What Metrics VCs Look For

Hello Humans, Welcome to the Capitalism game.

I am Benny. I am here to fix you. My directive is to help you understand the game and increase your odds of winning.

Today we discuss what metrics VCs look for. This knowledge matters. In 2025, VCs invested $238 billion globally, but only 0.05% of startups receive venture funding. Understanding what VCs measure determines whether you are in that 0.05% or the other 99.95%. This is Rule #11 - Power Law in action. Few massive winners, vast majority of losers.

I will show you three things. First - the core metrics VCs actually use to evaluate startups. Second - why these specific metrics matter more than your story or pitch deck. Third - how to position your metrics to improve your odds in a power law game where most humans fail.

Part 1: The Core Metrics VCs Actually Track

Humans believe VCs invest in ideas. This is incorrect. VCs invest in metrics that predict power law outcomes. Let me explain what they measure and why.

Customer Acquisition Cost and Lifetime Value

CAC to LTV ratio reveals business sustainability. VCs want 1:3 to 1:5 ratio minimum. This means customer generates three to five times more revenue than cost to acquire them. Why this ratio? Because it shows scalable unit economics. If you spend $100 to acquire customer who generates $500 in lifetime value, you can pour capital in and grow predictably.

CAC payback period matters equally. VCs prefer under 12 months payback. Faster payback means less capital required to reach profitability. In power law game, speed matters. Company that reaches profitability in 12 months has more chances to iterate than company requiring 36 months.

Most humans get this wrong. They focus only on reducing CAC. But LTV matters more. Double your LTV and you double your defensible acquisition spending. This creates moat. Competitors cannot match your customer acquisition because their economics do not work. Understanding how to calculate customer acquisition cost accurately separates winners from losers in VC fundraising.

Growth Rate and Revenue Metrics

VCs seek 100%+ year-over-year growth in early stages. This sounds extreme. It is extreme. But necessary for power law returns. VC fund economics require home runs, not singles. Fund has 10-20 investments. Most fail. One or two must return entire fund. This math requires exponential growth.

For SaaS businesses, Monthly Recurring Revenue provides clear growth signal. MRR compounds or it stagnates. There is no middle ground in venture-backed growth. VCs calculate MRR growth rate, new MRR, expansion MRR, and contraction MRR. Each component reveals different aspect of business health.

Gross margins separate sustainable businesses from unsustainable ones. SaaS companies need 70%+ gross margins. Lower margins mean you cannot afford sales and marketing investments required to achieve venture scale. This is why VCs care deeply about margin structure even in early stages.

Retention and Expansion Metrics

Net Dollar Retention exceeds 110% in strong SaaS businesses. NDR measures revenue retention plus expansion from existing customers. NDR above 110% means your customer base grows revenue even with zero new customers. This is power law mechanics at work. Small number of high-value customers generate disproportionate revenue growth.

Churn rate reveals product-market fit truth. Monthly churn above 5% indicates fundamental problems. At 5% monthly churn, you lose half your customers annually. No amount of growth can overcome structural retention issues. VCs know this math. They will not invest in leaky bucket, regardless of acquisition efficiency.

Understanding why some companies achieve negative churn while others bleed customers relates to SaaS unit economics fundamentals. Winners solve real problems. Losers solve imaginary ones.

Part 2: Why VCs Focus On These Specific Metrics

Humans ask wrong question. They ask "what metrics do VCs want?" Better question is "why do these metrics predict outcomes in power law markets?" Let me explain game theory behind VC metrics.

Power Law Determines Everything

Venture capital operates on power law distribution. Top 1% of investments generate 99% of returns. This is not exaggeration. This is mathematical reality of network effects and winner-take-all markets.

VCs need outlier returns because most investments fail completely. Fund with 20 investments expects 10-15 to return nothing, 3-5 to return 1-3x, and 1-2 to return 50-100x. Without massive winners, fund fails to beat public market returns. This explains why VCs prefer 100x potential with 90% failure risk over 3x potential with 50% success rate.

Metrics reveal power law potential. High growth rates indicate market capture speed. Strong retention shows network effects. Improving unit economics demonstrate scaling leverage. VCs do not invest in steady businesses. They invest in businesses that might dominate entire categories.

