Burn Multiple

For a long time, the only question asked of a startup was how fast it was growing. If revenue doubled in a year, that line alone made it a good company, and the question of how much cash went into producing that line got pushed to a later slide.

The result was that two very different companies looked identical on a growth chart. Picture two businesses that each added $1.5 million in annual recurring revenue (ARR) over a year. ARR is the total a subscription business is contracted to collect over a twelve-month period. One of them spent $1.5 million in cash getting there; the other spent $6 million. The growth column reads the same for both, but the first company is growing under its own power and the second is buying revenue with someone else's money.

The difference surfaced whenever the next round stopped being easy. When the funding market froze, growth at the second kind of company stopped in the same quarter, because what had been pushing it was capital rather than the product. Around then, "revenue came in on plan" stopped being a complete answer in an investor meeting, and a second question started following it: what did that revenue cost?

Burn multiple exists to fold those two questions into one number. Instead of writing growth and the price of growth in separate rows and comparing them in your head, you look at a single ratio of cost to result.

Divide the net cash the company burned over a period by the ARR it added over the same period.

The numerator is burn rate summed across the period. Burn rate is the amount of cash a company loses in a month on net — money going out minus money coming in that month. The denominator is the ARR at the end of the period minus the ARR at the start. Only the increase counts; revenue that was already there does not.

There are three steps.

1. Pick the period. A quarter or a full year is normal. Measured monthly, a single large contract landing or lapsing can swing the number by half.
2. Count the cash that actually left. If the balance goes from $6.2 million at the start of the quarter to $5 million at the end, the company burned $1.2 million. Money raised during the period gets excluded from that math. Investment isn't money the business earned, and counting it makes the burn look smaller than it was.
3. Divide by the ARR added. If ARR went from $4.6 million to $5.4 million in the same quarter, the increase is $0.8 million, and $1.2 million divided by $0.8 million gives a burn multiple of 1.5.

A 1.5 means the company spent $1.50 of cash to add $1.00 of ARR, so a smaller number means the same growth was bought more cheaply.

Some quarters produce a denominator of zero or less. If churn was heavy enough that ARR shrank, the burn multiple does not exist for that quarter — not a bad value, no value — and the question to answer first is why revenue went backward.

The rough scale runs like this. Under 1 is excellent, 1 to 1.5 is good, somewhere around 2 is ordinary, and anything past 3 reads as buying revenue with cash.

That scale gets read against the company's stage, though. A business that just shipped its product hires ahead of revenue, so a burn multiple of 4 or 5 there is unremarkable. A company past $8 million in ARR holding the same number is usually covering something broken with money instead of fixing it.

The direction tells you more than any single reading. Four quarters at 3.2, 2.8, 2.4 and 2.0 mean the spending is steadily buying more; 1.2, 1.8, 2.6 and 3.4 mean the opposite, and that second company should be worried two quarters out even though its number is still in the threes.

The metric divides work with the others that sit beside it. The rule of 40 adds growth rate to operating margin to judge the balance of the whole company in one line. CAC payback period asks how many months it takes to earn back what was spent acquiring a single customer. Burn multiple sits between them: it looks at the whole company rather than one customer, but it measures cash that actually left the bank account rather than accounting profit. At companies where reported profit and the bank balance disagree, this is the more honest of the two.

"Our burn multiple has been 1.3 for four quarters, so that's the slide we open the round with."

Leading with the efficiency of the growth rather than the growth itself.

"The 4 last quarter is hiring that landed ahead of the revenue. It comes back down next quarter."

Explaining a bad reading as deliberate spending that hasn't paid off yet.

"Send the burn multiple along with the growth rate."

A signal that the growth number alone won't decide anything.

At Pagedeck, Grace runs this number every quarter. Once the books close she puts the cash that actually left the account next to the change in ARR and produces one line. If the number is higher than last quarter, the first job is finding which line item raised it. In a quarter where Ravi doubled ad spend, this ratio is where you see how much revenue that money actually bought.

The number doesn't make the decision. Whether a jump to 3 means cutting marketing or pushing through to the next round depends on the remaining balance and the timing of that round.

The common reading is that lower is always better. It's a ratio measuring efficiency, so that feels right. But the number also falls when a company simply spends less. Freeze hiring and marketing for a quarter and the numerator shrinks to something like 0.5 — and two quarters later the revenue growth in the denominator has dried up with it. A company that held 1.5 while tripling revenue is almost always in a better position than one that held 0.5 and stood still.

The other frequent mistake is assuming a low burn rate implies a low burn multiple. Both deal with money going out, so they look like they should move together. But burn rate watches only the numerator while burn multiple watches the denominator too. A frugal company whose revenue isn't growing has a low burn rate and a high burn multiple. Miss that and tightening spend starts to look like getting healthier, and a quarter goes by with nobody asking why revenue is flat.