Burn Multiple

What is the Burn Multiple?

Burn multiple is a key financial metric that measures how efficiently a company spends money and turns its spending into new recurring revenue. Understanding the burn multiple helps in assessing capital efficiency and overall company financial health.

The burn multiple metric is particularly relevant for SaaS companies, where rapid growth often requires significant upfront investment. Developed by David Sacks, co-founder and partner of Craft Ventures, the burn multiple helps investors and founders determine whether a company is using its capital effectively or spending its cash unsustainably.

A low burn multiple indicates that a company is generating revenue efficiently relative to its spending, while a higher burn multiple means the company burns more cash to acquire new customers. A high or negative burn multiple also suggests that the company is consuming too much cash for the revenue it is generating, which can be a red flag for investors.

How to Calculate the Burn Multiple

Many SaaS companies operate on a subscription-based revenue model, meaning they invest heavily in acquiring customers upfront with the expectation of long-term recurring revenue. For this reason, it’s important to track efficiency metrics like burn multiple to measure capital efficiency and determine if a company’s spending is driving sustainable growth.

Burn multiple is composed of two key elements:

• Net Burn: The amount of cash a company spends over a given period, calculated as Net Burn = Cash Revenue – Cash Operating Expenses. This represents the net amount of money a company loses within a specified time frame.
• Net New ARR (Annual Recurring Revenue): The increase in recurring revenue generated within a specific period, excluding previously existing ARR, calculated as Net New ARR = New ARR + Expansion ARR – Churned ARR. Unlike total ARR, which represents cumulative subscription revenue, Net New ARR focuses only on new revenue from new customers, upgrades, and expansions, while excluding renewals or existing contracts.

Understanding how to calculate burn multiple helps SaaS founders and investors assess capital efficiency, optimize cash flow, and make informed decisions about runway planning and long-term sustainability.

Burn Multiple Formula

The Burn Multiple formula is:

Burn Multiple = Net Burn/Net New ARR.

Where:

• Net Burn = Cash spent per period (typically per month or quarter)
• Net New Annual Recurring Revenue (ARR) = The increase in annual subscription revenue over the same period

Burn Multiple Calculation Example

If a SaaS company has a net burn of $500,000 and net new ARR of $250,000, the burn multiple is: $500,000/$250,00 = 2.0.

This means the company is spending $2 for every $1 of new ARR generated.

What is a Good Burn Multiple for a SaaS Company?

A good burn multiple depends on a company’s stage and growth trajectory, but general burn multiple benchmarks exist to guide SaaS startups :

Burn Multiple Benchmarks

• Under 1.0 – Excellent efficiency; the company is converting burn into revenue effectively.
• 1.0 to 1.5 – Strong efficiency, often seen in well-run, scaling SaaS startups.
• 1.5 to 2.0 – Reasonable but should be monitored closely.
• Above 2.0 – High burn relative to revenue growth; raises concerns about sustainability.

Startups in hyper-growth phases may tolerate a higher burn multiple (e.g., 1.5–2.5) if they are investing in aggressive expansion. However, sustained high burn rates without improving efficiency could signal trouble.

Factors Affecting Burn Multiple

Several factors impact different burn multiples, particularly for early-stage companies, where achieving product market fit is essential before optimizing spending.

• Revenue growth rate – Faster growth in revenue helps lower the burn multiple over time.
• Operating expenses – High fixed costs, such as salaries and infrastructure, can inflate burn multiples.
• Customer acquisition cost (CAC) – A high CAC means more spending to acquire customers, leading to a higher burn multiple.
• Sales efficiency – Efficient sales teams contribute to faster ARR growth, reducing the burn multiple.
• Product-market fit – Strong demand and low churn rates improve revenue efficiency.

How to Lower Burn Multiple and Improve Capital Efficiency

To optimize burn multiple, companies should focus on:

• Lowering Customer Acquisition Cost – Improving marketing and sales efficiency to reduce CAC.
• Enhancing retention – Reducing churn to maximize revenue from existing customers.
• Optimizing spending – Cutting unnecessary expenses without sacrificing growth.
• Increasing pricing power – Offering premium pricing or value-based pricing strategies.

Burn Multiple vs. Other Efficiency Scores

While burn multiple is crucial, it’s not the only measure of SaaS financial health. Companies also track:

• LTV:CAC Ratio – Compares customer lifetime value (LTV) to the cost of acquiring a customer.
• Rule of 40 – Evaluates whether growth in revenue plus profit margin equals at least 40%.
• Magic Number – Measures sales efficiency and how much revenue growth is generated per dollar spent on sales and marketing.
• Hype Ratio – Compares a company’s valuation to its ARR, helping investors assess whether market excitement aligns with actual financial performance.

Burn multiple provides a direct cash burn-to-revenue perspective, while other metrics focus on profitability, growth, cash management, and sales efficiency.

Revenue Growth and Burn Multiple

The relationship between revenue and burn multiple is key to sustainable scaling. If a company aggressively spends on customer acquisition but sees little revenue, it leads to a high burn multiple and short runway. Conversely, if revenue growth accelerates while controlling burn, the company achieves lower burn multiple, improved capital efficiency, and a stronger company’s financial health, making it more attractive to investors.

Why Burn Multiple Matters for SaaS Success

Burn multiple is a critical capital efficiency metric for SaaS startups. It measures how effectively a company burns cash to generate new recurring revenue while maintaining healthy cash flow. By improving sales efficiency, reducing churn, and optimizing expenses, companies can achieve a lower burn multiple and create a more sustainable growth path.

Want to improve your valuation techniques for early-stage companies? Explore financial modeling and valuation with CFI’s expert-led courses today.

Additional Resources

Thank you for reading CFI’s guide to the Burn Multiple. To keep advancing your career and skills, the following CFI resources will be useful:

• Net Revenue Retention (NRR)
• CAC Payback Period
• Return on Ad Spend (ROAS)
• SaaS Quick Ratio
• See all valuation resources
• See all accounting resources