# Burn Multiple

## Quick Definition  
A capital efficiency metric showing how much cash is burned to generate each dollar of new annual recurring revenue.

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## What is Burn Multiple?
Burn Multiple measures how much cash you burn to generate each dollar of new ARR. It's calculated by dividing net burn by net new ARR. A burn multiple of 2x means you spend $2 to create $1 of new annual recurring revenue.

David Sacks popularized this metric as a way to assess capital efficiency in growth-stage startups. It cuts through the complexity of multiple metrics to ask one simple question: how efficiently are you converting cash into growth?

## Why Burn Multiple Matters
In capital-constrained environments, burn multiple separates efficient operators from cash incinerators. Two companies with identical growth rates can have vastly different burn multiples, revealing which one is building a sustainable business.

Investors increasingly focus on burn multiple alongside growth rate. The best companies achieve high growth with low burn multiple.

## How to Calculate Burn Multiple Step by Step
**Step 1: Calculate your Net Burn for the period.** Use a trailing 12-month or quarterly window. Net Burn = total cash spent minus total revenue collected. Pull this from your bank statements, not your P&L (you want cash-basis numbers).

- Total cash out (last 12 months): $1,800,000  
- Total revenue collected: $600,000  
- **Net Burn = $1,200,000**

**Step 2: Calculate your Net New ARR for the same period.** Net New ARR = (Current ARR) minus (ARR 12 months ago). Make sure to use the same time window as your burn calculation.

- Current ARR: $900,000  
- ARR 12 months ago: $350,000  
- **Net New ARR = $550,000**

**Step 3: Divide Net Burn by Net New ARR.**

- **Burn Multiple = $1,200,000 ÷ $550,000 = 2.2x**

You're spending $2.20 to generate each dollar of new ARR. That's in the "mediocre" range — there's room to improve efficiency.

**Step 4: Track the trend.** A single snapshot is less useful than the trajectory. Calculate burn multiple quarterly and chart it over time. A declining burn multiple (3x → 2x → 1.5x) signals improving efficiency even if the absolute number isn't great yet.

**Step 5: Benchmark by stage.** Early-stage companies naturally have higher burn multiples because of upfront investment. What matters is the trend toward efficiency as you scale.

**Common mistakes founders make:**
- Using gross burn instead of net burn (overstates the ratio)
- Comparing quarterly burn against annual Net New ARR (mismatched time windows)
- Ignoring one-time costs that inflate burn temporarily (office buildout, conference sponsorships)
- Not separating S&M burn from R&D burn — investors want to know where the cash is going

## Burn Multiple Benchmarks
Below 1x: Amazing. You're generating more ARR than you're burning.  
1-1.5x: Great. Efficient growth.  
1.5-2x: Good. Acceptable efficiency.  
2-3x: Mediocre. Room for improvement.  
Above 3x: Concerning. Inefficient growth.

**Formula**  
Burn Multiple = Net Burn ÷ Net New ARR  
Lower is better. Shows how efficiently you convert cash into growth.

**Example**  
Annual metrics:  
- Net burn: $2,000,000  
- Net new ARR: $1,500,000  
  
Burn Multiple = $2M ÷ $1.5M = 1.3x  
You're spending $1.30 to generate $1 of new ARR. That's efficient growth. Below 1x would be exceptional.

If burn multiple was 3x, you'd be spending $3 for every $1 of ARR, which is concerning.