Burn Multiple: one metric to rule them all

Metric Stack 8: Burn Multiple and more!

Have you heard the saying that every business is a hypothesis? You’re absolutely certain that your idea will attract hordes of customers. However, you’re essentially betting on this assumption by investing in your idea. Read on to find out how to measure this risk.

I’m Priyaanka Arora, your personal metric assistant and Content Researcher & Writer at Klipfolio. In this edition of Metric Stack, we’ll explore why Burn Multiple is a great measure of product-market fit, and how it can prove or disprove your business hypothesis.

What is Burn Multiple?

Burn Multiple is a growth and efficiency metric that measures net burn for each dollar recurring revenue earned. Here’s the formula:

Burn Multiple = Net Burn / Net New ARR

This metric, coined by SaaS venture capitalist David Sacks, measures how much a startup is burning in order to generate each incremental dollar of ARR. This is the inverse of Bessemer Efficiency Score and differs by looking at efficiency in terms of burn per dollar revenue. In other words, Burn Multiple calculates the cost of each new dollar revenue your business generates.

The key advantage of tracking Burn Multiple for your business is that it can pinpoint several different potential problems with your business. Primarily, a high Burn Multiple can be an indicator of weak product-market fit. But this metric can also uncover high CAC, disproportionate churn, stalled growth, or inefficient spending.

Tracking such a powerful metric can be a great way of assessing the health of your business in multiple aspects. As I mentioned earlier, this means you can use Burn Multiple to validate your business hypothesis and quickly course correct when there's an indication of trouble.

What is a good Burn Multiple benchmark?

A good Burn Multiple benchmark depends on your stage of growth. For the most part, it is normal for an early stage startup to have a higher Burn Multiple that reduces as the company matures. Remember that it’s better the closer your Burn Multiple gets to zero.

A good rule of thumb for Burn Multiple benchmarks is that less than 1X is amazing, between 1 to 1.5X is great, up to 2X is good, and anything higher than 2X is a cause for concern. Again, assess how to apply Burn Multiple to your business; if you don’t have paying customers yet, this metric is obviously not for you. If you’re an early stage startup, you might have a high Burn Multiple that could be justified by high R&D costs especially if you’re in tech. Context always matters while applying benchmarks to any situation.

More money, more problems?

I’ve covered this idea in previous editions that cash burn isn’t an effective primary solution to problems in business. In particular, if you’re spending more in proportion to revenue, AKA high Burn Multiple, you should examine where you’re channeling that excess burn. If it’s CAC, as it often is since CAC is the startup killer, this tells you you’re fighting to win new customers with little or nothing in return.

I want to go on a bit of a tangent here by looking at a bonus benchmark. How can you know if you’re burning in excess? Take a look at OpenView’s 2019 benchmark for burn rate by ARR scale and growth rate:

What you should notice here is how excessive burn is for $10M - $20M ARR companies with less than 25% growth, compared to most other cells. Such cases can be preempted by regularly monitoring Burn Multiple and other efficiency metrics such as Hype Factor.

We’ve seen how crucial Burn Multiple is, but what are you supposed to do about it? The obvious answer is to cut costs, but it’s not so easy to determine where. The best part about Burn Multiple is that although it can highlight problems with your business, you can always improve your numbers because of the dynamic nature of this metric. Burn Multiple too high this quarter? You can act on it and see a marked improvement in the next quarter.

The best metrics let you work on your performance for steady improvements over time. After all, the true power of data is its ability to empower your decision making. Tracking key metrics like Burn Multiple in a dashboard can act as an early warning which you can address before it gets out of hand.

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Stay tuned for the next edition of Metric Stack Newsletter to get the latest scoop on all things metrics! Send feedback, comments, questions here: parora@klipfolio.com