by Startup and investment terminologies are essential for understanding the financial health, growth potential, and sustainability of a startup. TAM (Total Addressable Market) represents the total market demand for a product or service if a company captures the entire market. LTV (Customer Lifetime Value) measures the total revenue a business expects from a customer over the entire relationship period. CAC (Customer Acquisition Cost) indicates the cost incurred to acquire a new customer through marketing and sales efforts.
Burn Rate refers to the rate at which a startup spends its available cash, usually on a monthly basis. Runway shows how long a startup can continue operations before running out of funds, based on its burn rate. Churn Rate measures the percentage of customers who stop using a product or service over a given period.
Together, these metrics help entrepreneurs and investors evaluate scalability, profitability, customer retention, and financial stability, making them critical tools in startup decision-making and investment evaluation.
High TAM + Low CAC + High LTV + Low Churn = Attractive Startup
Startup & Investment Terminologies
1. TAM – Total Addressable Market
Total Addressable Market (TAM) refers to the overall market demand for a product or service if a company were to capture 100% of the market without any competition or limitations. It represents the maximum revenue opportunity available to a business in a particular market. TAM helps startups and investors understand the scale and growth potential of a business idea.
TAM is especially important during fundraising, as investors want to know whether a startup operates in a large and scalable market. A small TAM may limit future growth, even if the business model is strong. Therefore, startups often highlight a large TAM to demonstrate long-term revenue potential.
There are three common approaches to calculating TAM.
- Top-Down Approach uses industry reports and market research to estimate total market size.
- Bottom-Up Approach calculates TAM based on pricing and number of potential customers, making it more realistic and preferred by investors.
- Value Theory Approach estimates TAM based on the value delivered to customers.
TAM is often used along with SAM (Serviceable Available Market) and SOM (Serviceable Obtainable Market) to give a more practical market view. While TAM shows the total opportunity, SAM and SOM show what portion the startup can realistically serve.
In the startup ecosystem, TAM helps in strategic planning, market expansion, and valuation. A growing TAM indicates future opportunities, while a shrinking TAM signals risk. However, TAM should be estimated carefully, as exaggerated numbers can reduce credibility.
Numerical Example
A startup sells an online learning subscription at ₹5,000 per year.
Total potential customers in India = 20 million students.
TAM = 20,000,000 × 5,000 = ₹100,000 crore
This means if the startup captures the entire market, the maximum revenue opportunity is ₹100,000 crore annually. Investors use this to judge scalability.
2. LTV – Customer Lifetime Value
Customer Lifetime Value (LTV) refers to the total revenue a business expects to earn from a customer throughout their entire relationship with the company. It is a key metric used to measure customer profitability and long-term business sustainability. LTV helps startups understand how much value each customer brings over time.
LTV is calculated using factors such as average purchase value, purchase frequency, and customer lifespan. A simple formula is:
LTV = Average Revenue per Customer × Customer Lifetime.
In subscription-based startups, LTV is especially important because recurring revenue depends on customer retention. A higher LTV means customers stay longer and spend more, which improves profitability.
LTV is closely linked with Customer Acquisition Cost (CAC). For a startup to be sustainable, LTV should be significantly higher than CAC. A commonly accepted benchmark is LTV ≥ 3 × CAC. If CAC exceeds LTV, the business may face financial difficulties.
Investors closely examine LTV to assess scalability and unit economics. A strong LTV indicates customer satisfaction, loyalty, and product-market fit. Startups can improve LTV by enhancing customer experience, offering personalized services, improving product quality, and reducing churn.
However, calculating LTV accurately can be challenging for early-stage startups due to limited data and changing customer behavior. Overestimating LTV can lead to unrealistic growth expectations.
Numerical Example
Average revenue per customer per year = ₹4,000
Average customer lifespan = 5 years
LTV = 4,000 × 5 = ₹20,000
This shows each customer generates ₹20,000 over their lifetime with the business.
3. CAC – Customer Acquisition Cost
Customer Acquisition Cost (CAC) refers to the total cost incurred by a business to acquire a new customer. It includes expenses related to marketing, advertising, sales salaries, promotions, and onboarding costs. CAC helps startups measure the efficiency of their customer acquisition strategies.