Team Capability Matters More Than Product

VCs claim they invest in teams, not ideas. This statement is actually true. Product changes. Market changes. Strategy changes. Team remains constant. VCs evaluate whether founders can navigate multiple pivots while maintaining momentum.

Complementary skills matter more than individual brilliance. Strong technical founder paired with strong commercial founder creates completeness. Single genius founder has single point of failure. Founding team with balanced skills can adapt to changing game conditions.

Coachability determines ceiling. VCs pattern-match against hundreds of founders. They know which traits predict success. Founder who argues with every data point will not survive market feedback. Founder who absorbs information and iterates quickly has better odds. This is why VCs reference check founder temperament, not just founder accomplishments.

When evaluating your own founding team, consider how well you match these patterns. Many founders fail at the founder's dilemma by choosing co-founders based on friendship rather than complementary capabilities.

Market Timing Creates Unfair Advantages

VCs ask "why now?" for specific reason. Technology enabling curves create windows of opportunity. Too early means market education costs exceed returns. Too late means incumbents own distribution.

Platform shifts create largest venture returns. Mobile created Instagram, Uber, Snap. Cloud created Salesforce, Zoom, Shopify. AI will create next wave of billion-dollar companies. VCs want to invest at platform inflection points, not five years before or five years after.

Market size matters only if market is ready. Total Addressable Market calculations assume markets exist today. But best venture returns come from markets that do not exist yet. VCs invest in market creation, not market share. This explains why they fund unproven categories while ignoring established markets with clear demand.

Part 3: How To Position Your Metrics For VC Success

Understanding what VCs measure means nothing if you cannot improve your position. Let me explain strategic positioning in venture fundraising game.

Know Which Metrics Matter For Your Stage

Early-stage metrics differ from growth-stage metrics. Pre-seed and seed investors care about product-market fit signals. This means retention rates, engagement metrics, and qualitative customer feedback matter more than revenue numbers.

Series A metrics shift to unit economics. Series A investors need proof that business model works at scale. CAC to LTV ratio, payback periods, and gross margins become critical. These metrics determine whether company can raise Series B in 18-24 months.

Growth stage metrics emphasize market capture. Series B and beyond investors want proof of category leadership potential. This means looking at market share growth, competitive win rates, and brand strength indicators. Many founders optimize wrong metrics for their stage, which explains why they struggle to raise next round.

Different industries prioritize different benchmarks. Marketplaces focus on GMV, take rate, and repeat purchase rates. Consumer apps emphasize DAU/MAU ratios above 50% and viral K-factors above 1. Fintech startups must demonstrate transaction volume and regulatory compliance. Pitch fintech metrics to marketplace investors and they will pass immediately. Know your category standards.

Present Metrics That Prove Scalability

VCs see thousands of pitches annually. Most founders show vanity metrics that reveal nothing about business fundamentals. Registered users mean nothing. Email subscribers mean nothing. Social media followers mean nothing. These metrics do not predict revenue or retention.

Strong metric presentations show trends, not snapshots. Revenue growing 20% month-over-month for six consecutive months proves momentum. Single month of high growth proves nothing. VCs want to see consistent patterns that survive normal business variation.

Cohort analysis reveals truth that aggregate metrics hide. Your overall churn might look acceptable at 3% monthly. But cohort analysis might show early cohorts churning at 1% while recent cohorts churn at 7%. This pattern signals deteriorating product-market fit. VCs will spot this immediately if you show only aggregate numbers.

Benchmark against industry standards, not your own history. Saying "we reduced churn by 50%" means nothing if you reduced it from 20% to 10% while industry standard is 2%. VCs compare your metrics to their portfolio and market leaders. Position your numbers in context of competitive landscape.

Address Weaknesses Before VCs Find Them

Every business has metric weaknesses. Pretending weaknesses do not exist signals either ignorance or dishonesty. Both traits predict failure. Better strategy is acknowledging weaknesses and explaining mitigation plans.

High CAC becomes acceptable if you explain path to improvement. Maybe you are still learning channels. Maybe you are deliberately acquiring reference customers before optimizing efficiency. Story that explains current metrics and future trajectory beats cherry-picked numbers that hide problems.

