Burn Multiple

Imagine you have a lemonade stand and your parents give you $10 to buy supplies. You spend all $10 on lemons and sugar, and by the end of summer, you have customers who promise to buy $5 worth of lemonade from you every month.

The burn multiple asks: "How many dollars did I spend to get each dollar of regular monthly sales?" In this case, you spent $10 to get $5 of monthly sales. That's a burn multiple of 2 — you spent $2 for every $1 of new sales.

Lower is better! If you could get the same $5 monthly sales by spending only $5, your burn multiple would be 1. That means you're being super smart with your money!

Historical context: Before 2021, startup investors mostly cared about one thing: growth rate. Companies that grew faster got higher valuations, regardless of how much cash they burned. This "growth at all costs" mindset fueled companies like WeWork, which burned billions chasing expansion.

The burn multiple concept emerged around 2020-2021, popularized by David Sacks of Craft Ventures, as interest rates rose and investors started caring about efficient growth. It became the defining metric of the post-ZIRP (Zero Interest Rate Policy) era.

Net Burn = how much cash you spent minus any revenue you collected (your cash loss)

Net New ARR = how much new annual recurring revenue you added this period

Burn multiple is essentially a capital efficiency ratio that answers: "For every dollar of cash consumed, how much recurring revenue did the company create?"

The benchmark scale:

• < 1x: Amazing — generating more ARR than cash burned (rare, usually means near-profitability)
• 1-1.5x: Excellent — very efficient growth
• 1.5-2x: Good — healthy for growth-stage companies
• 2-3x: Acceptable — typical for earlier-stage or aggressive growth phases
• > 3x: Concerning — spending too much for the growth achieved

Why it matters: A company with a 3x burn multiple needs to raise 3x more capital than a 1x company to achieve the same ARR growth. This dilutes founders and early investors significantly and requires favorable fundraising conditions to sustain.

Nuances and variations:

The standard formula uses net burn (operating cash outflow minus revenue), but some analysts use gross burn (total operating expenses). Net burn is preferred because it accounts for revenue contribution to funding operations.

The denominator debate: Should you use net new ARR (new ARR minus churned ARR) or gross new ARR? Net new ARR is more conservative and accounts for the fact that high churn negates new sales efforts. A company adding $2M ARR but losing $1M to churn has net new ARR of $1M.

Stage-adjusted expectations:

• Seed/Series A: 2-3x often acceptable while finding product-market fit
• Series B: Should be trending toward 1.5-2x
• Series C+: Investors expect <1.5x, ideally approaching 1x
• Pre-IPO: Should demonstrate path to <1x

Relationship to other metrics: Burn multiple complements the Magic Number (sales efficiency) and Rule of 40 (growth + profitability balance). A company can have a great Magic Number but poor burn multiple if R&D or G&A spending is excessive.

Strategic implications:

Burn multiple directly determines runway and fundraising dynamics. A company with 24 months of runway at 3x burn multiple will need to raise before reaching profitability; the same company at 1x burn multiple might reach default-alive status.

The "burn multiple trap": Early-stage companies sometimes optimize for burn multiple by under-investing in growth. This can be as dangerous as over-spending. The goal is efficient growth, not just low burn. A 0.5x burn multiple with 20% growth is worse than 2x burn with 100% growth in most venture contexts.

Cohort-based analysis: Sophisticated operators calculate burn multiple by customer cohort. If your Q1 cohort required $3 of spend per $1 ARR but Q4 cohort requires $1.5, you're improving go-to-market efficiency even if blended metrics look flat.

The Sacks framework: David Sacks proposed combining burn multiple with growth rate for a complete picture:

• High growth + low burn multiple: Ideal — efficient hypergrowth
• High growth + high burn multiple: "Growth at all costs" — risky without clear path to efficiency
• Low growth + low burn multiple: Lifestyle business or market limitation
• Low growth + high burn multiple: Failing company — burning cash without results

Market-dependent benchmarks: Enterprise software companies can sustain higher burn multiples (2-3x) due to larger contract values and longer customer lifetimes. SMB-focused or consumer subscription companies need tighter efficiency (1-1.5x) because of higher churn and lower LTV.