn multiple
- Explain what looks healthy by stage (and what would make you pass)
1. The VC Lens: Why Unit Economics Beats "Revenue"
VCs don't just ask "is it growing?" They ask: is growth durable and scalable without infinite cash?
Two shortcuts VCs use to answer this:
- Retention tells you product truth. If retention is weak, scaling spend just pours water into a leaky bucket.
- Payback + burn efficiency tell you GTM truth. If you can't earn back CAC in a reasonable time, growth may be financial engineering, not a business.
The Trap of Revenue Growth
A startup showing 100% YoY revenue growth sounds great—until you discover they're burning $2 to generate $1 of new ARR with 50% annual churn. That's not a business; it's a burn machine.
2. Startup P&L: What Matters (and What's Noise)
A VC-style startup P&L is less about accounting purity and more about unit contribution and cash.
The "Interview P&L" You Should Rebuild from Memory
Startup P&L Structure
| Term | Definition | Note |
|---|---|---|
| Revenue | Often ARR/MRR for SaaS businesses | Recurring vs one-time matters |
| COGS | Direct costs to deliver the product | Hosting, support, success teams |
| Gross Profit | Revenue - COGS | This funds everything else |
| Gross Margin % | Gross Profit / Revenue | 80%+ for SaaS, lower for services |
| Opex | S&M, R&D, G&A | Where the burn happens |
| Operating Loss | Gross Profit - Opex | Proxy for burn (not equal) |
| Cash Burn | Actual cash reduction | The real runway driver |
Key Insight: Gross Margin is the Hinge
Many "good-looking" startups are just low gross margin + high opex businesses disguised by topline growth. Gross margin is the hinge because it funds everything else—marketing, R&D, and eventually profit.
Quick Check Questions (VC Brain)
- Structural gross margin: Is it strong for this model? (SaaS vs services vs marketplace vs AI-inference-heavy)
- S&M efficiency: Is it scaling efficiently or linearly with revenue?
- R&D purpose: Building defensibility or just maintaining the product?
3. Burn + Runway: The Cash Math You Can't Mess Up
Definitions (Simple + Interview-Safe)
Net Burn = Monthly Cash Outflow - Monthly Cash InflowWhat actually reduces your bank account each month
Outflow=Salaries, hosting, marketing, rent, etc.Inflow=Revenue collected (not booked ARR)Runway (months) = Cash on Hand ÷ Net Burn per MonthHow many months until you run out of cash
Cash on Hand=Current bank balanceNet Burn=Monthly cash consumption (from above)30-Second Runway Calculation
- Cash = €6.0M
- Net burn = €0.4M/month
- Runway = 6.0 ÷ 0.4 = 15 months
Most investors want 12-24+ months depending on stage and market conditions.
Interview Tip
Always state your assumptions: "Net burn excludes one-time financing proceeds or large CapEx spikes." This shows you understand the nuances.
4. CAC: What It Is and What "Fully Loaded" Means
CAC (Customer Acquisition Cost) is the cost to acquire a new customer. Simple in theory, nuanced in practice.
The Mistake: "Paid Ads CAC"
In interviews, you usually want fully loaded CAC, which includes:
- Sales & marketing salaries + commissions
- Marketing spend (paid acquisition + tools)
- Sales tools, SDR costs, onboarding costs
- …divided by new customers (or new ARR, depending on metric)
Fully Loaded CAC = Total S&M Spend ÷ New Customers AcquiredThe true cost to acquire each customer, including all GTM expenses
Follow-Up You'll Get in VC Interviews
"Is this blended CAC or only paid CAC? Is it logo CAC or CAC per € of new ARR?"
Be ready to discuss CAC by channel (paid vs organic vs sales-led) and by customer segment (SMB vs mid-market vs enterprise).
5. LTV: The Right Way (Gross Profit, Not Vibes)
The LTV that matters for investors is gross profit LTV (not revenue LTV), because gross profit funds CAC payback and future growth.
