GX Report | The One Accounting Ratio Every Startup Investor Should Track (And Every Founder Should Nurture)

Haoxuan Guo
Oct 11, 2025
3 min read

Early-stage diligence can drown in dashboards. Here’s a simple lens that cuts through the noise: decompose book valueand watch retained earnings-to-market (RE/M) like a hawk.

Why? Because RE/M tells you whether a company is compounding from the inside out. When retained earnings rise relative to the firm’s value, it signals that the business is converting customers into profits, and profits into future growth—without endless new equity.

Why RE/M beats the usual suspects

Beyond “cheap or expensive.” Classic ratios (like book-to-market) blur together contributed capital and accumulated profits. RE/M isolates the piece that reflects self-funded progress rather than money raised.
Compounding vs. dependency. Contributed capital (new equity) isn’t bad—but it shouldn’t be the main driver forever. A rising RE/M with flat or slowing contributed capital is the pattern of a durable, efficient company.
Cleaner story, fewer games. You can debate growth vanity metrics. It’s harder to argue with a track record of profits retained and redeployed.

How to use RE/M across stages

Pre-profit (Pre-Seed → early A)

You won’t have meaningful retained earnings yet—so track precursors:

Cohort gross profit after CAC: Are customer cohorts turning profitable within a reasonable window?
Payback & stickiness: Is CAC payback compressing as product-market fit improves? Is churn falling?
Equity efficiency: For every $1 of new equity, how much durable gross profit capacity did you create?

Early scale (late A → B/C)

RE starts moving; now watch the mix:

Best-in-class pattern: RE/M rising while contributed capital growth slows.
Yellow flag: RE/M flat but equity raises keep climbing—growth may be bought, not earned.
Bridge to zero: If retained earnings are negative, is there a clear, time-boxed plan to cross into positive territory (pricing, mix, margin, churn improvements)?

Late growth → pre-IPO

Underwrite compounding, not just TAM: If “value” screens look attractive but RE/M is weak, you may be staring at a value trap. Strong RE/M usually pairs with discipline and operating leverage.

A six-point diligence checklist

Retained Earnings Bridge: Last 8–12 quarters—reconcile net income to retained earnings; strip out one-offs.
RE/M Trajectory: Plot RE/M against contributed capital. Look for internal funding momentum.
Cohort Math → RE: Show that cohorts cover CAC within X months and sustain margin thereafter.
Operating Leverage: Are gross margin dollars growing faster than operating expenses?
Cash Conversion: Operating cash flow vs. accounting earnings; healthy businesses don’t need heroic working-capital assumptions.
Use of Proceeds: Every new dollar should have a credible line of sight to future retained earnings (not just vanity growth).

What great looks like (any industry)

Rising RE/M with controlled dilution: The business funds more of its growth from profits each quarter.
Shorter payback, lower churn: Learning loops tighten; customers stay longer and buy more.
Expense discipline that scales: Opex grows slower than gross profit as the model matures.
Clear reinvestment flywheel: Retained earnings repeatedly finance product adjacencies or go-to-market that raise LTV/CAC further.

Boardroom metrics to adopt tomorrow

RE/M (quarterly)
CC/M (contributed capital-to-market), to keep dilution honest
Equity efficiency: ΔRetained Earnings / ΔContributed Capital (last 4–8 quarters)
CAC payback & net revenue retention (or cohort margin at 12/24 months)
OCF / NI (cash conversion)
Dilution guardrail: Projected new equity needed vs. expected retained-earnings contribution

For founders: design your compounding engine

Make payback a product goal. Shorter payback and lower churn are everyone’s job, not just finance.
Sequence growth with margin. Add volume after you’ve proven cohorts return capital.
Celebrate RE milestones. Treat “first profitable cohort,” “first positive RE quarter,” and “RE funds new launch” as cultural wins.

The GX Ventures takeaway

Great companies don’t just raise well—they retain well. If you’re investing, prioritize teams that turn today’s customers into tomorrow’s retained earnings. If you’re building, make RE your north star. In both cases, you’re choosing compounding over dependency—and that’s how enduring value gets created.