Burn Multiple

What is Burn Multiple?

Burn multiple is a measure of capital efficiency for early-stage startups, specifically how effectively they use their cash to grow. To calculate the burn multiple, you divide a company’s net burn (the cash it spends over a year) by its net new annual recurring revenue (ARR) for that same period.

A burn multiple of 1x indicates the company has reached cash flow breakeven — it’s spending $1 to earn $1 in net new ARR. A multiple greater than 1x means it’s growing slower than it’s spending its cash reserves. A multiple lower than 1x implies more efficient revenue generation relative to spending.

For subscription businesses, the burn multiple is one of the best capital efficiency metrics because it considers both cash flow and revenue growth. Startups (and startup investors) use it as a measure of current efficiency and progress toward self-sustainability.

Synonym

• Cash burn multiple

Importance of Burn Multiple as a SaaS Metric

The burn multiple is best known as a SaaS metric — almost all companies with venture capital backing and a subscription-based business model (needed since ARR is a key factor in the calculation) fall under the “SaaS” umbrella.

It’s a metric that goes beyond the burn rate, which measures the amount a company spends per month. It adds growth to the equation, helping them measure how effectively they’re putting the cash they’re investing back into their pockets (which doesn’t normally happen right away for early-stage companies).

How Founders Use Burn Multiple

For startup founders, the burn multiple informs strategic decisions related to growth, cost management, and fundraising.

As a founder, you’ll use it to:

• Evaluate financial health and sustainability
• Benchmark performance
• Understand sales efficiency, product-market fit, and unit economics
• Optimize operating expenses (e.g., product development, R&D, marketing)
• Attract potential investors
• Measure the impact of your GTM strategy

It’s also a metric you can follow over time. Regularly tracking your burn multiple over time allows you to monitor trends and understand how various changes in strategy or market conditions affect your capital efficiency.

How Investors Use Burn Multiple

Early-stage startups won’t have the historical records to provide a solid basis for evaluation, so it’s almost impossible to guess at future revenue without (a) a known ARR, and (b) an estimation of the company’s ability to control spending while growing. As an investor, the burn multiple is therefore a crucial metric for evaluating how they’re growing and how they might use your money.

Depending on the investment prospect’s exact stage of growth, an investor would use the burn multiple for one or more of the following:

• Screening investments
• Comparative analysis
• Assessing investment risk
• Valuation considerations
• Exit strategy planning
• Strategic discussions with portfolio companies

As an investor, interpretation of the burn multiple is entirely subjective and case-by-case. A high multiple can signal a company that is growing rapidly but may not be able to sustain that growth without continued investment. On the other hand, a low multiple can indicate slower growth and more careful spending, which could lead to sustainable long-term growth.

How Other Stakeholders Use Burn Multiple

Beyond startup founders and investors, several other stakeholders might be interested in a company’s capital efficiency.

• Current and potential employees might consider the burn multiple to gauge the company’s financial health and job security.
• Lenders and creditors will use it to assess the company’s ability to manage capital and repay debt.
• Suppliers and business partners will include it when evaluating the company’s long-term viability and reliability.
• Industry analysts generally use it to compare companies in similar markets and industries.
• Competitors might analyze it to benchmark their own performance and understand the financial health and strategy of their direct competitors.
• B2B customers might consider a company’s burn multiple as a sign of its stability and the likelihood that it will remain in business to support its products or services long-term.
• Government and regulatory bodies might be interested in the burn multiple as part of broader economic or sectoral assessments, particularly if they are monitoring high-growth sectors or considering policy decisions that affect startup ecosystems.

Each can use the metric to derive insights relevant to their specific interests and needs. But the underlying principle remains the same: the burn multiple provides a snapshot of how effectively a company is converting its capital into revenue growth, which is a critical indicator of its financial health and operational sustainability.

Burn Multiple vs. Hype Ratio vs. Efficiency Score

The burn multiple, hype ratio, and efficiency score each offer a different perspective on how a company is utilizing its capital in relation to its growth and revenue generation.

The hype ratio is a metric that compares a company’s ARR to its total funding. It measures the expectations and valuations surrounding a company and how much investors are willing to pay for future growth potential.

Hype Factor = ARR / Cumulative Funding

A high “hype factor” (5+) suggests that the market has overly optimistic expectations for the company’s future growth (i.e., it’s overvalued or ‘hyped’).

Bessemer’s efficiency score measures capital allocation and spending habits to determine how efficiently a company is growing its revenue relative to its losses. It can be calculated using various formulas, but the most common approach is to divide the net new ARR by the net burn.

Efficiency Score = Net New ARR / Net Burn

This score helps investors and stakeholders understand how effectively a company is translating its investment in growth into actual revenue. An efficiency score greater than 1.5x indicates that a company is growing its revenue faster than it is increasing its losses, which is a positive sign of efficient growth.

