Growth Metrics Defined: Burn Multiple

burn-multiple

There was a time when “growth at any cost” was the rallying cry of SaaS. That is no longer the case, even though tech spending rises every year. 

It isn’t enough to grow fast… you have to grow efficiently.

If you are spending $2M to get $1M in revenue, your burn multiple is unsustainable and your company will have trouble attracting capital. Burn multiple will tell you how efficiently your company uses its capital to create new recurring revenue. It also helps show how resilient the company might be when hard times hit.

Burn multiple is a financial metric used to assess the efficiency and sustainability of a SaaS company’s spending in relation to its revenue growth. The burn rate represents the rate at which a company is spending its available capital. The burn multiple provides a multiple of that rate in comparison to the company’s net new revenue.

Investors and stakeholders use burn multiple as part of their analysis when evaluating the financial health and viability of a SaaS company.

The Burn Multiple Formula:

To calculate burn multiple for your SaaS company, use the following formula:

BURN MULTIPLE DEFINED

Burn Multiple = Net Burn / Net New ARR

To compute the Burn Multiple formula, you’ll need to know the following performance numbers from your financial team:

  • Net Burn: Decide on the period of dates you’ll measure. Burn rate will be your SaaS company’s net negative cash flow or net cash decrease over that specific period (often monthly or annually).
  • Net New Annual Recurring Revenue: This represents the annualized value of your SaaS company’s new subscription-based contracts after churn.

How do I calculate Burn Multiple?

Here’s an example of how to calculate burn multiple using a fictional SaaS company in Akron called GoodCompany. GoodCompany makes software for decorative in-store ecommerce displays in high end salons.

Here’s the facts:

  • Last year, GoodCompany had 150 B2B customers and achieved $2.5M in net new ARR (10% more than the previous year).
  • Last year also saw higher marketing costs and some new expensive events that didn’t pay off as hoped, which lifted their Net Burn to $2.75M (up 25% from the previous year).

Burn Multiple for Last Year:
(2,750,000 / 2,500,000) = 1.1x

This means that this SaaS company is spending $1.10 for every dollar in new recurring revenue it achieves. In any kind of market, this would be seen as a success.

BURN MULTIPLE EXAMPLE 2

Suppose GoodCompany spent much more to get that same revenue last year. Here’s the facts:

  • Last year, GoodCompany had 150 B2B customers and achieved $2.5M in net new ARR (10% more than the previous year).
  • Last year also saw higher marketing costs and some new expensive events that didn’t pay off as hoped, which lifted their Net Burn to $4.4M (up 50% from the previous year).

Burn Multiple for Last Year:
(4,400,000 / 2,500,000) = 1.76x

This means that this SaaS company is spending $1.76 for every dollar in new recurring revenue it achieves. In previous markets, there were periods where a burn multiple between 1.5x – 2x would have been ok, particularly for an early stage one. In tighter markets like those seen in 2023, it would no longer be acceptable unless the startup is showing a timeline of progress in reducing burn multiple.

What Is A Good Burn Multiple?

Expectations for burn multiples tend to change over time, depending upon how quickly capital is flowing in one quarter or another. In periods like 2021-2022, when capital flowed too freely, high growth companies with higher burn multiples were still ok. Post 2022, this is no longer the case. It is a return to profitability, which is probably a healthier position for everyone involved.

  • A burn multiple less than 1 means the company is burning capital at a rate lower than its revenue growth. This is a healthy financial position in any market and desirable for SaaS investors. 
  • Conversely, a burn multiple greater than 1 suggests that the company’s spending is outpacing its revenue growth. Not a problem, for recurring revenue, as long as it doesn’t go over 1.5x or trend in that direction for long.
  • If it goes over 1.5x, it will raise concerns about the sustainability of your business model. 

At the 2023 Recurring Revenue Conference, put on by Sutton Capital Partners, Managing Director Peter Cowen recommended paying attention mostly to Rule of 40 and Burn Multiple. These are the true efficiency metrics that every investor will be examining closely. 

Burn MultipleEfficiency
Under 1xAmazing
1 – 1.5xVery good
1.5 – 2xNeeds to be improved (used to be OK)
2 – 3xUnacceptable
Over 3xGoodbye
Source: Sutton Capital Partners

An expert fractional CMO can help diagnose the reasons why your growth isn’t meeting expectations. This not an uncommon GTM problem for SaaS startups, which enter and leave several stages of growth in their lifetimes – each with their own GTM characteristics.

How Can I Reduce My Startup’s Burn Multiple?

Reducing the burn multiple for a SaaS (Software as a Service) company involves three tricky areas, all of which need to be managed in sync: 

  1. Managing expenses
  2. Optimizing revenue streams
  3. Improving overall operational efficiency. 

Putting effort into reducing your burn multiple from multiple angles is important.

Here are some strategies to help your SaaS company reduce its burn multiple:

  • Test Your ICP and Personas: Make sure you are reaching the right users, buyers and sponsors at the right organizations that truly feel the pain points your software alleviates.
  • Make Sure Your PMF is There: Growth can hit a wall quickly if a software solution that is being sold at one end fails to meet expectations on the other. A high churn rate can mean unhappy customers that won’t stay and pay in a way that will satisfy investors.
  • Prioritize Spending to Manage Expenses: Identify and prioritize essential expenses that directly contribute to the growth and success of the business.
  • Cut Costs Wherever Possible: Evaluate non-essential expenses and implement cost-cutting measures where possible without compromising the core operations.
  • Focus on Customer Retention: Focus on customer satisfaction and retention to minimize churn and maximize the lifetime value of customers.
  • Drive Upselling and Cross-Selling: Encourage existing customers to upgrade their plans or add complementary services to increase revenue from the current customer base.
  • Test Your Pricing Strategy: Evaluate and adjust your pricing strategy to ensure it reflects the value provided to customers.
  • Try AI, Machine Learning and Automation: Implement automation to streamline repetitive tasks, reduce manual effort, and enhance operational efficiency.
  • Secure Additional Funding: If feasible, secure additional funding through investments or loans to extend the runway and reduce financial pressure.
  • Optimize Use of Capital: Allocate funds strategically, focusing on initiatives that have the highest potential for return on investment.
  • Boost Conversion Rates: Optimize the conversion rates at various stages of the sales funnel to increase the number of customers acquired for the same marketing spend.
  • Examine CAC (Customer Acquisition Cost): Evaluate and optimize the cost of acquiring new customers to ensure it aligns with the expected customer lifetime value.
  • Align Teams for Efficiency: Ensure that the team is aligned with company goals and operating efficiently. Regularly assess team performance and make adjustments as needed.
  • Experiment With Remote Work Policies: Consider remote work options to reduce office-related expenses and attract talent from a wider geographical area.

By adopting a combination of these strategies, your SaaS company can work towards reducing its burn multiple. Achieving a more sustainable and financially healthy business model doesn’t have to be a drag. 

Make Burn Multiple Efficiency Planning Part of Your Annual Growth Planning

If you involve the whole team and make Burn Multiple a part of your annual planning, it will become a subject that sparks a lot of learning and innovation. 

Regular monitoring, analysis, and optimization adjustments are key to success in the dynamic and competitive SaaS industry.

FURTHER READING:
The Burn Multiple: How Startups Should Think About Capital Efficiency by David Sacks
• What Is Burn Multiple? at Mosaic
• Burn Multiple: Understanding and Calculating the Metric at Growth Equity Interview Guide