Alp SuleimanGrowth Partner

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What is a good burn multiple?

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Short answer

Burn multiple is net burn divided by net new ARR: cash burned per unit of new annual recurring revenue. David Sacks's suggested scale for venture-stage startups: under 1x amazing, 1 to 1.5x great, 1.5 to 2x good, 2 to 3x suspect, over 3x bad. It is an investor's rule of thumb; there is no measured industry average behind it.

Ranges by segment

SegmentRangeContext
AmazingUnder 1x1Sacks's suggested scale for venture-stage startups; an investor's rule of thumb with no industry average behind it.
Great1x – 1.5x1Same scale.
Good1.5x – 2x1Same scale.
Suspect2x – 3x1Same scale.
BadOver 3x1Sacks: if 3x burn or more is needed, product-market fit may not be what it appears to be.
By stage (Sacks's example)Seed ~3x · after Series A ~2x1Sacks's illustration. The multiple is expected to improve as the company matures.

Reminder: These ranges are reference points, not targets. Your segment, contract structure and stage change the number.

Burn multiple

How to read it

  • The formula is Sacks's definition: net burn ÷ net new ARR. In his own example a startup that burns $2M in a quarter while adding $1M of ARR sits at 2x; one that burns $5M for the same ARR sits at 5x and, in his words, should probably cut costs immediately. Both figures are Sacks's illustration.
  • The denominator is net new ARR. Per Sacks, churn nets against it and raises the multiple. Using gross bookings would hide that loss and flatter the number (our inference).
  • Sacks finds a ‘bad’ multiple acceptable mostly in the earliest years, when sales are incipient and the product is still being built. With no revenue, net new ARR is zero and the ratio does not compute. As the company matures he expects the multiple to fall; if it moves the wrong way, headline growth can still be rising while something is wrong.
  • Read the scale against your own stage. The same 2x says something different for a company that has just started selling than for one past its Series B.

What moves this metric

  • 01

    Gross margin

    If delivering the product is expensive, burn rises fast as you scale. Per Sacks, without operating leverage the multiple will not improve with scale.

  • 02

    Sales efficiency

    Per Sacks, if CAC is prohibitive or sales productivity is falling, burn rises against new ARR and the multiple worsens even while growth continues.

  • 03

    Churn

    Per Sacks, churn nets against the denominator and raises the multiple; a leaky bucket makes it hard to grow efficiently.

  • 04

    Buying back slowing growth

    Per Sacks, when growth stalls and marketing, give-aways, discounts or promotions go up, burn rises faster than new sales and the multiple picks it up.

Calculate your own

Burn multiple calculatorGlossary term: Burn multiple →

Frequently asked

What should my burn multiple be?

On Sacks's suggested scale for venture-stage startups, under 1x is amazing and over 3x is bad. The scale is an investor's rule of thumb; the multiple is expected to fall as the company matures.

Why net new ARR and not gross bookings?

Per Sacks, churn nets against the denominator and raises the multiple. Using gross bookings would hide that loss and make the multiple look better than it is.

Is a high multiple always bad?

Sacks finds it acceptable in the early years, when sales have just started. If it does not fall as the company matures, he treats it as a warning sign.

Sources

  1. 1.David Sacks, “The Burn Multiple” (Craft Ventures, April 23, 2020)Year and scope: 2020. A rule-of-thumb scale for venture-stage startups; it contains no measured sample or industry average.