What is a 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.

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:

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. 

How did the burn multiple become important?

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 multiple vs Capital Efficiency Ratio

One of the best things about using a the burn multiple metric is that it is starting to over take a bastardized version of the Capital Efficiency Ratio. The capital efficiency ratio is a metric that works for traditional businesses, where it measures how much operating profit is being generated by the company’s investments. However, SaaS investors attempted to change this metric to suit the needs of recurring revenue software companies, and in our opinion it fails. In the subscription world, the capital efficiency metric only measures ARR over capital burned - in our opinion, it’s not taking into account the company’s profits as well as the Burn Multiple.