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Burn Multiple: What it is, Formula, and What it Says About Your SaaS Business

The burn multiple allows SaaS companies to gauge their spending efficiency. In this guide, we explore how to calculate, interpret, and improve your burn multiple.

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Your SaaS company’s capital efficiency affects its ability to attract investors, raise funds, and grow sustainably. One of the preferred metrics used to measure capital efficiency is the burn multiple. 

What is the burn multiple? The burn multiple measures how much capital your SaaS company spends to generate $1 of new annual recurring revenue (ARR). Created by Craft Ventures co-founder David Sacks, it measures how efficiently your company converts its spending into ARR. The lower your burn multiple, the less your company is spending to grow.

In this article, we’ll show you everything you need to know about the burn multiple and why it’s important for your SaaS company.

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5 reasons why the burn multiple is important for SaaS companies

Unlike many SaaS metrics that provide insight into specific areas of your business, the burn multiple takes every business function into account. Some of the reasons the burn multiple is important for SaaS companies include:

1. Quantifies capital efficiency

Growth at all costs is no longer the industry norm. Instead, businesses have turned their focus to being capital efficient. The burn multiple allows you to quickly quantify your business’ capital efficiency by comparing the amount of capital you burn to the new ARR it creates. 

Investors look at it, too. They’re looking for companies that spend capital efficiently and maintain good margins. Your burn multiple along with other revenue multiples offer them insight into your capital efficiency. So, that’s another good reason to keep an eye on it. 

According to David Sacks, the burn multiple is easier to use and more accurate than other capital efficiency metrics like the Hype Factor or Bessemer’s Efficiency Score.

2. Places growth in context with investment

Although growth is always important, venture capital (VC) firms tend to pay more attention to a company’s capital allocation and spending habits when the market slows down. 

Demonstrating your company’s capital efficiency through its burn multiple gives investors a quick way to measure the viability of your business and the potential return on investment (ROI). A low burn multiple also encourages higher company valuations during fundraising.

3. Helps gauge product-market fit

A low burn multiple is a good indicator that the market is accepting your product. If your company has a great product-market fit, you won’t have to spend as much capital on promoting or further developing your product to boost growth. In contrast, if you don’t have a good  product-market fit, you’re going to spend more, which can increase your burn multiple significantly.

4. Indicates underlying issues

Since the burn multiple calculation includes all the cash your company burns, a higher-than-ideal result indicates underlying problems with your business model. 

The most common issues indicated by burn multiple inefficiency include: 

  • Low gross margins – If your company spends too much on operating expenses or cost of goods sold (COGS) to produce its product or service, it will have a high burn multiple.
  • High churn ratesRevenue churn is subtracted from overall ARR growth in the burn multiple formula. High churn will result in a higher burn multiple as losing customers and revenue makes efficient growth difficult to achieve. 
  • Sales inefficiency – If your sales team’s productivity is decreasing you’ll likely start spending more to draw in new customers. This pushes up your customer acquisition cost (CAC) and, subsequently, your burn multiple.

5. Helps in planning

And, since the burn multiple takes a company’s entire spending into account, unlike alternative metrics like the LTV:CAC ratio, it plugs well into KPI-based SaaS financial planning and SaaS continuous planning.

How to calculate the burn multiple

The burn multiple formula is: 

Burn multiple equals net burn divided by net new ARR
Burn multiple formula.

To calculate each variable in the equation, you can expand the formula to: 

Burn multiple equals the difference between cash at beginning of the period and at the end divided by the sum of new ARR, expansion ARR, churn, and downgrades.
Expanded burn multiple formula.

Note that in the formula above, you can substitute the current month’s EBITDA, which reflects net cash profit/loss, instead of the change in cash balance. This is useful for investors and others that don’t have access to the company’s cash balance figures. However, it's also important to note that this method provides an approximation of burn, not the actual burn.

Here’s what that formula would look like:

Burn multiple equals EBITDA in the current month, multiplied by negative one, divided by the difference between ARR in the current month and ARR in the previous month.
Alternative way to calculate burn multiple using EBITDA instead of change in cash balance.

