In recent years, capital has become more expensive (thanks to interest rates), and capital efficiency is increasingly crucial to a startup’s survival. First popularized by David Sacks, the Burn Multiple is now a popular metric used by investors to assess the efficiency by which a startup can convert cash into revenue.
The Burn Multiple quantifies the cash a company must expend to generate each incremental dollar of ARR. For example, a startup reporting Net Burn of $2 million and Net New ARR of $1 million in a given quarter would have a Burn Multiple of 2. This suggests that the company burns two dollars to acquire a single dollar of revenue.
While this might be acceptable in the early phases of a startup’s growth, a Burn Multiple that remains consistently high as the business matures can signal an unsustainable business model. It can even signal issues with product-market fit, suggesting that the startup must burn extra cash to “push” its product into the market.
The Burn Multiple is calculated by dividing Net Burn by the Net New ARR (Annual Recurring Revenue) generated in a given period:
Here, Net Burn is the total amount of cash a company spends (cash outflows) in excess of the revenue it generates (cash inflows) over a specific period, typically measured monthly or quarterly. In other words, it is the total amount of money lost each month after accounting for revenue.
Here, cash outflows include all expenses like salaries, rent and utilities, marketing expenses, R&D expenses, and COGS. Cash inflows encompass all sources of cash a company receives, including recurring revenue from sales of its products or services, and non-recurring revenue like capital injections, one-time sales of assets, and interest income.
Net New ARR measures the growth in recurring revenue from one period to the next. It captures the total value of new subscriptions, expansions in existing subscriptions, contractions, and customer churn over a specific period. As such, it quantifies the new recurring revenue added while accounting for a reduction in revenue from existing customers.
The choice of the period over which the Burn Multiple is calculated can significantly influence the result. Typically, it’s calculated quarterly or annually to align with financial reporting periods. However, startups with longer sales cycles or product development phases might require longer periods to reflect the impact of investments on revenue growth accurately.
Investors and board members closely monitor Burn Multiples to determine whether startups manage their growth efficiently. A startup that maintains a lower Burn Multiple is typically viewed as more capital efficient, making it a more attractive investment opportunity.
The acceptable range for a Burn Multiple tends to vary by the stage of the startup:
While the Burn Multiple provides a snapshot of how efficiently a startup uses its resources to grow, it has limitations. It’s a catch-all metric that identifies many potential problems without isolating them individually.
As a result, Burn Multiple should not be used as a standalone operating metric to run a business; instead, it should be paired with other metrics like LTV, CAC, and Gross Margin. For example, while a high Burn Multiple might indicate inefficient spending, pairing it with CAC and Gross Margin can reveal whether the excessive burn is due to the go-to-market motion or other operational inefficiencies.
Many successful companies have had “bad” Burn Multiples, particularly during the early stages that require substantial R&D investment. We refer to these as “full-build” startups — companies for whom an MVP just doesn’t quite cut it, and substantial investment is needed upfront to build a functional and fully realized product that can compete against incumbents.
In such cases, we’d expect that these investments are necessary to build a “moat” — a significant competitive advantage that should yield market share gain and improve the Burn Multiple over a longer time horizon.