• bsi-innovation
  • bsi-learning
  • bsi-people
  • bsi-wealth

David Sacks – the Burn Multiple

https://sacks.substack.com/p/the-burn-multiple-51a7e43cb200

David Sacks of PayPal, Twitter and All in game talks about a burn multiple
Two simple ways to measure capital efficiency are the Hype Ratio and Bessemer’s Efficiency Score:
  1. Hype Ratio = Capital Raised (or Burned) / ARR
  2. Efficiency Score = Net New ARR / Net Burn

David  think Bessemer has the right idea but prefers to flip the numerator and denominator, so the ratio is an annualized version of the Hype Ratio. 

He  calls this the Burn Multiple:

Burn Multiple = Net Burn / Net New ARR

  • gross margin problem — If the company spends too much on COGS in order to deliver the product or service, its burn will increase rapidly as it scales. If there’s not operating leverage in the business, the Burn Multiple will not improve with scale.
  • A sales efficiency problem — If CAC is prohibitive or sales productivity is diminishing, burn will increase relative to new ARR, causing the Burn Multiple to worsen even though growth continues.
  • A churn problem — Churn will net against the denominator of the Burn Multiple, causing the multiple to increase. A leaky bucket makes it hard to grow efficiently.
  • A growth challenge — If growth is stalling, the company may seek to compensate by spending more on marketing, give-aways, discounts, or promotions. That will be picked up in a higher Burn Multiple, as burn rises faster than new sales.
  • A founder leadership problem — If the founder lacks the skill or will to control burn, that will show through in the Burn Multiple.

Eventually, for a company to become profitable, burn must reach 0, which implies that the Burn Multiple should also approach 0 over time.

Posted on March 20, 2023

Leave a Reply

Your email address will not be published. Required fields are marked *

referron-logo
BBG-logo
spark-logo

Contact us today to find out how we can make your business grow!
Ph: 02 9126 9100  Email: info@bsi.com.au
Level 9, Angel Place,123 Pitt Street
Sydney NSW 2000

© Copyright 2023 BSI