A (somewhat) popular metric used to evaluate SaaS startups’ capital efficiency is the burn multiple.
This metric is calculated, for a SaaS company, by dividing the net cash burned by the net new ARR (Annual Recurring Revenue) in a given period. The lower the number the better, as this shows that the startup burns less capital to generate its growth. Decent burn multiples are under 2x, whereas the best are under 1x.
To calculate the burn multiple, you would first determine the net cash burned, which is the amount of cash the company has spent in a given period, minus any financing or investment it has received. Then, you would divide this amount by the net new ARR, which is the increase in the company’s annual recurring revenue over the same period. (If you want to learn more about ARR, click here.)
For example, if a SaaS company spent $50,000 in cash in a month and generated $20,000 in net new ARR over the same period, its burn multiple would be 2.5 (50,000 / 20,000). This would indicate that the company is generating $2.50 in net new ARR for every $1 of net cash burned.
Burn Multiple = Net Cash Burned / Net New ARR
Net cash burned is the amount of cash that the company has spent in a given period, minus any financing or investment it has received. Net new ARR is the increase in the company’s annual recurring revenue over the same period.
Remember to use the same period for both parts of the formula!
This metric is going to vary by the stage of company/by how much ARR a company is generating. In general, SaaS startup generating lower ARR will have worse (lower) multiples. Conversely, a SaaS company with a higher ARR is likely to have a lower burn multiple, because it is generating more revenue with a given amount of capital (and it’s possible that it’s closer to profitability!).
For example, consider two SaaS companies that both have a net cash burned of $50,000 in a given period. If one of these companies generates $100,000 in net new ARR over the same period, while the other generates only $50,000, the first company would have a multiple of 0.5 (50,000 / 100,000), while the second company would have a multiple of 1.0 (50,000 / 50,000). This indicates that the first company is more capital efficient, as it is generating more revenue with a given amount of capital.
The well-known VC firm Andreessen Horowitz has published what they consider good multiples by amount of ARR. From their blog:
|$0 - $10M||3.8x||1.6x||1.1x|
|$10M - $25M||1.8x||1.4x||0.8x|
|$25M - $75M||1.1x||0.7x||0.5x|
Efficiency matters for startups - especially for SaaS companies, which are expected to start generating gross-profit positive revenue quickly.
The burn multiple is a good metric for evaluating the financial health and growth potential of a Software as a Service company because it takes into account both gross margins/profit and sales and marketing expenses (among other expenses - but these two financial metrics are particularly important for SaaS companies). .
Gross margins/profit refer to the amount of revenue that a company generates after deducting the cost of goods sold, which includes the direct costs of producing and delivering its products or services. Gross margins are important because they indicate how much profit a company is able to generate from each sale.
Sales and marketing expenses refer to the costs that a company incurs in order to generate revenue, such as advertising, sales commissions, and lead generation. These expenses are an important factor in the financial performance of a SaaS company because they can have a significant impact on the company’s ability to generate new revenue.
The burn multiple takes both of these factors into account by dividing the net cash burned (which is lower when a company has a lot of gross profit, and is higher when a company spends a lot on sales and marketing - note in this particular moment, a lower cash burn means a company is closer to cash flow breakeven) by the net new ARR in a given period. This helps to provide a more complete picture of the company’s financial performance and growth potential, as it accounts for both the costs of generating revenue and the profits generated from those sales.
VCs LOVE metrics that they can use like peanut butter, spreading it across multiple companies and different stages of company. This metric is great for that, since it can be used to compare capital efficiency across pretty much any SaaS company vs. any other. Additionally, it can be used to benchmark companies as they grow and become later stage.
As a leading SaaS accountant, we also like this metric because it’s pretty hard to argue with. We do think that it should e used in conjunction with other metrics, like the LTV to CAC. And some downsides that we will note is that it penalizes companies that are investing aggressively in R&D or that are building out their sales teams or marketing/branding. Early-stage companies should be given the opportunity to create excellent product and go to market engines, and strong brands, as this drives long-term enterprise value. So be aware that this metric does have downsides.
David Sacks, a VC with Craft Ventures (he is the co-founder of the fund, and is considered one of the top SaaS investors on the planet) is known for popularizing this KPI as a key metric for evaluating the health and growth of SaaS startups.
Sacks has spoken publicly about the importance of the burn multiple as a metric for SaaS startups, and has emphasized the need for SaaS companies to focus on maximizing their capital efficiency in order to achieve long-term success. By popularizing the it as a key metric for evaluating SaaS companies, Sacks has helped to bring greater attention to the importance of capital efficiency in the SaaS industry. The burn multiple metric is starting to become more popular than LTV to CAC and is almost as popular as the Rule of 40.
Burn rate and burn multiple are two related but distinct metrics that are used to evaluate the financial health and growth potential of a company.
Burn rate refers to the rate at which a company is spending its cash, typically on a monthly basis. It is calculated by taking the company’s total expenses and dividing them by the number of months over which those expenses were incurred. Burn rate is an important metric because it helps investors and company leaders understand how quickly the company is using its capital and how long it has before it runs out of cash. Check out our cash burn rate calculator here.
Burn multiple, on the other hand, is a measure of capital efficiency for a SaaS (Software as a Service) company. It is calculated by dividing the company’s net cash burned (cash spent minus financing or investment received) by its net new ARR (Annual Recurring Revenue) in a given period. A lower number is generally seen as more favorable, as it indicates that the company is able to generate more revenue with less capital.
In summary, burn rate is a measure of how quickly a company is spending its cash, while burn multiple is a measure of how efficiently a SaaS company is using its capital to generate new revenue.
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