Software Growth

Burn multiple

The burn multiple is net burn divided by net new ARR. It shows how many dollars you burn to add one dollar of annual recurring revenue.

The burn multiple answers a simple question: how much cash did you burn to add each dollar of new annual recurring revenue? David Sacks of Craft Ventures introduced it as a way to judge growth efficiency. Growth alone looks good in any funded company. Burn alone looks bad in any growing one. The multiple ties them together.

How to calculate burn multiple

Use the same period for both. Net burn is cash spent minus cash collected (see burn rate). Net new ARR is new plus expansion ARR minus churned and contracted ARR.

Example: over a quarter, you burn $15,000 per month, or $45,000. Your ARR grows from $240,000 to $270,000, so net new ARR is $30,000.

You spent $1.50 for each $1 of new ARR. Craft's own illustration is similar: burning $2 million to add $1 million of ARR is 2x, reasonable early on, while $5 million for the same growth is 5x and calls for immediate cost cuts.

What good looks like

Craft Ventures publishes ratings by stage:

  • Seed and Series A: under 1x is amazing, 1 to 1.5x great, 1.5 to 2x good, 2 to 3x suspect, over 3x bad.
  • Series B and later: under 0.5x amazing, 0.5 to 1x great, 1 to 1.5x good, 1.5 to 2.5x suspect, over 2.5x bad.

The bar is stricter at later stages because larger companies should be more efficient.

Why Sacks likes it

Sacks argues that any serious problem will show up in the burn multiple: higher burn, lower net new ARR, or both moving the wrong way. Weak retention, a slow sales team, overhiring and bad pricing all hit it. That makes it a good single number for a board or a founder who wants a health check.

Limits

  • It applies to companies that burn cash. If you are profitable, net burn is negative and the multiple loses meaning.
  • Net new ARR can be lumpy. A single large annual deal makes one quarter look great. Use a trailing four quarters when your volume is low.
  • It fits recurring revenue models best. Usage-based or service-heavy revenue needs adjustments.

For small teams

Burn multiple is mainly a venture metric, but a founder spending savings on a product can apply it. If you put $60,000 of your own money in and added $20,000 of ARR, that is a 3x multiple, which tells you the plan needs to change before the money runs out. Combine it with runway and the SaaS magic number, which measures sales efficiency.

How to improve it

  • Raise net new ARR: fix churn first, since every churned dollar cancels new sales.
  • Lower burn: cut spending that is not producing growth, such as channels with poor payback.
  • Raise prices, which adds ARR without adding cost.
  • Delay hires until revenue supports them.

Because the multiple is a ratio, small improvements on both sides add up. Cutting burn by 20% and lifting net new ARR by 20% takes the 1.5x in the example down to about 1.0x.

Sources

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