What Is Burn Multiple?
Also known as Burn rate multiple, Capital efficiency multiple
Burn multiple is a capital efficiency metric that shows how much cash a company burns to generate each dollar of net new annual recurring revenue. It is calculated by dividing net burn by net new ARR over the same period. A lower burn multiple means growth is costing less cash, and anything below 1 is considered very efficient.
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Burn multiple was popularized by investor David Sacks as a simple test for whether a startup's spending is buying real growth. It works because it ties cash out the door to the one thing that cash is supposed to produce, recurring revenue. A company burning $2 million to add $1 million of ARR has a burn multiple of 2.
A commonly used reading is that under 1 is excellent, 1 to 1.5 is good, 1.5 to 2 needs attention and above 2 is a warning sign. Early-stage companies often run higher while they find their market, so the trend matters as much as the number. A rising burn multiple usually means acquisition is getting more expensive or churn is eating into gains.
Because it uses net new ARR, burn multiple catches problems that top-line growth hides. Strong new bookings offset by heavy churn produce little net new ARR and a high multiple. That makes it a useful check on growth spending, including outbound teams, paid campaigns and agency retainers. If the multiple climbs as spend rises, the extra spend is not paying off.
Burn Multiple formula
Burn multiple = Net burn ÷ Net new ARR
- Net burn
- Cash spent minus cash received in the period, so it reflects the actual decrease in cash from operations.
- Net new ARR
- New ARR plus expansion ARR, minus contraction and churned ARR, over the same period as net burn.
Worked example: In a quarter, a startup burns $3,000,000 in net cash and adds $2,000,000 in net new ARR. Burn multiple = $3,000,000 ÷ $2,000,000 = 1.5. It spends $1.50 in cash for every $1 of new recurring revenue.
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Burn Multiple example
A Series A sales tool burned $1.2M last quarter and grew net new ARR by $1.0M, a burn multiple of 1.2. This quarter it doubled paid ad spend, burned $1.8M and added only $900,000 of net new ARR, pushing the multiple to 2.0. The team cuts the new ad budget and redirects part of it to outbound, which had been closing deals at a lower cost.
How to calculate and improve burn multiple
Measure net burn
Take cash at the start of the period minus cash at the end, excluding any new funding raised during the period.
Calculate net new ARR
Add new and expansion ARR for the period, then subtract contraction and churned ARR to get the net change.
Divide burn by ARR
Divide net burn by net new ARR. Track the result every quarter so you can see the trend, not just a single snapshot.
Cut inefficient growth spend
Review CAC and payback by channel, pause the channels with the worst return, and fix churn so new bookings are not lost.
Common mistakes
- Using gross new ARR instead of net new ARR, which ignores churn and makes efficiency look far better.
- Counting funding received as reduced burn, when net burn should only reflect operating cash flow.
- Comparing a single quarter's figure without context, since one large deal or late payment can swing the result.
- Reading burn multiple without growth rate, since a low multiple with almost no growth is not a healthy outcome.
Burn Multiple FAQ
A commonly cited guide is that under 1 is excellent, 1 to 1.5 is good, 1.5 to 2 is a concern, and above 2 suggests growth is too expensive. Earlier-stage companies often run higher, so the direction of the trend matters as much as the current number.
It means the company burns $2 in cash for every $1 of net new ARR it adds. At that rate, adding $5 million of ARR would consume about $10 million in cash, so growth depends heavily on raising more capital.
Not in the usual sense. If a company generates cash instead of burning it, net burn is zero or negative and the metric stops being meaningful. Profitable companies tend to use measures like the Rule of 40 or free cash flow margin instead.
Burn multiple compares total net cash burn with net new ARR, so it captures every cost in the business. The magic number compares new revenue only with sales and marketing spend, so it isolates go-to-market efficiency.