Y Combinator's

Guide to Business Models

SaaS (Software as a Service):
Cloud-based subscription software
PRIMARY METRICS: TAKEAWAYS:
Monthly Recurring All the benefits of
Revenue (MRR) or Annual recurring revenue
Recurring Revenue (ARR) Can have non-recurring
Growth Rate: Measured revenue, but don’t include
weekly or monthly in ARR/MRR
Net Revenue Retention: % Usually sold to businesses,
of recurring revenue ideally on annual
retained from a prior contracts
period Growth can be driven by
CAC: Costs to acquire a direct sales, self-serve
new customer acquisition channels, or
both
 Transactional:
Facilitate transactions and take a cut

PRIMARY METRICS: TAKEAWAYS:

Gross Transaction Value Usually fintech and
(GTV): Total payment payments businesses
volume transacted One-time transactions
Net Revenue: Fees rather than recurring
charged for Often high volume
transactions (often a %) with a low fee (1-3% is
User Retention: % of common)
month 1 customers that Best transactional
make a purchase in businesses have
month 2, etc extremely consistent
CAC revenue from high
repeat usage
 Marketplaces:
Facilitate transactions between buyers and sellers

PRIMARY METRICS: TAKEAWAYS:

Gross Merchandise Value
(GMV): Total sales volume
transacted
Net Revenue: Fees charged
for transactions (often a %
take rate)
Growth Rate
User Retention: % of
month 1 customers that
make a purchase in month
2, etc
Hard to get off the
ground, chicken & egg
problem
Need to scale supply
and demand in sync
Network effects at scale
drive exponential
growth
When they work, often
become dominant
winner-take-all winners
 Subscription:
Product or service sold on a recurring basis, usually
to consumers

PRIMARY METRICS: TAKEAWAYS:

Monthly Recurring Recurring revenue is the
Revenue (MRR) or Annual most valuable revenue
Recurring Revenue (ARR) Usually sold to
Growth Rate: Measured consumers, often paying
weekly or monthly monthly
User Retention: % of Usually lower price
month 1 customers that points, from a higher
make a purchase in volume of customers
month 2, etc Growth driven by
CAC scalable, self-serve
acquisition channels
 Enterprise:
Sell large fixed-term contracts to big companies (5k+
employees)

PRIMARY METRICS: TAKEAWAYS:

Bookings: Total signed Very few customers,
contract value (recurring much larger deals
+ non-recurring) ($100k+/year)
Revenue: Recognized Growth driven by direct
when delivering on the sales
contract Often begin with paid
Annual Contract Value pilots or LOIs
(ACV): Total contract Usually long sales cycles,
value / # of years with many gatekeepers
→
Demo Close
→
Pipeline: Top of funnel The buyer is not always
the end user
Lumpy growth:
measuring m/m growth
rate doesn't make as
much sense
 Usage Based:
Pay-as-you-go based on consumption in a given
period

PRIMARY METRICS: TAKEAWAYS:

Monthly Revenue (not Don’t confuse usage-
recurring!) based revenue with
Growth Rate recurring revenue
Revenue Retention: % of Charge per API request, #
revenue from last month’s of records, data usage, etc
customers in this month Grow as your customers
Gross Margin: Revenue - grow
Cost of Goods Sold Product and pricing scale
(COGS) to support tiny startups to
large enterprises
 E-commerce:
Sell products online

PRIMARY METRICS: TAKEAWAYS:

Monthly Revenue: Includes D2C brands
Total sales and Shopify stores
Growth Rate: Not marketplaces, so
Measured weekly or keep 100% of each sale
monthly Higher COGS = lower
Gross Margin/Unit margins
Economics: Revenue - Products often
Cost of Goods Sold commoditized
(COGS) Need to be excellent at
CAC user acquisition and
operations/unit
economics
 Hardtech/Bio/Moonshots:
Hard businesses with lots of technical risk and long
time horizons

PRIMARY METRICS: TAKEAWAYS:

Milestones: Progress
towards the long-term
vision
Signed contracts
Letters of Intent (LOIs):
Non-binding contracts
indicating interest to
purchase
Often take years to get to a
live product because of
technical and/or regulatory
risk
Impressive technical
milestones or experimental
data can de-risk the tech
Revenue is often years
away, so signed LOIs are
usually the best way to
show customer interest

Credit: Aaron Epstein via

YCombinator