Written By: Janine Kick
“It’s been a long time coming, but we done fell apart. Really wanna work this out, but I don’t think you’re gonna change. I do, but you don’t, think it’s best we go our separate ways.”
Who knew there were analogies to be made between Usher’s Burn and a startup’s Burn Multiple? Well, I’m here to tell you there are and why measuring your startup’s Burn Multiple is so important.
As someone who spends hours upon hours working with Founders on their ‘go-to-market’ strategy, capital efficiency is always a pressing issue in my mind and that of an investor. Over the last few months in the uncertain market that we’re in, I’m seeing an increased focus on not only maximizing runway, but measuring a company’s burn against its growth. Which brings me to the Burn Multiple…
What is the Burn Multiple
The Burn Multiple is a tool for evaluating a startup’s burn rate as a multiple of its revenue growth. The usefulness of the burn multiple comes from its ability to assess the cost at which growth is generated, rather than solely focusing on the rate of growth itself. Ultimately, painting a picture of how capital efficient a company is.
I like to think of the Burn Multiple as an LTV:CAC ratio for the entire organization in any given month, quarter, or year. The higher the multiple the more the startup is spending to achieve growth. The lower the multiple the more efficient growth.
The Burn Multiple in Practice
Now, how do we find our Burn Multiple?
Burn Multiple = Net Burn / Net New ARR
David Sacks coined the Burn Multiple and as he will tell you, inverting the Net Burn with Net New ARR puts the focus squarely on spend by evaluating it as a multiple of revenue growth. Or better asked, how much is the startup burning in order to generate each dollar of ARR?
As a good rule of thumb, Sacks suggests the following for venture-stage startups:
Let’s work through an example. It’s Q2 and you’re meeting with your board. The startup reports burning $300K in the quarter while adding $150K to its ARR. That’s a 2x Burn Multiple which is decent for a Seed stage startup. Now, if the same company burned $750K in Q2 to only add $150K of net new ARR that would fall in the ‘Bad’ camp with a 5x Burn Multiple. The company is spending far more than it’s generating.
What Your Burn Multiple Says
A high Burn Multiple indicates a lack of product-market-fit, or that there’s some other issue in the business. VCs like the Burn Multiple because it’s a catch-all metric. Any serious problem will eventually impact the Burn Multiple and generally falls into one of the following buckets: low gross margin, sales inefficiency, high churn, stalling growth, or a leadership issue.
Chances are if you’re reading this, you’re an early stage founder. With that in mind, it’s likely many of you may very well have a ‘Bad’ Burn Multiple. This is especially true for those of you who fall in the pre-revenue camp, because net new ARR will be zero the ratio won’t even compute. That’s ok as long as you’re focused on keeping your burn as low as possible and generating revenue (even if it’s pennies) as quickly as possible. Your Burn Multiple should improve as the startup matures.
What I love about the Burn Multiple is it tells founders exactly what needs to be done. In fact, you can always improve your Burn Multiple and it tells you how far you need to go to reduce burn to a reasonable level.
In an uncertain market, it won’t just be growth, but the efficiency of growth that are seen as the key indicators of startup performance. Tracking your Burn Multiple is an easy way for founders to make sure that their burn isn’t getting ahead of traction and, overtime, it reveals if incremental spend is working.
Now, back to more important things…Usher. Take some advice from the R&B singer: aim to optimize your Burn Multiple so you and any investors don’t end up going your separate ways.
Kerosene Ventures – Helping Great Founders Raise Capital