Not all growth is created equal. 

The efficiency of a startup's growth reveals a lot about the overall health of the startup. Our favourite metric for assessing this is the Burn Multiple. 

What is the Burn Multiple?

The metric measures how much cash the startup is burning to generate each incremental dollar of ARR. The lower the Burn Multiple, the less a startup has to spend to grow–in other words, the growth is more efficient.

If you look at a company's burn rate in isolation, you don't get the full picture. The Burn Multiple tells you how productive a company is for a given burn rate. 

For instance, Company A and Company B are both burning $5m a year. Company A adds $3m of ARR in that time while Company B only adds $1m of ARR (Burn Multiple of 1.7x vs. 5.0x). In this case, Company A appears to have used that $5m more effectively.

We typically view Burn Multiples on a quarterly and 12-month basis. Looking at the metric on a quarterly basis helps assess the impact of recent initiatives. A trailing 12-month view helps smooth out any anomalies (e.g. a seasonally strong selling period). 

My early-stage startup is burning a lot of cash–should I be worried?

“You have to spend money to make money.”
“You have to burn to earn.” 

One of the defining characteristics of startups is the need to burn cash while you build, sell your product and pursue growth. In the process of scaling, this part of the curve is referred to as the J-Curve.

Take a typical SaaS startup, for example. It has to spend money building the product, hire salespeople and pay them a salary before they've landed customers. Even after landing customers, the business may not recoup the cost of acquiring them for ~12-24 months. But once you've acquired those customers, they keep paying, ideally long into the future and ideally paying more and more over time. 

Most venture-backed companies are unprofitable for many years–and this is by design. They optimise for growth over short-term profitability. One reason venture capital exists is to get startups through the bottom part of this J-Curve. This allows the startup to grow rapidly, resulting in large potential future cash flows. 

What does the Burn Multiple tell us?

Product-market fit

How efficiently a company can grow is a good proxy for how badly customers want its product. If you have to spend $5m to convince customers to pay you an additional $1m, it may be a sign that you haven’t reached product-market fit. Other go-to-market metrics like Magic Number and CAC payback tell us a similar thing by showing the efficiency of a business's sales and marketing spend, but Burn Multiple reflects the efficiency of all spend. This is important as R&D spend plays a big role in driving customer acquisition, particularly as more startups move towards product-led growth.

GTM efficiency & retention

‍Two of the key ingredients for the J-curve are the efficiency of the go-to-market strategy (CAC paybacks), and retention/churn. A poor Burn Multiple could indicate that one or both of these needs work. 

Unit economics

‍Burn Multiples typically reduce over time as a startup scales (see more below) because it is able to leverage its fixed costs. But if a company has high variable costs (i.e. costs that increase and decrease relative to revenue), like COGS, it’s challenging to bring the burn multiple down over time. If you have negative unit economics, the more you grow, the more money you burn. 

Effectiveness of incremental spend

‍Monitoring changes in your Burn Multiple in response to spending decisions can help show how efficient this incremental spend is. 

For example, consider a company that burned $2.5m last quarter to add $1m of ARR (Burn Multiple = 2.5x). A new marketing push increases burn to $3m for the next quarter but ARR grows by $1.5m because of new customer sign ups. The Burn Multiple for this quarter is 2.0x and the incremental Burn Multiple of the marketing initiative was 1.0x ($0.5m increase in burn for $0.5m increase in new ARR). This is an overly simplistic example, but it shows how changes in the Burn Multiple can be a high-level indicator for assessing new initiatives.

Implications for fundraising

If you have a particular ARR milestone you want to hit before your next raise, you can calculate a target Burn Multiple that will get you there based on how much cash you have. Assume a cash buffer of ~6 months ahead of your raise–you can't spend your entire cash balance to get to this milestone.

What is a good burn multiple?

In his Burn Multiple article, David Sacks lays out some helpful rule-of-thumb benchmarks for SaaS companies:

These are handy for quick comparisons, but as Sacks points out, the Burn Multiple should improve as the startup matures. As a company becomes profitable, its Burn Multiple passes through zero, meaning that the Burn Multiple should trend toward zero over time as the company scales and leverages its cost base.

We find these benchmarks helpful when looking at the Burn Multiple across different stages. 

Burn Multiple Benchmarks by ARR

Benchmarks for Non-SaaS businesses

All of the benchmarks we've listed are based on the analysis of SaaS companies. SaaS businesses typically have gross margins around 70-80% and a higher degree of recurring revenue. It's important to keep that in mind when comparing Burn Multiples between SaaS companies and non-SaaS businesses (or even a SaaS business with lower gross margins, e.g. transaction/usage-based).

Gross margin differences

A SaaS startup with a Burn Multiple of 1.0x adds $1 of ARR for every $1 of net burn. If it has a gross margin of 80%, that means they are adding 80c of gross profit for every $1 burned. 

