David Sacks – the Burn Multiple
- Hype Ratio = Capital Raised (or Burned) / ARR
- 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:
In other words, how much is the startup burning in order to generate each incremental dollar of ARR?
The higher the Burn Multiple, the more the startup is burning to achieve each unit of growth.
The lower the Burn Multiple, the more efficient the growth is.
For venture-stage startups, these are reasonably good rules of thumb:
Burn Multiple by Stage
The Burn Multiple should improve as the startup matures.
For example, a seed stage company might have a Burn Multiple of 3 because it just started selling. After the Series A, it might drop to 2. After the Series B, when the sales team should be operating at scale, the expectations for efficiency increase even more.
Eventually, for a company to become profitable, burn must reach 0, which implies that the Burn Multiple should also approach 0 over time.
If the Burn Multiple is going in the wrong direction as the startup matures, that’s a indicator that something is wrong, even though headline growth might still be increasing in nominal terms.
What Founders Can Do
1. they should keep salaries and expenses low in the early days —
2. strengthen the impression of product-market fit for when they go out to raise a venture round.
3. cut costs, the Burn Multiple doesn’t care about sunk costs and always gives founders the chance to improve.
4. It be worth giving up some revenue (e.g. unprofitable growth) if it brings the Burn Multiple down to a much healthier ratio.
It’s not just about growth but the efficiency of growth .
It’s an indicator that incremental spend is working
As everyone in the startup ecosystem scrutinizes their runway and makes tough decisions about how to extend it, the Burn Multiple is a useful rule of thumb for founders and investors alike to keep in mind.