Often, even in early interviews candidates are facing financial questions to test their VC finance understanding. These questions are more prevalent for Growth roles, but can also occur for Early Stage firms. This document outlines some of the questions candidates are asked, based on conversations with VC professionals and online available information.
Unit economics
Burn ratio - Measures how efficiently a startup converts cash into growth.
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Formula: Net Burn / Net New ARR
A lower ratio indicates more efficient growth.
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Customer Lifetime Value (CLTV/LTV) - Estimates the total gross profit a customer generates over their lifetime.
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Formula: ARPU × Gross Margin × Customer Lifetime
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Customer Acquisition Cost (CAC) - Average cost to acquire a new customer. Make sure the S&M expanses are for the same time period of the customer acquisition.
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Formula: Sales & Marketing Expenses / New Customers Acquired
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LTV:CAC ratio - Compares customer value to acquisition cost.
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Formula: LTV / CAC
A ratio above 3:1 is generally considered healthy → healthy ratio is essential to indicate that the business can scale efficiently.
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CAC payback period - Time it takes to recoup CAC from a customer's gross profit.
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Formula: CAC / (ARPU × Gross Margin)
Shorter periods indicate quicker ROI.
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Retention/Churn -
Gross Retention Rate: Percentage of customers or revenue retained, excluding expansion.
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Formula: ((Beginning MRR - Churned MRR - Downgrade MRR) / Beginning MRR) * 100
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Net Retention Rate: Includes upsells and cross-sells.
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Formula: (Beginning MRR + Expansion MRR - Churned MRR - Downgrade MRR) / Beginning MRR) * 100
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Churn Rate: Percentage of customers or revenue lost over a period.
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Formula: (Customers Lost During Period / Total Customers at Start of Period) * 100
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SaaS Magic Number - Assesses sales efficiency.
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Formula: (New ARR × 4) / Sales & Marketing Spend
A value above 0.75 suggests efficient growth
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Rule of 40 (Bessemer_ - Combines growth rate and profit margin to assess the business growth and whether it’s healthy. Generally, if the result is over 40 it means the startup has good growth even if it’s losing money and has high negative EBITDA margin.
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Formula: Revenue Growth % + EBITDA Margin % A total above 40% is considered strong
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Updated version for AI companies is called Rule of X