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Glossary

Burn multiple

Net burn divided by net new ARR: how many dollars a company spends to add each dollar of recurring revenue. Lower is more efficient.

Updated 2 min read
Summarise
How it works

Definition: Burn multiple is a company's net burn divided by its net new ARR over the same period: how many dollars of cash it spends to add each dollar of annual recurring revenue. Investor David Sacks popularised the measure in April 2020. Lower is more efficient. A burn multiple of 2 means the company burned two dollars for every new dollar of ARR.

Key takeaways

  • Burn multiple = net burn divided by net new ARR, over the same period.
  • It reads growth and spending together, which neither does alone.
  • It breaks down when net new ARR is tiny or negative.

How to calculate burn multiple

Take net burn for a period, which is cash going out minus cash coming in from operations, and divide it by net new ARR in the same period, which is new and expansion ARR minus churned and contracted ARR.

Example: in one quarter a company's net burn is $1.5 million and its ARR grows from $3 million to $4 million. Net new ARR is $1 million, so the burn multiple is 1.5.

Why funds look at it

Sacks introduced it as a way to judge whether growth is efficient: a company can grow fast by spending heavily, and burn multiple shows the price of that growth. A fund comparing two companies with the same growth rate can see which one needs more capital to get there, and what that means for future rounds and dilution.

Limits to keep in mind

  • Very early companies with little ARR get huge or meaningless multiples.
  • Negative net new ARR makes the figure negative; treat that as a warning, not a good score.
  • Quarters with a large upfront cost, such as a hiring push, distort it. Look at a few periods.
  • It depends on ARR being defined well. Check the ARR first.

Common confusions

  • Net burn versus gross burn: gross burn is total spending; net burn subtracts cash coming in.
  • Burn multiple versus CAC payback: payback looks at acquiring one customer; burn multiple covers all spending.
  • A low burn multiple says nothing about how large the company can become.

Sources

Facts about other companies and services come from the pages listed, on the dates shown, and can change.

FAQ

Questions about burn multiple

Lower is better. In the original post, Sacks calls 2 reasonable for an early-stage startup and 5 terrible, and says a seed-stage company might sit around 3 because it has just started selling.

Rarely. With little ARR, the figure swings wildly. It becomes more useful once a company has steady recurring revenue.

A quarter or a trailing twelve months, with the same period for burn and net new ARR.
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