Burn Multiple: What it is, Formula, and What it Says About Your SaaS Business

5 reasons why the burn multiple is important for SaaS companies

Unlike many SaaS metrics that provide insight into specific areas of your business, the burn multiple takes every business function into account. Some of the reasons the burn multiple is important for SaaS companies include:

1. Quantifies capital efficiency

Growth at all costs is no longer the industry norm. Instead, businesses have turned their focus to being capital efficient. The burn multiple allows you to quickly quantify your business’ capital efficiency by comparing the amount of capital you burn to the new ARR it creates. 

Investors look at it, too. They’re looking for companies that spend capital efficiently and maintain good margins. Your burn multiple along with other revenue multiples offer them insight into your capital efficiency. So, that’s another good reason to keep an eye on it. 

‍According to David Sacks, the burn multiple is easier to use and more accurate than other capital efficiency metrics like the Hype Factor or Bessemer’s Efficiency Score.

2. Places growth in context with investment

Although growth is always important, venture capital (VC) firms tend to pay more attention to a company’s capital allocation and spending habits when the market slows down. 

Demonstrating your company’s capital efficiency through its burn multiple gives investors a quick way to measure the viability of your business and the potential return on investment (ROI). A low burn multiple also encourages higher company valuations during fundraising.

3. Helps gauge product-market fit

A low burn multiple is a good indicator that the market is accepting your product. If your company has a great product-market fit, you won’t have to spend as much capital on promoting or further developing your product to boost growth. In contrast, if you don’t have a good  product-market fit, you’re going to spend more, which can increase your burn multiple significantly.

4. Indicates underlying issues

Since the burn multiple calculation includes all the cash your company burns, a higher-than-ideal result indicates underlying problems with your business model. 

The most common issues indicated by burn multiple inefficiency include: 

• Low gross margins – If your company spends too much on operating expenses or cost of goods sold (COGS) to produce its product or service, it will have a high burn multiple.
• High churn rates – Revenue churn is subtracted from overall ARR growth in the burn multiple formula. High churn will result in a higher burn multiple as losing customers and revenue makes efficient growth difficult to achieve. 
• Sales inefficiency – If your sales team’s productivity is decreasing you’ll likely start spending more to draw in new customers. This pushes up your customer acquisition cost (CAC) and, subsequently, your burn multiple.

5. Helps in planning

And, since the burn multiple takes a company’s entire spending into account, unlike alternative metrics like the LTV:CAC ratio, it plugs well into KPI-based SaaS financial planning and SaaS continuous planning.

How to calculate the burn multiple

The burn multiple formula is: 

To calculate each variable in the equation, you can expand the formula to: 

‍‍Note that in the formula above, you can substitute the current month’s EBITDA, which reflects net cash profit/loss, instead of the change in cash balance. This is useful for investors and others that don’t have access to the company’s cash balance figures. However, it's also important to note that this method provides an approximation of burn, not the actual burn.

Here’s what that formula would look like:

The burn multiple is typically calculated yearly or quarterly. In the following example, we’ll use the standard burn multiple formula that relies on cash balance figures with the additional information below:  

Company A reports the following over one year: 

• Cash at the beginning of the year – $50,000,000
• Cash at the end of the year – $40,000,000
• ARR at the beginning of the year – $25,000,000
• ARR at the end of the year – $30,000,000
• New ARR – $4,000,000
• Expansion ARR – $2,500,000
• Churned ARR – $1,000,000
• Downgrades – $500,000

Based on this data, its burn multiple is calculated as follows: 

Comparing your company’s year-on-year burn multiple provides a clear picture of whether your new revenue generation is becoming more efficient. 

Burn multiple, Hype Factor, and Bessemer Efficiency Score

Burn multiple isn’t the only way to measure capital efficiency in SaaS. Hype Factor and the Bessemer Efficiency Score are a couple of other metrics that are commonly used. 

The formulas for each are shown below:

Some investors will flip the numerator and denominator in the Bessemer Efficiency Score to get a sense of a company’s spending habits. However, in order to answer the critical question of how much money a company is burning to create each dollar of new ARR, the burn multiple is the best metric to use. 

What is the difference between burn rate and burn multiple?

The burn multiple describes how efficiently your company spends its cash to generate new ARR. As such, it offers more investment-related context to your spending. 

In contrast, the burn rate reflects how fast your company is spending (or “burning”) cash.  

Using your burn rate, you can calculate your runway, which is an all-important metric for CEOs/CFOs and your board because it measures how long you have before you run out of cash at your current burn rate. Runway is typically calculated based on the previous three months as shown in the formula below. However, you can calculate it for any period of interest.

The formulas for gross monthly burn rate and gross burn rate are shown below:

The runway can be calculated as follows:

What is a good burn multiple for SaaS?

Below are the rules of thumb for interpreting the burn multiple of a venture-stage startup (Series A or above) according to David Sacks.

For more context, VC firm a16z listed the following burn multiple benchmarks by ARR: 

‍What if your burn multiple is “bad?”

There are three situations in which a “bad” burn multiple might be considered acceptable (or at least expected). 

1. Pre-revenue and early-stage startups often have high burn multiples because they’re spending a lot on development and trying to find their product-market fit. As the company matures, however, cash flow should increase along a “J-curve,” resulting in decreasing burn multiples. 

2. Another scenario in which a higher burn multiple is acceptable is if investing more in research and development creates an economic moat allowing your company to maintain a competitive advantage (e.g. “deep” tech that would be hard for your competitors to match). However, you would want to make sure your investors are on board with this idea.  
3. Companies that pivot in their business strategy will also often have high burn multiples. For example, say a company has raised $10M, and after spending a lot of that money fails to find a product market fit. In this case, the company now has to change its strategy and has little to show for that expenditure. Since it’s essentially starting over on several fronts, it will take time and more money to show results.

With the exception of these three scenarios, your burn multiple should consistently decline as your company matures. While the number itself offers some context, it’s really the trend in your burn multiple that matters as you mature. You could have a low burn multiple, but if this number is increasing, investors might balk at putting more cash into the business.

How to improve your burn multiple

Since the burn multiple encompasses all your company’s spending, there are many ways you can improve your score if you can identify the factors that are driving it up. 

Below are some of the most effective steps to take to improve your burn multiple:

• Improve your product-market fit – Early-stage SaaS companies often have higher burn multiples while they adjust their products to fit the market. As your company grows, you should focus on developing your product to generate organic demand. If you don’t have to push your product, you’ll save money on sales and marketing, lowering your burn multiple.
• Reduce your COGS – Cutting costs of any kind, including your COGS, will help reduce your burn multiple. The additional benefit of working to reduce your COGS is that doing so improves your gross margin (GM). 
• Reduce your CAC – Take note of your company’s CAC and CAC payback period and how this may be raising your burn multiple. The faster you recover your CAC, the more cash you have on hand to fund growth, reducing the need to seek external funds. The lower your CAC is, the less you’ll have to spend on growth.
• Lower your churn – Ensure all new ARR directly contributes to growth by minimizing customer and revenue churn. That way, new ARR won’t simply go towards replacing churned revenue, wasting all the capital put into generating it. 
• Increase your expansion revenue – Getting your existing customers to spend more on your product increases subscription revenue and MRR while minimizing your new customer acquisition expenses. Spending less capital on sales and marketing improves your burn multiple.