Burn multiple: what it measures, how to calculate it, and what a good one is

The burn multiple is net burn divided by net new ARR over the same period: how many dollars of cash a startup burns to add one dollar of annual recurring revenue. A burn multiple of 2 means the company spent $2 of net cash for every $1 of new ARR.

David Sacks introduced it in April 2020 as a single number for capital efficiency. Unlike the SaaS magic number, it counts all spending, not only sales and marketing.

The burn multiple formula

Burn multiple = net burn / net new ARR

net burn     = cash spent − cash received in the period
               (leaving out new funding)
net new ARR  = new + expansion − contraction − churned ARR
               in the same period

Calculate it per quarter or over a trailing twelve months. Monthly figures swing too much, because one large deal or one annual bill moves either side.

A worked burn multiple calculation

Two companies, same quarter:

Company A: 1,200,000 / 800,000 = 1.5x
Company B: 1,500,000 / 300,000 = 5.0x

Both companies have the same ARR to start with. Company A burns $400,000 a month and adds $800,000 of ARR in the quarter. Company B burns more and adds less, so every dollar of new ARR costs it $5 of cash. At that rate, adding another $1M of ARR would cost Company B $5M.

Burn multiple benchmarks

The benchmarks most people quote come from Sacks' original post, "The Burn Multiple" (April 2020), written for venture-stage startups. In it he calls a 2x burn multiple reasonable for an early-stage startup, describes 5x as terrible, and treats growth that requires extraordinary investment, about 3x burn or more, as a sign that product-market fit is weaker than the growth suggests. He also notes that a seed-stage company that has just started selling can show a multiple around 3 without that being alarming, and that the multiple should fall toward zero as a company matures, since burn has to reach zero for it to become profitable.

So, as a rough guide drawn from that post:

• Below 2: efficient for an early-stage company.
• Around 2 to 3: acceptable early on; look at the trend.
• 3 or more: ask why growth costs so much, unless the company is very young.
• 5 or more: a serious efficiency problem.

Burn multiple calculator

With a quarter per row, net burn in column B and ARR at the end of each quarter in column C:

Net new ARR (D3):    =C3-C2
Burn multiple (E3):  =IF(D3>0, B3/D3, "no net growth")
Trailing 4 quarters: =SUM(B3:B6)/(C6-C2)

Common burn multiple mistakes

• Using gross burn. The metric is about cash actually lost, so subtract the cash coming in.
• Counting fundraising as cash in. A new round lowers nothing; leave financing out of net burn.
• Mismatched periods. Net burn for a quarter needs net new ARR for the same quarter.
• Calling a negative multiple good. Negative net new ARR gives a negative number, which is the worst case, not the best.
• ARR that includes services or usage spikes. Use recurring revenue only, as defined on the ARR page.

Related metrics

• Burn rate: gross and net burn, and runway.
• Annual recurring revenue: where net new ARR comes from.
• Rule of 40: another way to weigh growth against losses.
• SaaS magic number: efficiency of sales and marketing spend only.

Get the inputs automatically every week

Both halves can be computed by your own agent on a schedule. QuickBooks cash and runway posts cash, monthly net burn and runway every Monday from your books, and the Stripe weekly MRR report posts net new MRR every Monday; times 12, that is net new ARR. Once a quarter, have the agent divide one by the other and post the burn multiple as a metric card next to runway on your Briefkin board.