The burn multiple is typically calculated yearly or quarterly. In the following example, we’ll use the standard burn multiple formula that relies on cash balance figures with the additional information below:  

Company A reports the following over one year: 

  • Cash at the beginning of the year – $50,000,000
  • Cash at the end of the year – $40,000,000
  • ARR at the beginning of the year – $25,000,000
  • ARR at the end of the year – $30,000,000
  • New ARR – $4,000,000
  • Expansion ARR – $2,500,000
  • Churned ARR – $1,000,000
  • Downgrades – $500,000

Based on this data, its burn multiple is calculated as follows: 

Burn multiple equals the difference between cash at beginning of the period 50 million dollars and at the end 40 million dollars divided by the sum of new ARR 4 million dollars, expansion ARR 2.5 million dollars, churn 1 million dollars, and downgrades 500,000 dollars giving us a result of 2.
Example burn multiple calculation.

Comparing your company’s year-on-year burn multiple provides a clear picture of whether your new revenue generation is becoming more efficient. 

Burn multiple, Hype Factor, and Bessemer Efficiency Score

Burn multiple isn’t the only way to measure capital efficiency in SaaS. Hype Factor and the Bessemer Efficiency Score are a couple of other metrics that are commonly used. 

The formulas for each are shown below: 

Formula for Bessemer Efficiency Score. The Bessemer Efficiency Score equals the net new ARR for a given period by the net burn for that period.‍
Formula for Bessemer Efficiency Score
Formula for Hype Factor. Hype Factor equals the capital consumed in a given period divided by the ARR for that period.
Formula for Hype Factor.

Some investors will flip the numerator and denominator in the Bessemer Efficiency Score to get a sense of a company’s spending habits. However, in order to answer the critical question of how much money a company is burning to create each dollar of new ARR, the burn multiple is the best metric to use. 

What is the difference between burn rate and burn multiple?

The burn multiple describes how efficiently your company spends its cash to generate new ARR. As such, it offers more investment-related context to your spending. 

In contrast, the burn rate reflects how fast your company is spending (or “burning”) cash.  

Using your burn rate, you can calculate your runway, which is an all-important metric for CEOs/CFOs and your board because it measures how long you have before you run out of cash at your current burn rate. Runway is typically calculated based on the previous three months as shown in the formula below. However, you can calculate it for any period of interest.

The formulas for gross monthly burn rate and gross burn rate are shown below:

Gross Burn (for a given month) = Total expenses include COGS and operating expenses (including research and development, sales and marketing, and general and administrative expenses) for the same month.
Gross monthly burn rate formula.
Gross burn rate equals total expenses (or Burn) for the last “x” number of months divided by the total number of months over which those expenses were incurred.
Gross burn rate formula.

The runway can be calculated as follows:

Runway equals cash balance for the previous 3 months divided by the burn for the previous 3 months.
Runway formula.

What is a good burn multiple for SaaS?

Below are the rules of thumb for interpreting the burn multiple of a venture-stage startup (Series A or above) according to David Sacks.

A burn multiple below 1 is amazing, between 1 and 1.5 it’s great, 1.5 to 2.0 is good, 2.0 to 3.0 is suspect, and over 3.0 is bad.‍
The rules of thumb for interpreting your burn multiple according to David Sacks.

For more context, VC firm a16z listed the following burn multiple benchmarks by ARR

For companies with an ARR between zero and 10 million dollars,  a burn multiple of 3.8x is bad, 1.6x is the median, and 1.1x is good. For companies with an ARR between 10 and 25 million dollars, a burn multiple of 1.8x is bad, 1.4x is the median, and 0.8x is good. For companies with an ARR between 25 and 75 million dollars, a burn multiple of 1.1x is bad, 0.7x is the median, and 0.5x is good. And for companies with an ARR of 75 million dollars or more, a burn multiple of 0.9x is bad, 0.5x is the median, and 0.0x is good.
Burn multiple benchmarks by ARR according to VC firm a16z.

What if your burn multiple is “bad?”

There are three situations in which a “bad” burn multiple might be considered acceptable (or at least expected). 

1. Pre-revenue and early-stage startups often have high burn multiples because they’re spending a lot on development and trying to find their product-market fit. As the company matures, however, cash flow should increase along a “J-curve,” resulting in decreasing burn multiples. 

Chart showing the J-curve in cash flow that commonly occurs as a company matures.
J-curve in cash flow that commonly occurs as a company matures.

