What is Burn Multiple?
Burn Multiple measures how much a startup is burning in order to generate each incremental dollar of ARR. This metric evaluates burn as a multiple of revenue growth. The higher the Burn Multiple, the more the startup is burning to achieve each unit of growth. The lower the Burn Multiple, the more efficient the growth is.
How to calculate Burn Multiple
What is a good Burn Multiple benchmark?
For venture-stage startups, these are reasonably good rules of thumb:
Q1 just ended and it’s time for a board meeting. The startup reports that it burned $2M in the quarter while adding $1M to its ARR. That’s a 2x Burn Multiple — reasonable for an early-stage startup. On the other hand, if the company burned $5M in Q1 to add $1M of net new ARR, that’s a terrible Burn Multiple (5x). It should probably cut costs immediately. That company is spending like a later-stage company without delivering later-stage growth.
More about this metric
Venture Capitals use the Burn Multiple to help assess the quality of product-market fit. The startup that generates $1M million in ARR by burning $2M is more impressive than one that does it by burning $5M. In the former case, it appears that the market is pulling product out of the startup, whereas in the latter case, the startup is pushing its product onto the market.
The beauty of the Burn Multiple is that it’s a catch-all metric. Any serious problem will eventually impact the Burn Multiple by either increasing burn, decreasing net new ARR, or increasing both but at disproportionate rates.
If the startup is pre-revenue, net new ARR will be zero so the ratio will not even compute. The founders should focus on keeping burn low and crossing the Penny Gap, in other words getting their first few paying customers, as quickly as possible. The Burn Multiple should improve as the startup matures. Eventually, for a company to become profitable, burn must reach 0, which implies that the Burn Multiple should also approach 0 over time.
Additional Burn Multiple recommended resourcesRead about Burn Multiple from David Sacks.
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