In the current climate, the pressure to demonstrate growth is immense.
AI-powered dashboards make it dangerously easy to cherry-pick metrics that look impressive on the surface—$1M ARR! 200% YoY growth!—while masking significant rot underneath the hood. Founders can be lulled into a false sense of security, celebrating top-line numbers that are built on shaky foundations. One classic tale is of a founder who proudly announced tripling revenue, only to discover that 90% of it came from a single client who churned the very next month.
This illusion is even more dangerous in 2025, as investors have pivoted from rewarding growth-at-all-costs to scrutinizing capital efficiency and sustainable economics. Misleading metrics now outright kill deals, whether it’s an “AI-optimized” CAC that artfully excludes hidden sales costs, “recurring revenue” padded with non-renewable pilots, or “record signups” comprised of 90% free-tier users who will never convert. For a startup’s financial health, true clarity requires a forensic audit of the numbers that matter.
Red Flag #1: The ‘Hollow Growth’ Deception
The most common trick in the book is the over-reliance on top-line revenue, a figure that can be easily manipulated to tell a flattering but false story. This deception ignores critical underlying factors like negative net dollar retention, where expansion revenue is actually less than what is being lost to churn. It also includes counting one-time revenue spikes from fire sales or special projects as recurring income, and the dangerous practice of booking unpaid pilots as MRR.
The fix is rooted in disciplined financial hygiene. Calculate Net Dollar Retention monthly—it is the ultimate truth-teller for SaaS health. Rigorously tag all revenue in your accounting system as either recurring or non-recurring to prevent confusion. Most importantly, audit customer cohorts, not just aggregate numbers, to see if your growth is broad-based or reliant on a few large, risky bets. We’ve seen the horror story firsthand: a SaaS company successfully raised a round at a $20M valuation based on a “$500K MRR” figure that was later discovered to include $300K from a single, non-renewable government contract. The aftermath was not pretty.
Red Flag #2: CAC That Doesn’t Add Up
Many modern analytics tools deliberately distort Customer Acquisition Cost (CAC) to make growth look more efficient than it is. They do this by systematically excluding real costs, such as the immense value of founder-led sales time (often counted as “$0 CAC”), hidden referral and influencer costs, and the pre-sale engineering time spent customizing demos and building POCs.
The real, investor-ready CAC formula is far more comprehensive: it’s the total sales and marketing spend plus a realistic allocation for founder time (we use 30% as a standard benchmark), all divided by new customers. One of our clients made the brave decision to recalculate their CAC using this method. It reduced their reported efficiency, jumping from $800 to a more honest $2,100. However, this transparency allowed them to accurately model their unit economics, build a credible scaling plan, and ultimately secure more funding because they could prove their path to profitability was predictable and based on reality, not fantasy.
Red Flag #3: Engagement Theater
Vanity metrics around user activity are a classic form of engagement theater designed to mask low product-market fit. These include reporting “active users” with no minimum meaningful usage threshold, boasting about “feature adoption” for tools that are opened once and never used again, and celebrating “session length” that is artificially inflated by users struggling with bugs or poor UX.
The reality check is to shift from tracking activity to tracking outcomes. Instead of “active users,” define and measure the key actions that correlate with long-term retention and revenue, such as “users who completed onboarding and logged in at least twice in the first week.” A fintech client learned this the hard way; they were bragging about “10K weekly active users” until a deeper audit revealed that 85% of those “actives” were just users triggering password resets, a clear sign of friction, not engagement.
The 5-Step Metric Detox
Cleansing your reporting requires a systematic approach. This isn’t about analytics for analytics’ sake; it’s about building a financially sound company.
- Kill “Zombie Metrics” that haven’t been relevant in a decade, like “total registered users.”
- Implement “Metric Sourcing,” ensuring every KPI presented to the board has a clear, auditable data lineage back to your financials.
- Conduct Monthly “Red Team” Audits where a skeptic tries to dismantle your growth narrative using the data.
- Investor-Stress Test every metric by asking how it would hold up under the intense scrutiny of due diligence.
- Build AI-Proof Dashboards that always show complementary metrics, like presenting CAC alongside its payback period.