EBITDA is one of those financial acronyms that sounds intimidating but is actually straightforward once you break it down.
EBITDA = Revenue − Operating Costs (before interest, taxes, D&A)
It's the money your business generates from operations — before financing costs, tax obligations, and non-cash accounting entries.
Why investors care about EBITDA
Investors use EBITDA to compare businesses that might have: - Different amounts of debt (affecting interest payments) - Different tax structures (affecting net income) - Different asset bases (affecting depreciation)
Stripping these out gives a cleaner picture of operational performance.
A simple example
A software company at $5M ARR: - Revenue: $5,000,000 - COGS (hosting, support): $750,000 - S&M payroll: $1,500,000 - G&A: $500,000 - R&D payroll: $750,000 - EBITDA: $1,500,000 (30% margin)
Compare that to a services company at $5M revenue with 60% cost structure: EBITDA of $500,000 (10% margin). Same revenue, very different profitability.
When you have negative EBITDA
Negative EBITDA isn't necessarily bad for startups. Most VC-backed SaaS companies run negative EBITDA in the early years while investing heavily in growth. Investors evaluate the trajectory toward profitability.
The question isn't "is EBITDA positive?" but "can this business become profitable at scale, and when?"
Use the EBITDA Calculator to model your numbers.