Burn multiple, explained — and why investors watch it

Few metrics went from blog post to board staple as fast as the burn multiple. David Sacks introduced it in April 2020, writing that capital efficiency was becoming a more pressing issue as the economic crisis deepened, and offered it as a single number for judging whether a startup’s burn was justified by its growth¹Source 1 · David Sacks (Craft Ventures), 2020The Burn Multiplesacks.substack.com. When the funding market tightened in 2022 and 2023, more investors started asking for it. Bessemer wrote that growth “should be at optimal costs, not growth-at-all-costs”²Source 2 · Bessemer Venture Partners, 2023State of the Cloud 2023bvp.com, and the burn multiple is the simplest way to check whether that holds.

Both inputs need care. Net burn is the figure investors use to estimate how long your cash will last, and it is different from gross burn, which counts only outflows⁴Source 4 · Andreessen Horowitz (a16z), 201516 Startup Metricsa16z.com. Net new ARR depends entirely on your ARR definition. If ARR includes one-time fees or services revenue, the multiple will look better than the business really is. See ARR and the SaaS metrics definitions guide for a definition that holds up in diligence.

A worked example

In this example the company spent $1.67 of net cash for every dollar of ARR it added. Notice how much churn matters: if churned ARR had been $0.5M instead of $0.2M, net new ARR would drop to $0.6M and the multiple would jump to 2.5x without a single extra dollar of spend.

There is no single official scale, and you should be wary of anyone who presents one as settled. These are the reference points published by the people who use the metric most:

Stage changes the target. Sacks expects the multiple to fall as a company matures, describing a company near 3x at seed that improves to about 2x after its Series A. After a Series B, when the sales team should be operating at scale, expectations rise further, and a multiple moving in the wrong direction signals a problem even if headline growth is still increasing. Profitability means burn reaches zero, so over time the multiple should approach zero as well¹Source 1 · David Sacks (Craft Ventures), 2020The Burn Multiplesacks.substack.com.

Because it compresses almost everything that can go wrong into one ratio. In Sacks’s words, “the beauty of the Burn Multiple is that it’s a catch-all metric”¹Source 1 · David Sacks (Craft Ventures), 2020The Burn Multiplesacks.substack.com. Weak pricing, high churn, low gross margin, an expensive sales motion and a bloated cost base all raise it. A board does not need to know which problem is present to see that something is wrong. The multiple tells them where to start asking.

It also measures the current period rather than the company’s whole history. Sacks contrasts it with the “hype ratio”, capital raised divided by ARR, which permanently penalizes a startup for money spent years ago. The burn multiple can improve the quarter after you cut costs or fix churn¹Source 1 · David Sacks (Craft Ventures), 2020The Burn Multiplesacks.substack.com. That makes it a management tool, not only a scorecard.

• Mismatched periods. Net burn for the quarter divided by net new ARR for the year is meaningless. Use the same window for both.
• Annual prepayments. A large upfront annual payment lowers net burn in the quarter it arrives and raises it later. If billing is lumpy, show the trailing four-quarter multiple next to the quarterly one.
• Negative or tiny net new ARR. When net new ARR is zero or negative, the ratio is undefined or misleading. Report “n/m” (not meaningful) and show net burn and net new ARR separately.
• Loose ARR. Counting services, one-time fees or signed-but-not-live contracts inflates the denominator. Write the definition down and apply it every quarter.
• Hidden gross-margin problems. Sacks flags that high cost of goods sold drives burn up as you scale, so the multiple will not improve with scale if margins do not¹Source 1 · David Sacks (Craft Ventures), 2020The Burn Multiplesacks.substack.com. Look at gross margin alongside it.
• Comparing across stages. A 2x multiple means one thing at $2M ARR and something else at $40M. Compare against your own trend and stage.

The burn multiple is one of several efficiency metrics a board may see. They answer different questions, and the strongest board decks show two or three of them together.

Watch the naming. In its 2023 State of the Cloud report, Bessemer used “efficiency score” for net new ARR divided by net burn, which is simply the burn multiple turned upside down²Source 2 · Bessemer Venture Partners, 2023State of the Cloud 2023bvp.com. If an investor quotes an efficiency score, ask which version they mean. Burn multiple fits best in the window between product-market fit and profitability, which is exactly where most Series A and B companies sit. Once you approach break-even, the Rule of 40 and free-cash-flow metrics take over.

Because the ratio has two parts, there are two ways to move it: add more net new ARR for the same spend, or spend less for the same net new ARR. In practice the fastest improvements usually come from the denominator, not from cost cuts.

1. 1Fix churn first. Every dollar of churned ARR comes straight out of net new ARR. Recovering a struggling cohort often improves the multiple more than a new campaign does. Start with a cohort analysis to see where revenue leaks.
2. 2Invest in expansion. Expansion ARR from existing customers usually costs far less to win than new logos. Seat growth, usage tiers and add-ons all count.
3. 3Cut the channel, not the team. Look at CAC payback by channel and segment, and pull spend from the ones that take longest to pay back.
4. 4Check gross margin. Hosting, support and onboarding costs scale with revenue. If they grow as fast as ARR, the multiple will not improve with scale.
5. 5Revisit pricing. A price increase on new contracts lifts net new ARR without adding spend, and it is often overdue at Series A.

Whatever you change, measure the effect on the trailing four-quarter multiple, not a single quarter. Show the board both the lever you pulled and the number it moved.

Burn multiple needs data from two systems that rarely agree: ARR movements from billing (such as Stripe) and cash from accounting (such as QuickBooks or Xero). In Kimo, both feed one governed model, and burn_multiple is defined as a measure on top of net_burn and net_new_arr. Change the ARR definition and the multiple updates everywhere it appears: the revenue dashboard, your board deck, and answers from Ask Kimo.

The SaaS metrics template ships with burn multiple, quarterly and trailing four-quarter, next to ARR, NRR, CAC payback and runway. For the full list of numbers a board will expect alongside it, read The metrics every Series A board will ask about, and see the burn multiple glossary entry for a short reference.