How To Calculate Burn Multiple for Your Startup

Of all the capital efficiency metrics that investors assess to gauge the efficiency of your startup’s spending, burn multiple may be the most crucial — and any metric that’s valued by investors should also be valued by startup founders and leadership.

Your startup’s burn multiple essentially shows the amount of money your startup is spending to generate each dollar of annual recurring revenue (ARR). Beyond showing your startup’s capital efficiency, it can also help investors determine product-market fit, and gauge your startup’s overall financial stewardship and sustainability.

The metric was introduced and popularized by David Sacks, a co-founder and partner at Craft Ventures, in 2020 as a means of helping both founders and investors determine how effectively startups convert cash into recurring revenue. The metric is especially important in tight capital markets, where investors want to see not just growth, but efficient growth as well.

The Burn Multiple Formula

So, how do you calculate the burn multiple metric? Here’s the formula:

• Burn multiple = Net burn / Net new ARR

Your net burn is the total cash spent minus the total cash received over a specified period. Net burn excludes financing activities, such as investments or debt. The net new ARR represents the increase in contracted recurring revenue from the start to the end of the period after accounting for any churned revenue. Follow the formula, and you’ll discover your burn multiple.

Quarterly vs. Annual Calculations

How often should you calculate your burn multiple? It depends. Startups with shorter sales cycles should track burn multiple more frequently than those with longer sales cycles.

It’s best practice to calculate your burn multiple on at least a quarterly basis; however, you may want to do it as often as monthly under certain circumstances. By calculating burn multiple quarterly, you can assess the results of any recent initiatives or tactical adjustments that you’ve made. Quarterly calculations are also ideal for showing progress to investors against internal burn multiple benchmarks and external multiple benchmarks.

Depending on the status and stage of your startup, you may want to calculate burn multiple as often as monthly. Tracking it on a monthly basis is beneficial if your startup has any short-term or major initiatives coming up and wants to quickly identify cash burn, test growth hypotheses or monitor the impact of any cost-cutting measures you’ve implemented.

Beyond these regular checks, you’ll want to maintain a trailing annual burn multiple to track fluctuations and trends throughout the year.

What Is a Good Burn Multiple?

While there’s a standard definition as “good” for a burn multiple, keep in mind that this figure can vary significantly based on the stage of your startup. Generally speaking, a good burn multiple for a startup is anything between 1.5x and 3x. Here’s an overview of what different burn multiples tend to imply about your startup:

• A multiple of 1x or less is considered excellent, indicating that your startup is generating more than $1 of ARR for every $1 it spends.
• 1x – 1.5x is considered good and shows efficient growth.
• 1.5x – 2x is acceptable, especially for early-stage startups that are still in the process of generating traction in the market.
• Anything above 2x likely requires attention, as it indicates excessive spending relative to growth.
• A burn multiple 3x or higher is alarming and suggestive of poor capital efficiency or poor product-market fit.

For a startup, a good burn multiple tends to be between 1.5x and 3x. Anything under 2 is considered strong and indicative of a good product-market fit, while 1.5 and under is considered excellent. However, as your startup evolves and moves from Series A to Series B fundraising, the burn multiple ideally continues to decrease to show evidence of good product-market fit, smart spending and sustainability. Occasionally, strong gross margins and efficient expansion can produce a negative burn multiple for a period.

How Benchmarks Shift by Stage

While a good burn multiple for a startup tends to be anywhere from 1.5x to 3x, what’s acceptable to investors changes as your startup evolves. For example, in the seed stage, a higher burn multiple is considered acceptable as your startup builds traction and establishes its name in the market, which is common among early stage companies.

However, the burn multiple should go down as your startup progresses to later fundraising zones. For instance, once it reaches Series A, the ideal burn rate multiple is 1.5x or below. Once your startup hits growth stages and starts earning $10 million or more in ARR, the burn multiple should be 1x or less to offer evidence of a working business model.

Why Does Burn Multiple Matter for Fundraising?

Investors assess a startup’s burn multiple during due diligence to measure its capital efficiency and growth quality. They want to determine the cost of generating each new dollar of recurring revenue. Low burn multiples tend to signal a strong product-market fit, implying that customers are buying your product without incurring excessive spending, which helps your startup tell a more compelling story as it pitches to investors for fundraising.

Conversely, a high burn multiple can serve as a warning sign to investors. If an investor decides to proceed with their investment in your startup, it may lead to more rigorous negotiations or lower valuations, depending on the stage of your startup. When a company burns cash faster than it adds ARR, the burn multiple reflects the gap immediately.

In markets where capital is scarce, investors are specifically looking to invest in startups that demonstrate evidence of efficient and sustainable growth. This can be demonstrated in financial models and with the burn multiple.

Burn Multiple for Non-SaaS Startups

Burn multiples are valued differently for SaaS startups than for other types of startups. For instance, while SaaS startups tend to use ARR, CPG and eComm startups might track against gross merchandise value or contribution margin. Furthermore, the standard burn multiple formula assumes SaaS gross margins of 70-80%, while eComm and CPG startups with lower gross margins should target lower burn multiples.

Adjusting the gross margin can provide more accurate cross-industry comparisons. Keep in mind that non-recurring revenue models should expect faster overall capital recovery timelines compared to recurring revenue models.