Each of these metrics serves a different purpose:

• The burn multiple is particularly useful for assessing operational efficiency and financial sustainability.
• The hype ratio identifies market expectations and potential overvaluation.
• The efficiency score provides a direct measure of revenue growth efficiency relative to spending.

Calculating Burn Multiple

To calculate the burn multiple, use the following formula:

Burn Multiple = Net Burn / Net New ARR

Where:

• Net Burn is the difference between cash inflows and outflows over a period (usually a year).
• Net New ARR is the increase in ARR compared to the previous period.

Let’s say Startup X that begins the year with an ARR of $1 million. Over the year, it successfully acquires new contracts worth $500,000 of additional ARR. However, it also experiences churn and downgrades amounting to $100,000.

Net New ARR = $500,000 − $100,000 = $400,000

During the same year, suppose Startup X had total cash outflows (expenses) of $1.2 million and cash inflows (revenue) of $800,000.

Net Burn = $1.5 million − $800,000 = $700,000

To calculate the Burn Multiple, you would divide the Net Burn by the Net New ARR:

Burn Multiple = $700,000 / $400,000 = 1.75x

In this example, the burn multiple of 1.75x means Startup X spent $1.75 for every $1 of new ARR generated during the year.

A figure between 1 and 1.5x is considered healthy. It means the company is breaking even or close to it. Anything between 1.5x and 2x is healthy for early-stage companies and seed-stage startups in high-growth mode.

Interpreting Burn Multiple Results

The burn multiple can provide a quick and digestible snapshot of a company’s financial health. However, investors and stakeholders should consider carefully how they interpret the results.

Considerations for Investors

When assessing the burn multiple as an investor, here are some factors to keep in mind:

• Industry benchmarks. Different industries have different cost structures and growth patterns. What’s considered an acceptable burn multiple will vary across sectors.
• Growth stage. Early-stage startups generally have higher burn multiples as they are still investing heavily in growth. Later-stage companies with more established revenue streams should have a lower burn multiple (or a positive profit margin).
• Cash reserves. The amount of cash a company has on hand is an important factor when interpreting the burn multiple. A multiple may be acceptable if the company has enough cash to sustain growth before reaching expected profitability.
• Investment horizon. A high burn multiple may be acceptable for a short-term investment with the potential for significant returns, but not for a more extended investment with lower expected returns or potential for an economic downturn.
• Product innovation. Some SaaS products require massive R&D and development costs (both before and after GTM launch). If you have a longer investment timeline, you’ll want to consider how a product could potentially dominate the future marketplace.

Considerations for Startup Founders

Startup founders can also use the burn multiple to monitor their company’s financial health and make informed decisions about growth strategies and spending. Consider these factors:

• Growth goals. A high burn multiple may be acceptable for early-stage startups seeking rapid growth, but it should align with your company’s overall growth goals.
• Cost-cutting opportunities. Reducing customer acquisition costs or operating more efficiently might be a simple fix for a higher-than-expected burn multiple.
• Timing. Don’t analyze this metric in isolation. Take into consideration other financial metrics like ARR growth rate, churn rates, and cash reserves to get a more comprehensive picture of your company’s financial health.
• Context. How much were you growing before? Gradually decreasing your cash burn or improving your growth rate over time can boost your credibility and underscore potential for future success.
• Investor expectations. Communicate how your spending habits align with your growth strategy. Investors have different risk tolerances and expectations, so open communication is crucial.

Limitations of Using Burn Multiple as a Standalone Metric

While the burn multiple is a valuable metric, it should not be used in isolation when evaluating a company’s financial health.

Here are some limitations to consider:

• Short-term perspective. It doesn’t provide insight into long-term sustainability and does not factor in potential future revenue growth.
• Ignores non-cash expenses. It also doesn’t take into account depreciation and amortization, which can significantly impact a SaaS business’s profitability.
• Focus on cash rather than profit. It measures how much a company is burning through cash, not whether it is profitable.
• Limited comparability. Different companies may use different accounting methods or have varying levels of customer acquisition costs, making it challenging to compare burn multiples across companies.

Ways to Improve Burn Multiple for Startups

Since your burn multiple is a ratio between your expenses and ARR, any improvement to either side of the equation will lower your burn multiple. That means you’ll either have to reduce your expenses without lowering ARR growth or grow faster without increasing expenses.

Some strategies to achieve this include:

• Operate more efficiently by re-evaluating your business processes and cutting unnecessary expenses.
• Use software like chatbots, CPQ (configure, price, quote), marketing automation, and revenue management platforms to streamline operations.
• Improve productivity by investing in employee training and development, pursuing sales innovation, and creating a supportive company culture.
• Increase ARR growth through product innovation, better pricing strategies, and market expansion.

Although it won’t directly improve your burn multiple, securing more financing can also give you more runway and allow you to focus on growing your ARR. Keep fundraising to a minimum, though, as it can cause you to overvalue your company or lead to unnecessary dilution.

People Also Ask