SaaS Rule-of-Thumb Formula (Steady State)
LTV (Gross Profit) = ARPA × Gross Margin % ÷ Churn RateLifetime gross profit contribution from an average customer
ARPA=Average Revenue Per Account (match period with churn)Gross Margin %=Gross profit as % of revenueChurn Rate=Monthly or annual customer churn (match ARPA period)LTV Calculation Example
- ARPA = €400/month
- Gross Margin = 80%
- Monthly Churn = 2%
LTV = €400 × 0.80 ÷ 0.02 = €320 ÷ 0.02 = €16,000
Reality Check on LTV
LTV is highly sensitive to assumptions (churn, expansion, margin). Investors like it as a directional metric, not a truth machine. Always say: "That assumes churn stays stable and no expansion; I'd validate by cohort."
6. CAC Payback: The GTM Efficiency Headline Metric
CAC payback asks: how many months of gross profit does it take to earn back CAC?
CAC Payback (months) = CAC ÷ Monthly Gross Profit per CustomerTime to recover your customer acquisition investment
CAC=Fully loaded customer acquisition costMonthly GP=ARPA × Gross Margin %What "Good" Looks Like (Bessemer Benchmarks)
CAC Payback Benchmarks
| Term | Definition | Note |
|---|---|---|
| 0-6 months | Best | Elite GTM efficiency |
| 6-12 months | Better | Strong, scalable GTM |
| 12-18 months | Good | Acceptable for most stages |
| 18+ months | Concerning | Need strong retention to justify |
How VCs Interpret Payback by Stage
- Seed/Early: Longer payback can be fine if retention is stellar and you're still finding PMF
- Series A/B: Payback should tighten as you scale GTM
- Growth: Efficiency becomes a valuation driver
CAC Payback Calculation
- CAC = €6,000
- ARPA = €400/month
- Gross Margin = 80%
- Monthly Gross Profit = €400 × 0.80 = €320
Payback = €6,000 ÷ €320 = 18.75 months (~19 months)
Interpretation: "Borderline; I'd want stronger retention or proof payback improves with scale."
7. Retention + Cohorts: The Leaky Bucket Test
Retention is where "story" becomes "evidence." It's the single most important validation of product-market fit.
The Key Retention Types
Retention Metrics
| Term | Definition | Note |
|---|---|---|
| Logo Retention | % of customers who stay | Do customers churn? |
| Gross Revenue Retention (GRR) | Revenue kept excluding expansion | Max 100%, shows pure churn |
| Net Revenue Retention (NRR) | Revenue kept including expansion | Can exceed 100% with upsells |
Bessemer's NRR Benchmarks
Net Revenue Retention Benchmarks
| Term | Definition | Note |
|---|---|---|
| ~100% | Good | Breaking even on existing customers |
| ~110% | Better | Growing existing customer base |
| 120%+ | Best | Strong expansion motion |
How to Talk About Cohorts in Interviews
Cohort Analysis Framework
When shown a cohort chart, say:
- "Retention shape tells me the product's value curve" (quick drop vs stable plateau)
- "Expansion shows pricing power and real adoption"
- "I'd segment by customer type, channel, and use caseto find what's driving it"
8. Growth Efficiency: Burn Multiple + Rule of 40
Burn Multiple
Burn Multiple = Net Burn ÷ Net New ARRHow much cash you burn per dollar of new ARR (lower is better)
Net Burn=Cash consumed over the periodNet New ARR=New ARR added over the same periodBurn Multiple Benchmarks
| Term | Definition | Note |
|---|---|---|
| < 1x | Excellent | Adding more ARR than burning |
| 1-1.5x | Good | Efficient growth |
| 1.5-2x | Acceptable | Watch efficiency |
| > 2x | Concerning | Expensive growth |
Related: Efficiency Score
Bessemer also uses Efficiency Score = Net New ARR ÷ Net Burn(the inverse of burn multiple). Higher is better. Useful for comparing companies at different scales.
Rule of 40
Rule of 40 = Revenue Growth % + Profit Margin % ≥ 40%A widely used SaaS heuristic balancing growth and profitability
VC-Ready Nuance on Rule of 40
It's useful as a shorthand, but definitions of "profit margin" vary (operating vs FCF), and it can be gamed. Always ask: "Which margin definition are you using?" In interviews, show you know this isn't gospel.
