SaaS Metrics
The Burn Multiple has become VCs' favorite metric for judging capital efficiency. Here's how to calculate it and optimize it.
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Create a free accountIn recent years, the Burn Multiple has become venture capital investors' favorite metric for evaluating startups' capital efficiency. Coined by David Sacks (founder of Craft Ventures), this metric answers a question that MRR and burn rate can't answer on their own: how much money are we burning for every dollar of new ARR we generate?
The Burn Multiple measures how many dollars of burn you need to generate one dollar of Net New ARR (new ARR net of churn). The formula is simple:
Net Burn: net cash burn for the period (typically a quarter)
Net New ARR: new ARR minus ARR lost to churn in that period
Your startup burns $400,000 in a quarter. In that same quarter, you add $500,000 of new ARR, but lose $100,000 to churn. Your Net New ARR is $400,000.
Burn Multiple = $400,000 ÷ $400,000 = 1.0
That means that for every dollar of new ARR you generate, you're burning one dollar.
Before the Burn Multiple, investors looked at growth and burn rate separately. You could have a company growing 200% a year with an enormous burn, or one growing 50% with very low burn. Which is better? Impossible to compare directly.
The Burn Multiple normalizes both variables. It tells you not how much you grow, nor how much you spend, but how efficient your growth is. Two companies growing at the same rate can have very different Burn Multiples — and the one with the lower figure has the superior business model.
The ranges originally published by David Sacks are:
You generate more ARR than you burn. An exceptional startup profile. Very rare outside of extreme product-market fit.
Excellent. Most high-growth startups aspire to be here.
Healthy. Acceptable for early stages and seed/Series A rounds.
Warning sign. Capital is being burned faster than it turns into real growth. Hard to fund in tight market conditions.
These benchmarks need to be adjusted by stage: at pre-seed and early seed, a Burn Multiple of 3x can be acceptable if there are clear signs of traction. For Series A+, the market expects you to be below 2x.
Traditional burn rate has two important limitations:
The Burn Multiple solves both limitations. By using Net New ARR, it already accounts for current churn. And by relating burn to growth, it tells you whether your capital burn is buying something valuable.
Reducing churn improves Net New ARR without increasing burn. It's the most efficient lever. Every dollar invested in customer success usually yields a better Burn Multiple than a dollar spent on marketing.
Expansion MRR from your installed base is almost free in terms of burn. It requires no new acquisition, just upsell. The best SaaS companies get 30-40% of their Net New ARR from expansion.
Analyze the Burn Multiple by acquisition channel. There are probably 1-2 channels with a Burn Multiple <1x and several at 3x-5x. Reallocate budget from the latter to the former.
Infrastructure, internal tools, administrative expenses. Reducing them improves the numerator of the Burn Multiple without touching the denominator.
Like any metric, it has limitations:
The Burn Multiple has become the standard capital efficiency metric in the SaaS world for a good reason: it captures in a single number what used to require several. If you're raising capital or running a growing SaaS, you should calculate it quarter by quarter and optimize it as one of your north star metrics.
To understand the ARR metrics that feed the calculation, check out our guide on MRR vs ARR and SaaS metrics.
Hayes Strategic brings ARR and burn together in a single dashboard. A pitch-ready metric.