CAC is calculated using the formula:
CAC = Total Sales and Marketing Expenses ÷ Number of New Customers Acquired.
A low CAC indicates efficient marketing and sales processes, while a high CAC may signal inefficiencies or intense competition. Startups aim to keep CAC as low as possible while maintaining growth.
CAC is critically evaluated alongside LTV. If CAC is too high compared to LTV, the business may struggle to achieve profitability. Investors analyze CAC to understand how much capital is required to scale the business.
Startups can reduce CAC by improving brand awareness, referral programs, organic marketing, customer retention, and better targeting. Digital marketing analytics plays a key role in optimizing CAC.
However, CAC may increase during early growth stages due to experimentation and brand building. This is acceptable if LTV increases proportionately over time.
Numerical Example
Total marketing & sales expense = ₹10,00,000
New customers acquired = 500
CAC = 10,00,000 ÷ 500 = ₹2,000
The startup spends ₹2,000 to acquire one customer.
LTV – CAC Relationship Example
LTV = ₹20,000
CAC = ₹2,000
LTV : CAC = 10 : 1
This indicates a healthy and profitable business model.
4. Runway
Runway refers to the amount of time a startup can continue operating before running out of cash, assuming current expenses and no additional funding. It is usually measured in months. Runway is a critical financial indicator for startups, especially in early stages.
Runway is calculated using the formula:
Runway = Total Available Cash ÷ Monthly Burn Rate.
A longer runway provides startups with more time to build products, acquire customers, and achieve milestones. A shorter runway increases pressure on founders to raise funds or reduce expenses quickly.
Investors closely monitor runway to assess financial discipline and risk. A startup with a very short runway may be seen as risky, while a well-managed runway reflects good planning.
Startups can extend runway by reducing costs, increasing revenue, improving operational efficiency, or raising additional funding. Strategic budgeting and financial forecasting are essential to manage runway effectively.
However, excessive cost-cutting to extend runway may slow growth and innovation. Therefore, startups must balance spending and progress.
Numerical Example
Cash available = ₹60,00,000
Monthly burn rate = ₹5,00,000
Runway = 60,00,000 ÷ 5,00,000 = 12 months
The startup can operate for 12 months without new funding.
5. Burn Rate
Burn Rate refers to the rate at which a startup spends its cash reserves over a given period, usually monthly. It indicates how quickly a startup is “burning” money before becoming profitable. Burn rate is a key indicator of financial health.
There are two types of burn rate:
• Gross Burn Rate – total monthly expenses
• Net Burn Rate – monthly expenses minus revenue
High burn rate may help accelerate growth, but it also increases financial risk. A low burn rate improves survival chances but may slow expansion.
Investors evaluate burn rate to understand spending discipline and funding requirements. A controlled burn rate reflects efficient resource utilization.
Startups manage burn rate through budgeting, cost optimization, and revenue growth. Burn rate must align with business milestones and funding strategy.
Numerical Example
Monthly expenses = ₹8,00,000
Monthly revenue = ₹3,00,000
Net Burn Rate = 8,00,000 − 3,00,000 = ₹5,00,000/month
This means the startup loses ₹5 lakh every month.
6. Churn Rate
Churn Rate refers to the percentage of customers who stop using a product or service over a specific period. It is a key metric for subscription-based and service-oriented startups. High churn indicates customer dissatisfaction or strong competition.
Churn Rate is calculated as:
Churn Rate = (Customers Lost ÷ Total Customers) × 100.
A low churn rate indicates strong customer retention and product-market fit. A high churn rate increases CAC and reduces LTV, negatively impacting profitability.
Startups reduce churn by improving customer experience, offering better support, enhancing product quality, and understanding customer feedback.
Investors closely monitor churn rate as it reflects sustainability and long-term growth potential.
Numerical Example
Customers at start of month = 1,000
Customers lost during month = 50
Churn Rate = (50 ÷ 1,000) × 100 = 5%
A 5% churn rate indicates moderate customer retention.
