Today, I want to talk to you about a startup metric you don’t hear much about: the burn multiple. The burn multiple measures how efficiently you’re using your cash to drive growth.
This number is more important now than it’s been in many years. We are in a more difficult fundraising environment and investors are heavily scrutinizing how companies use cash.
In the boom times we’ve had for the last couple years, high growth startups could get funded no matter how inefficiently they spent. Shoot, even startups with no revenue or product often raised big rounds!
Those days are over.
The NASDAQ is in a bear market, late stage funding is down, and investors are asking themselves not just “Who will thrive?” but “Who will survive?”
The startups that make it will be those who know how to use money to efficiently drive growth.
So now that you know why the burn multiple matters, how do you actually calculate it?
It’s pretty simple. For any period (usually a quarter or a year), divide burn (losses) by new revenue added in that period.
Your burn multiple calculation should account for the length of your sales cycle.
If it takes you around 2-3 months to close a new customer, it’s appropriate to compare burn in Q4 2021 to new ARR in Q1 2022, for example. If your sales cycle is 6 months, compare Q3 2021 to Q1 2022.
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Now you know what your burn multiple is. But how can you tell if it’s good or bad?
Use these benchmarks from a superb post by David Sacks, one of the leading SaaS entrepreneurs and investors:
Burn multiple is especially relevant for SaaS companies with their sticky revenue. Burning cash to get lots of revenue that sticks around makes sense.
But the burn multiple is still quite relevant for all startups. It helps you understand if the cash you’re burning is actually building your business.
I recently saw a deal memo for a company that had burned about $1.1 million in a quarter to add just $80,000 of new ARR. That’s a burn multiple of 14.
A burn multiple like that is an emergency!
So let’s say you’re that company. What should you do?
Get that burn down right away! If you can’t show cash efficient growth, it’s going to be hard to raise money right now.
You’ll want to extend your runway (time before you run out of money) as much as possible. This gives you time to figure out the issues in your business before the cash runs out.
Another advantage of knowing your burn multiple is that you can share it proactively with prospective investors. Especially if you’re a seed stage company, your awareness of this important metric alone will impress investors.
Of course, you’ll impress them even more if you can show a good burn multiple!
I’m writing this because I want to see your company survive and even flourish! But we won’t get there with happy talk alone.
Calculate your burn multiple regularly and act when it gets out of line.
What issues are you seeing in today’s fundraising environment? Leave a comment at the bottom and let me know!
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