2. Another scenario in which a higher burn multiple is acceptable is if investing more in research and development creates an economic moat allowing your company to maintain a competitive advantage (e.g. “deep” tech that would be hard for your competitors to match). However, you would want to make sure your investors are on board with this idea.  
3. Companies that pivot in their business strategy will also often have high burn multiples. For example, say a company has raised $10M, and after spending a lot of that money fails to find a product market fit. In this case, the company now has to change its strategy and has little to show for that expenditure. Since it’s essentially starting over on several fronts, it will take time and more money to show results.

With the exception of these three scenarios, your burn multiple should consistently decline as your company matures. While the number itself offers some context, it’s really the trend in your burn multiple that matters as you mature. You could have a low burn multiple, but if this number is increasing, investors might balk at putting more cash into the business.

How to improve your burn multiple

Since the burn multiple encompasses all your company’s spending, there are many ways you can improve your score if you can identify the factors that are driving it up. 

Below are some of the most effective steps to take to improve your burn multiple:

  • Improve your product-market fit – Early-stage SaaS companies often have higher burn multiples while they adjust their products to fit the market. As your company grows, you should focus on developing your product to generate organic demand. If you don’t have to push your product, you’ll save money on sales and marketing, lowering your burn multiple.
  • Reduce your COGS – Cutting costs of any kind, including your COGS, will help reduce your burn multiple. The additional benefit of working to reduce your COGS is that doing so improves your gross margin (GM). 
  • Reduce your CAC – Take note of your company’s CAC and CAC payback period and how this may be raising your burn multiple. The faster you recover your CAC, the more cash you have on hand to fund growth, reducing the need to seek external funds. The lower your CAC is, the less you’ll have to spend on growth.
  • Lower your churn – Ensure all new ARR directly contributes to growth by minimizing customer and revenue churn. That way, new ARR won’t simply go towards replacing churned revenue, wasting all the capital put into generating it. 
  • Increase your expansion revenue – Getting your existing customers to spend more on your product increases subscription revenue and MRR while minimizing your new customer acquisition expenses. Spending less capital on sales and marketing improves your burn multiple. 

How Drivetrain simplifies improving capital efficiency and accelerating growth

Drivetrain makes improving capital efficiency and accelerating growth simpler with features that enable:

  • Intelligent cost control – Align your budget and planning processes to improve your company’s cost control and reduce expenses. 
  • Real-time revenue tracking and forecasts – Instant revenue tracking allows you to adjust and adapt your forecasts throughout the year, leading to improved revenue predictability. This lets you see where your capital efficiency may land in the future and whether you need to change your approach to spending in the name of growth.
  • Built-in collaboration functionality – Take every aspect of your business and how it affects growth and capital efficiency into account. As a result, you’re better equipped to make positive changes that improve your growth efficiency. 
  • Detailed financial insight – Gain deeper insight into your company’s finances to make far reaching changes that improve overall efficiency and sustainability.
  • Scenario planning – Gauge how changes to other financial metrics will affect your burn multiple and adjust accordingly to improve your company’s efficiency.

The burn multiple offers powerful insight into how efficiently your business spends money on growth. Tracking and adjusting your business model to improve your burn multiple score can boost your company’s valuation and investor appeal. 

Want to learn more about how Drivetrain can help you improve capital efficiency and accelerate growth? Reach out to us.


What is the burn multiple?

The burn multiple is a capital efficiency metric that measures how much capital your SaaS company burns to generate $1 of new annual recurring revenue (ARR). Created by Craft Ventures co-founder David Sacks, it determines how efficiently your company converts its spending into ARR.

Can the burn multiple be negative?

Yes, the burn multiple can be negative if a company increases the cash it has on hand (when cash balance is used in the calculation) or is profitable (when EBITDA is used instead of the cash balance to calculate the number) during a specific period.

What is the difference between burn rate and burn multiple?

The burn multiple describes how efficiently your company spends its cash to generate new ARR. In contrast, the burn rate reflects how fast your company is spending (or “burning”) cash.

What is a good burn multiple?

For companies with an ARR of $0 - $10,000,000, a good burn multiple is 1.1x, according to VC firm a16z. As your company’s ARR increases, the benchmark for a “good” burn multiple becomes lower.

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