For a D2C startup with a 1x Burn Multiple, they’re likely adding ~20-40c of gross profit for the same net burn. 

For startups with gross margins <70% (average SaaS GM%), we look at gross margin-adjusted Burn Multiples to account for these differences and allow for better comparability across business models, versus rule-of-thumb benchmarks. In practice that looks like:

Revenue quality

The less recurring your revenue is, the quicker you want to see a return on the capital spent to obtain that revenue.

We’ll talk more about the relationship between CAC payback and revenue retention in a future post but for now, let's consider two examples:

1. If you’re in the business of selling a particular widget that people only ever need one of, and it costs you $50 to acquire each new customer, you definitely want to make sure you’re making more than $50 on each widget (in gross profit). If not then you won’t cross over the x-axis on the J-curve.
2. If you have a SaaS business with strong net dollar expansion (i.e. customers spend more on your service over time), you might be able to tolerate longer payback periods because the lifetime value of the customer is potentially huge.

Many non-SaaS businesses have some “recurring” element–whether it’s repeat purchasing habits from customers or a subscription model like Eucalyptus, Who Gives a Crap or Pet Circle. 

As a general rule of thumb, the less recurring your revenue is, the lower your target Burn Multiple should be. One exception to this is when a business is investing heavily in the infrastructure that will scale over time - this is another illustration of the J-curve and helps explain why earlier-stage companies can have higher Burn Multiples.

How to improve your Burn Multiple

If you’re reading this and now thinking, “Wait, my burn multiple is way too high. What do I do? Am I unfundable?”, don’t worry, you’re not alone and it can be improved quickly.

Over the last couple of years plenty of startups have grown their teams very quickly and invested ahead of growth which has seen their Burn Multiples tick up. There are founders across our portfolio that are in this position as well and we’re working with them to improve their Burn Multiples to more comfortable zones before they need to fundraise again. Below are some of the key levers that you can work on to help improve your own Burn Multiple:

• Achieve product-market fit: As early-stage investors, we realise that high Burn Multiples are inevitable when a company is starting out, trying to build a product and find product-market fit. In this phase, you should focus on staying lean and ensuring their burn doesn't get too out of sync with your traction. 
• Reduce churn: Minimising ARR leakage out each period means more of your new ARR goes straight to growth rather than replacing what was lost. There may be several underlying causes of churn (e.g. poor product-market fit, product bugs, bad customer support, price), so how you fix it depends on your unique circumstances. Potential remedies may include improving your user experience, customer onboarding and support so that users realise the product's value, and new features solve pain points or increase stickiness. ‍
• If you’re non-SaaS startup, you could also think about this as increasing the recurring nature of your revenue. This might include building in a subscription component or improving customer experience to drive repeat purchasing habits.‍
• Increase expansion revenue: Getting existing customers to spend more on your product is an efficient source of growth. How can you do this? Some examples are making it easy for customers to add more seats, tying an element of pricing to the customer's product usage, and having tiered pricing for access to certain features. ‍
• Lower your CAC: Explore different go-to-market strategies and marketing channels to determine the most efficient one. This may change over time but keeping an eye on metrics like Burn Multiple and CAC payback is a good way to monitor what’s working and what isn’t. In many cases this will just be a case of doing more with your existing go-to-market team. Many companies ramped their sales headcount quickly over the last few years and have teams that aren’t yet fully ramped or operating as efficiently as they should be.  Getting them working more efficiently will have a dramatic impact on your burn multiple. ‍
• Improve your unit economics: This is particularly relevant for non-SaaS businesses with higher variable costs involved in generating each incremental dollar of revenue (e.g. higher COGS, fulfilment and delivery). Consider how you can improve the cost side of the equation by driving efficiencies in COGS, delivery and CAC. You can also look at improving margins from the revenue side by experimenting with price increases or adding on higher-margin revenue streams.

Tracking your Burn Multiple as part of your usual reporting is useful to gauge your product’s traction as well as the impact of certain initiatives–whether it's assessing the impact of incremental spend or a shift in go-to-market channels. It can also be a useful output to cross-check in a budgeting process and for setting fundraising milestones. How efficiently a startup is able to grow is one of the best indicators of future success and investors will focus on this accordingly.

Our goal at Airtree is to write the first cheque into a startup, and often that’s pre-product and pre-revenue. The early days can be messy and unpredictable, and there are very few data points to go off. At this stage, we place more emphasis on qualitative factors–your idea, team and vision–than metrics.

From there, whether your next big milestone is finding product-market fit or generating revenue, having a good grasp on your metrics brings focus to hitting your goals. But when you’re just getting started, these metrics aren’t clear-cut, and we don't expect you to know all of these at Seed.

Metrics Matter is a series where we break down metrics– from how to calculate, levers you can pull to optimise and what good looks like–to help your startup grow efficiently, increase profitability and manage your runway.