Strategies To Improve Your Burn Multiple

If your startup’s burn rate isn’t up to snuff, you’d do well to put in the effort to improve it. Improving your burn multiple is like anything — it’s not going to happen overnight. It takes work and commitment. But the payoff is more than worth it when it comes to the efficiency of your startup and its attractiveness to investors.

So, how can you improve your burn multiple metric? Consider these strategies:

• Focus on reducing your startup’s churn. Every dollar that’s not lost through churn will go directly to your net new ARR. Some ways to reduce churn include improving your onboarding and support services to retain your existing customers. In some cases, you may need to make improvements or adjustments to your product.
• Work to improve your sales efficiency through better targeted marketing, shorter sales cycles and higher overall close rates. If you can lower your customer acquisition cost (CAC), you can earn more customers while spending less money to do it.
• Prioritize expansion revenue from your existing customers via upgrades or new features. It’s often more cost-efficient to work with your existing customers than to acquire new ones.
• Internally, work to right-size your employee headcount and delay any non-essential hires until your revenue can support their overhead costs. Furthermore, you may also consider cutting any unnecessary costs to run a leaner overall operation.
• Work to negotiate annual contracts with upfront payments to improve cash dynamics.

Common Mistakes When Calculating Burn Multiple

It’s important to follow the formula when calculating your burn multiple. Otherwise, you won’t come up with the right metric, which can be problematic. Some of the mistakes you’ll want to be sure to avoid when calculating your burn multiple include:

• Using gross burn instead of net burn when making your calculation can overstate the inefficiency of your operation.
• Including one-time expenses that can skew the final number.
• Calculating over inconsistent time periods when comparing performance.
• Ignoring seasonal trends in your quarterly calculations.
• Comparing your burn multiple against benchmarks without properly adjusting for your business model differences.

Build Your Capital Efficiency Roadmap with Graphite

Do you need help calculating or improving your burn multiple? At Graphite Financial, we specialize in partnering with startups to track key metrics, such as burn multiple, and help drive improvements. As a full-service financial accounting firm, we’ll pair one of our fractional CFOs with your startup to serve as a true extension of your operations. Thanks to this partnership, your startup can expect more robust financial reporting, investor-ready financial models and a service that scales with your startup as it grows.

Contact us today to learn more and schedule a consultation.

FAQs

What is the burn multiple formula?

Burn multiple measures a startup’s capital efficiency by showing how much cash it burns to generate each dollar of new ARR. The formula for calculating burn multiple is as follows:

• Burn multiple = Net burn / net new ARR

Net burn is the cash that’s spent and net new ARR is the growth in recurring revenue after accounting for churn. Lower burn multiples tend to indicate more efficient growth, while higher burn multiples suggest inefficiency.

What is a good burn multiple for Series A startups?

For a startup entering the Series A fundraising stage, a good burn multiple tends to be 1.5x. Anything under 2x is generally considered strong and indicative of a good product-market fit, while 1.5x and under is considered excellent. Higher burn multiples suggest inefficiency. As your startup evolves and moves from Series A to Series B fundraising, the burn multiple ideally continues to decrease.

How often should I calculate my burn multiple?

We suggest calculating your burn multiple at least quarterly to track trends and efficiency. However, you may also consider tracking it on a monthly basis if you have any short-term or major initiatives coming up and want to quickly identify cash burn, test growth hypotheses or monitor the impact of any cost-cutting measures you’ve implemented.

How is burn multiple different from burn rate?

Burn multiple is a metric that shows how efficiently you’re turning spending into new revenue, while burn rate shows how fast your startup is spending its capital. Think of burn rate as the speed of your startup’s spending and burn multiple as the return on your startup’s spending as it pertains to revenue growth.

Can eComm startups use burn multiple?

Yes, eComm startups can use the burn multiple to measure their capital efficiency, but they need to adapt the metric to their specific model and growth metrics. Calculating the burn multiple is important for eComm startups for attracting investors, maintaining internal discipline and setting stage-specific benchmarks.

What causes a high burn multiple?

High burn multiples may be indicative of many things. Most commonly, high figures signal inefficient cash flow used for facilitating growth, which is problematic. This inefficient cash flow may stem from a variety of underlying issues, such as weak sales, high customer churn, operational bloat, gross margin problems, stalling growth and more. This can lead to overspending as a means of overcompensating.

High burn multiples are common for early-stage startups when they’re spending more to market and sell their product, but should gradually decrease as a startup evolves over time.

How do investors use burn multiple in due diligence?

Investors assess a startup’s burn multiple during due diligence to measure its capital efficiency. In other words, investors want to see how much cash it costs to generate each new dollar of recurring revenue. Burn multiples can also help support startup valuation, confirm product-market fit and help investors better determine if your startup has a sustainable future — all key factors they weigh when electing whether to invest.

What’s the relationship between burn multiple and cash runway?

The burn multiple and cash runway have an inverse relationship. A lower burn multiple tends to mean you have greater capital efficiency, which can thereby extend your cash runway and give you more time to operate before you need more funding — and vice versa. The cash runway is essentially the period you have until your startup runs out of cash and the burn multiple helps influence this based on how you’re spending to grow revenue.