The burn multiple

The burn multiple is a key metric used to assess how efficiently a startup is using its capital in relation to revenue growth. It measures the ratio of net cash burn to the company's revenue growth over a period of time.

Formula:

Where:

• Net Cash Burn is the total cash spent (expenses) minus the revenue received in a given period.
• Net New ARR is the increase in annual recurring revenue over that same period.

How to interpret:

• Efficient Burn Multiple (< 1x): The company is using less cash than it’s adding in revenue, showing efficient capital use.
• Moderate Burn Multiple (1x to 2x): The company is spending cash at a pace close to or slightly higher than the new revenue it generates.
• High Burn Multiple (> 2x): The company is burning cash significantly faster than it’s growing revenue, which might be unsustainable.

This metric is critical in evaluating the financial health and growth efficiency of a startup, especially for SaaS companies or other subscription-based businesses.