Measuring how efficiently a startup grows
Startups burn cash to grow. The question investors ask is how much growth each dollar buys. In 2020, investor David Sacks proposed the burn multiple as a simple answer:
Burn multiple = net burn ÷ net new ARR
- Net burn is the cash the company consumed over the period (operating cash outflow minus inflow, before any new funding).
- Net new ARR is the change in annual recurring revenue over the same period: new customers and expansion, minus churn and contraction.
A burn multiple of 2 means the company spent $2 of cash to add $1 of recurring revenue.
Worked example
Over the past year, a SaaS company burned $3,000,000 and grew ARR from $4,000,000 to $6,000,000:
| Result | Value |
|---|---|
| Net new ARR | $2,000,000 |
| Burn multiple | 1.50 |
| New ARR per dollar burned | $0.67 |
| ARR growth | 50% |
| Maximum burn for a multiple of 1.5 | $3,000,000 |
A burn multiple of exactly 1.5 sits at the boundary between great and good.
Benchmarks
| Burn multiple | Rating |
|---|---|
| Below 1 | Amazing |
| 1 to 1.5 | Great |
| 1.5 to 2 | Good |
| 2 to 3 | Suspect |
| Above 3 | Bad |
These are the thresholds Sacks suggested for growth-stage companies. Very early companies often have higher multiples while they find product-market fit; investors usually expect the multiple to fall as the company scales.
Why it is useful
The burn multiple catches problems that other metrics miss. A company can show strong revenue growth while spending far too much to get it, or high gross margins while churn cancels out new sales. Because net new ARR already subtracts churn, a leaky business has a high burn multiple even if bookings look healthy.
It also ties directly to runway. A company with a burn multiple of 1 that wants to add $5 million of ARR knows it needs about $5 million of cash to do it.
Limits
- It works best for subscription businesses with meaningful ARR, typically above $1 million.
- Quarterly figures can swing because of timing of large deals or annual payments; a trailing 12-month figure is more stable.
- One-off costs, such as an acquisition, distort the burn and should be excluded.
- A company that is profitable has no burn, and the metric does not apply.
This calculator gives estimates for education and planning. It is not investment, tax or legal advice; for decisions about your own situation, talk to a qualified financial professional.