9. VC Interview Framework: How to Analyze Unit Economics Fast
Use this in cases and "walk me through the metrics" questions:
5-Step Unit Economics Framework
- Step 1 — Quality of Revenue: Recurring vs one-off? Gross margin structurally strong? Hidden COGS?
- Step 2 — Retention Engine: What do cohorts look like? NRR/GRR trend improving?
- Step 3 — GTM Efficiency: CAC definition + trend. Payback by segment/channel. LTV:CAC (after you trust retention + margin).
- Step 4 — Cash + Runway: Net burn, runway, milestone realism. Can they cut burn without killing growth?
- Step 5 — "What Would Change My Mind?": List the 3 diligence questions you'd ask next.
Diligence Questions VCs Love
- "What's CAC payback by channel and by ICP segment?"
- "What does retention look like for cohorts after onboarding changes?"
- "What's gross margin after scaling support and infrastructure?"
- "How does NRR trend as customers mature past year 1?"
- "What's the path to breakeven if growth slows?"
10. Sample VC Interview Questions (With Model Answers)
11. Common Mistakes Candidates Make
Avoid These Errors
- Using revenue LTV instead of gross profit LTV
Revenue doesn't pay back CAC—gross profit does. - Mixing time units
Annual churn with monthly ARPA will give you nonsense. Match periods. - Trusting one average churn number
Churn varies wildly by cohort, segment, and channel. Always ask for cohort data. - Treating payback as universal
Payback is channel and segment specific. Enterprise vs SMB, paid vs organic. - Confusing operating loss with cash burn
Non-cash items (depreciation, stock comp) create differences. Cash burn is what matters for runway. - Quoting "Rule of 40" without stating which margin
Operating margin? EBITDA margin? FCF margin? Be specific. - Calculating LTV:CAC without questioning inputs
If retention is shaky, your LTV is fiction. Don't build on sand.
Frequently Asked Questions
What's the single most important unit economics metric for VC interviews?
Retention/cohorts first, then CAC payback. If retention is weak, the rest is mostly irrelevant—you're just measuring how fast money leaks out of a bucket with holes in it.
What CAC payback is "good"?
Common heuristics: 12-18 months good, 6-12 better, 0-6 best—but stage and GTM motion matter. A 24-month payback might be fine for enterprise SaaS with 95% gross retention; it's death for SMB with 10% monthly churn.
How do I talk about LTV without getting roasted?
State the formula, then immediately call out the assumptions: "That assumes churn stays stable and no expansion; I'd validate with cohort retention and expansion data." This shows you understand LTV is directional, not gospel.
What's the difference between GRR and NRR?
GRR (Gross Revenue Retention) measures revenue kept excluding expansion—it shows pure churn and can't exceed 100%. NRR (Net Revenue Retention) includes expansion from upsells/cross-sells and can exceed 100%. Best-in-class companies have both high GRR (>90%) and high NRR (>120%).
When does burn multiple matter most?
In tighter funding environments and for growth-stage companies. At seed, burn multiple is less relevant—you're burning to find PMF. By Series B+, you should have improving burn efficiency as proof the GTM scales.
Key Takeaways
Key Takeaway
- Retention first: Without strong retention, nothing else matters—you can't scale a leaky bucket
- Use gross profit LTV: Revenue LTV is misleading; gross profit pays back CAC
- CAC payback is the GTM headline: 12-18 months good, 6-12 better, 0-6 best (with caveats by stage)
- Burn multiple shows efficiency: Lower is better; context from retention determines what's acceptable
- Always segment: Blended metrics hide truth—segment by channel, cohort, and customer type
- Runway drives urgency: Know the formula and what 12-24 months means for milestone achievement
- Connect metrics to investment thesis: The goal isn't memorizing formulas—it's translating numbers into "invest or pass"
Unit economics is where VCs separate candidates who can "run numbers" from those who "think like investors." The metrics are learnable; the judgment comes from practice. Master these concepts, and you'll sound senior in any VC interview.