Burn Multiple

How to calculate the burn multiple

The burn multiple asks how many dollars of cash the company spent to add each dollar of recurring revenue. A multiple of 2.0 means it burned $2 for every $1 of net new ARR. Lower is more efficient.

Both inputs need to cover the same period. Net burn comes from the cash flow statement, not from the operating loss, because cash is what determines how long the company can last. Use the change in cash excluding money raised from investors or lenders. Net new ARR is ending ARR minus beginning ARR.

Worked example

A startup starts the year with $1.5 million of ARR and ends with $2.9 million. Over the same twelve months it burns $2.4 million of cash.

The burn multiple is $2.4 million ÷ $1.4 million = 1.71. On the ratings below, that is "good."

The formula makes clear that there are two ways to improve it, and they are worth the same at the margin. Cutting burn by 20% to $1.92 million gives $1.92M ÷ $1.4M = 1.37. Growing net new ARR by 25% to $1.75 million gives $2.4M ÷ $1.75M = 1.37. Whether cutting costs or selling more is cheaper depends on where the company is in its life.

Read the trend, not just the year

The annual figure of 1.71 averages four very different quarters. Broken out, the same year looks like this:

The company moved from "suspect" to "great" within the year, and an investor reading only 1.71 would miss it. That improvement might come from a new sales hire ramping up, a pricing change, or better retention, and finding out which one is the useful next question. Report the quarterly trend and the trailing four quarters together, since a single quarter can be distorted by one large deal.

Benchmarks: how the burn multiple is rated

David Sacks of Craft Ventures introduced the metric in April 2020 and proposed these bands, which investors still cite:

The bands apply differently by stage. Scale Venture Partners' benchmarking found average burn multiples that fall as companies grow, for instance about 3.4 for companies under $1 million of ARR and about 1.4 for those between $25 million and $50 million. Early companies spend heavily before revenue appears, so a high multiple is normal at that stage and worrying later.

Burn multiple versus burn rate and runway

These three numbers answer different questions. Burn rate is how much cash you spend per month. Runway is how many months that cash lasts. The burn multiple is how efficiently the spending produces growth.

A company with $3.6 million in the bank and $200,000 of monthly burn has 18 months of runway, and that number is the same whether the company is growing fast or not at all. The burn multiple tells you which of those companies you have. A low multiple with short runway can still end badly, since efficient growth doesn't create cash by itself, and a high multiple with long runway is a warning that the cash is being spent poorly.

You can also run the ratio forward as a budget. If the plan is to add $1.6 million of net new ARR and the board's ceiling is a burn multiple of 1.5, the year's spending limit is 1.5 × $1.6 million = $2.4 million. Against $3.6 million of cash, that leaves $1.2 million at year end and about 6 months of runway at the same pace, which tells you whether the plan needs a raise before it starts. Working from the multiple to a burn cap keeps growth targets and cash limits in the same conversation.

The burn multiple calculator computes the ratio and the resulting rating. The Rule of 40 is a related test that combines growth and profit margin, and the CAC payback period looks at the sales-efficiency side.

What distorts the burn multiple

• Annual prepayments. If customers pay a year up front, cash arrives before revenue is recognized, and it lowers net burn. Sign $1.2 million of annual contracts in a quarter and burn falls by up to $1.2 million that quarter while the ARR is added on the same day, so the multiple looks better than the underlying spending warrants.
• Lumpy deals. One large contract signed in December improves a full year's multiple and does the opposite to the next year. Use a trailing twelve months, or four quarters, to smooth it.
• Churn. Net new ARR includes churn, so a company with rising cancellations sees the multiple worsen even if sales are steady.
• Timing of hires. A sales team hired in Q1 that doesn't produce until Q3 raises the multiple in between. Judge the trend and not one quarter.
• Negative or tiny net new ARR. If net new ARR is zero or negative, the ratio is undefined or meaningless. Say so instead of quoting a number.

How to improve a high burn multiple

• Reduce churn first. Each dollar of ARR saved counts the same as a dollar of new ARR, and it costs less. Track it with net revenue retention.
• Cut spending that isn't producing growth. Review channels and programs by their payback, and stop the ones that don't return.
• Shorten the sales cycle. The same team closes more deals per quarter, so ARR grows without more spending.
• Raise prices or improve packaging. More ARR per customer means more net new ARR from the same acquisition spend.
• Grow into the cost base. A team sized for more revenue will look inefficient until revenue arrives. Check whether hiring is ahead of plan or behind it.

Common mistakes

• Using operating loss instead of net burn. Working capital, prepayments and capital purchases all change cash but not the operating loss.
• Counting gross new ARR. Ignoring churn and contraction makes the multiple look better than it is.
• Comparing a quarter to a year. A quarterly burn against annual net new ARR gives the wrong ratio. Match the periods.
• Applying SaaS benchmarks to other models. The metric assumes recurring revenue. A project-based business has no meaningful ARR to divide by.
• Treating the rating as a verdict. A "suspect" multiple at $500,000 of ARR is common. Weigh it against stage, market and runway.

What the burn multiple can't tell you

It says nothing about the quality of the revenue, gross margin, or whether growth will continue. It also ignores how much cash is left. Use it as one input beside runway, retention and margin, and as a trend over several quarters instead of a single reading.

Frequently asked questions