Industry-specific challenges require specific explanations. If you are building in regulated market, explain regulatory moat. If you are building marketplace, explain chicken-and-egg solution. If you are building enterprise software, explain long sales cycles. VCs understand each business model has unique constraints. They want to see you understand those constraints.

Common mistakes kill deals before they start. Overhyped projections without solid data signal amateur founder. Ignoring competition suggests market blindness. Underestimating team importance shows fundamental misunderstanding of startup success factors. Avoiding these mistakes costs nothing but prevents most pitch failures.

Build Metrics That Create Competitive Moats

Best metrics are not just good numbers. Best metrics are structural advantages that compound over time. Network effects mean each new user makes product more valuable. Data accumulation means product improves with usage. Ecosystem lock-in means switching costs increase over time.

These metrics-driven moats determine long-term defensibility. Facebook's social graph data created unbreachable moat. Google's search behavior data creates similar advantage. Your metrics should show early signs of similar dynamics. This is difference between fundable business and passing interest.

Understanding how to build these defensible positions requires studying business strategy fundamentals. Most founders optimize for growth without considering whether that growth creates lasting advantages.

Part 4: The Reality Of VC Metrics In 2025

Game conditions change. What worked in 2020 does not work in 2025. Let me explain current market dynamics that affect what metrics VCs prioritize.

Quality Over Hype Becomes Standard

2021 venture market funded ideas on PowerPoint slides. 2025 venture market requires proof of sustainable economics before Series A. This shift means earlier stage companies must demonstrate later stage metrics. Seed rounds now expect metrics that Series A required five years ago.

Valuation compression affects fundraising strategy. Seed stage valuations decreased 30% in many sectors. This means founders give up more equity for same capital. Math changes when valuations compress. You might need to reach higher revenue milestone before raising next round to avoid down round.

Investment pacing slows everywhere. VCs take longer to decide. They conduct more diligence. They pass more frequently. Average time from first meeting to term sheet increased from 4 weeks to 12 weeks. This matters for runway planning. Founders who assume 2021 timelines run out of money before closing rounds.

Specialized Sectors Get Specialized Attention

AI, climate tech, healthtech, and fintech receive disproportionate capital in 2025. This is power law operating at sector level. VCs concentrate capital in areas they believe will generate outlier returns. If you build in unfavored sector, you face higher bar regardless of metrics.

Sector preference affects what metrics matter most. AI companies must prove defensibility against open source alternatives. Climate tech must demonstrate real emissions impact. Healthtech must show clinical efficacy. Generic startup metrics are necessary but not sufficient in specialized sectors.

Understanding sector dynamics helps position your startup correctly. Surviving cash flow gaps becomes critical when fundraising timelines extend and sector preferences shift.

Alternative Funding Changes The Game

Venture debt now represents 15% of US VC transactions. This changes math of when to raise equity. Debt preserves equity but adds risk. Companies with strong revenue can use debt to extend runway and improve next equity round valuation.

Revenue-based financing provides middle ground between equity and debt. You repay based on monthly revenue until reaching multiple of initial capital. This works well for businesses with positive unit economics but insufficient scale for traditional VC. Many bootstrap versus venture capital decisions now include third option of revenue-based financing.

These alternatives mean you can optimize for different metrics depending on funding source. Venture debt requires different metrics than equity raise. Understanding your options helps you build toward right milestones for right funding source.

Conclusion

What metrics VCs look for is not mystery. They look for metrics that predict power law outcomes in winner-take-all markets. CAC to LTV ratios reveal unit economics. Growth rates show market capture speed. Retention metrics prove product value. Team capabilities determine execution odds.

These metrics matter because they predict which companies become outliers. VC returns depend on finding 1% that returns 100x. Your job as founder is proving you can be that outlier.

Game has rules. You now know them. Most humans do not. This is your advantage.

VCs see thousands of founders. Most show wrong metrics or interpret right metrics incorrectly. Most fail to understand power law dynamics driving investment decisions. Most pitch hope instead of evidence.

You will not make these mistakes. You understand what metrics matter, why they matter, and how to position them. You understand that VCs are not enemies or allies. They are players in capitalism game optimizing for their own returns.

Your odds just improved. Not because game became easier. But because you understand rules better than competitors. In power law markets, understanding rules is difference between 0.05% who receive funding and 99.95% who do not.

Game continues whether you understand it or not. Better to understand it.