Is the “Burn Multiple” the most important metric to measure Startups performance?
Updated: Jul 30, 2020

Coronavirus has dealt a deadly blow to early-stage funding and has put both Investors and Founders on edge. Capital from seed-stage funding, often the first significant source of cash for new ventures, is drying up and has declined by about 22% globally since January, according to an analysis by CB Insights, a market-intelligence company.
Over the past 12 years, Startups experienced an unprecedented boom in funding due to a deluge in the number of funds, which were raised relatively easily with low cost of capital and excess liquidity. In the coming years, however, it is expected that Startups and Venture firms will be severely challenged to raise capital. While COVID-19 may have exaggerated the above situation, things were on the boil from mid-2019 itself. When the economy takes a turn for the worst, market multiples contract and cash dries up. For many startups, this will mean certain death. For others, by clamping down on burn rates quickly, becoming hyper efficient, and continuing to execute even at reduced growth rates, they will make it out on the other side.
Recently, David Sacks wrote an article on how startups should think about capital efficiency in COVID-19 times. Sacks introduces the concept of the “Burn Multiple,” which correlates a company’s burn rate to its ability to add new annual recurring revenue. The lower your burn multiple, the more efficient your company is, he says. Here’s the formula:
Burn Multiple = Net Burn / Net New ARR
While the above is a take on Bessemer’s Efficiency Score, which is the same formula with numerator and denominator switched, Sacks goes on to give the chart, below, as guidance on what makes for a desirable burn multiple. This puts the focus squarely on burn by evaluating it as a multiple of revenue growth. In other words, how much is the startup burning in order to generate each incremental dollar of ARR?

For example, in the Q2 just ended, say a startup reports that it burned $2M while adding $1M to its ARR. That’s a 2x Burn Multiple which is reasonable for an early-stage startup. On the other hand, if the company burned $5M in Q2 to add $1M of net new ARR, that’s a terrible Burn Multiple (5x). It will obviously have to cut costs immediately as it is spending like a later-stage company without delivering later-stage growth. ‘Good Cash Burn’ helps a company drive rapid growth which is sustainable at scale and leads to a path to profitability. While ‘Bad Cash Burn’ drives only top line growth with its bottom falling off at an equally rapid pace.
To see what it means to maintain a burn multiple at each of these levels, Brainyard has built a simple spreadsheet, that allows you to edit bad, suspect, good, great and exceptional burn multiples based on your business reality. You can download it here. While the above table is applicable more to the software industry and SaaS companies as it focuses on ARR, it can be appropriately adjusted to Consumer Tech, Marketplace and E-commerce companies as well, depending on their CAC (customer acquisition cost) and LTV's (lifetime value).
Based on the above principles of the Burn Multiple, Founders are deploying various strategies to attain capital efficiencies to meet the challenges of the current times. Equally they are also adapting and executing more efficiently to generate better bang for the buck on every dollar being spent. Below is what I’ve noticed in a few of my portfolio companies:
Almost every company has pruned manpower costs and rationalised head count. Many Founders have led with pay cuts as high as 50%.
Most of them have either extended current rounds or raised quick no fuss bridge rounds, even flat rounds to help create additional runway to deal with the uncertainties of fundraising.
A campus based futuristic US school, which had a planned launch of their online program only in Q4 of 2020, moved quickly and launched in Q2 itself. They are today experiencing more than 10,000 visitors per month already.
A global photographer marketplace whose business was severely hit due to COVID (travel & tourism) is pivoting to a B2B model to better utilise its existing dormant infrastructure and also tap into a more lucrative space.
A robotic coffee barista company which was operating 2 outlets in US airports and was to launch a 3rd, went into hibernation mode as air traffic is nonexistent. Instead it shifted focus completely to manufacturing and is getting ready to internationally ship its coffee bars in Q4 2020.
A global flexi-term home rental marketplace has completely cut its demand side marketing spends and instead is focusing on the supply side by on-boarding new operators like hotels and apartments that have been hit by COVID to become a part of the co-living movement.
A Big Data / AI company saved over $100,000 just in technology costs by consolidating with Microsoft instead of using multiples companies as before.
It is very evident from the above that as capital becomes scarce, and with investors asking penetrating questions around capital efficiency, Founders are paying more heed to the Burn Multiple and developing growth strategies accordingly. Not just growth, but the efficiency of that growth will be increasingly seen as a key indicator of Startups performance in the day ahead. The days of overcapitalisation are truly over and eventually Darwin’s ‘survival of the fittest’ will come to fruition, and only the nimble and fittest will survive.
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