“Burn Multiple” is a term coined by Craft Ventures’ David Sacks to express how skilled a startup is at using their cash to generate growth. He defines it as follows:
In other words, how much cash does a business need to burn in order to generate every new dollar of annual recurring revenue? For example, if the startup burns $0.75 to make $1 of new ARR, you essentially have a money printer. If they instead burn $2 in order to make $1 in new ARR, you have a decently efficient business that may be able to sustain its burn for a few years until it achieves scale and can reign in spending. And if they burn $3 to make $1 in recurring revenue, they’re either an inefficient spender and at risk of running out of capital, or the product-market fit simply isn’t working.
What’s A Good Burn Multiple For a SaaS Company?
Here is how Sacks, a B-stage SaaS investor, answers the question of what a good burn multiple is for a growth-stage startup:
|0.5 – 1
|1 – 1.5
|1.5 – 2
|2 – 2.5
His view of the burn multiple changed in the context of the 2022 recession, tightening from his earlier perceptions in April 2020. Whereas he used to consider a burn multiple in the range of 1.5 – 2 good, today he considers it mediocre, preferring to see it around 1-1.5 for a startup. Cash is harder to find during a recession so startups need to be efficient with what they’ve got.
Growth stage is also a factor when considering your burn multiple. As the business grows, your burn multiple should decrease. Seed stage companies are still solidifying their product and its market fit, as well as acquiring customers, and thus need to burn more capital. Later stage companies should still be growing fairly aggressively, but can turn their focus more towards profitability. Below are burn multiple benchmarks for each stage in a SaaS startup’s life.
|On Target Burn Multiple
|Exceptional Burn Multiple
|Early Stage / Series A
|Mid Stage / Series B
|Late Stage / Series C
Burn Multiple vs Other SaaS Metrics
Sacks likes burn multiple because it emphasizes a business quality that venture capitalists prize: efficient growth. He’d always rather give his dollars to people who will spend them in a way that maximizes value and minimizes waste.
Burn Multiple is helpful to SaaS founders for other reasons as well. If you’re trying to get a sense of how well your product is being received by the market, or even how successful your customer acquisition program is, burn multiple gives you a ballpark answer. It essentially provides reassurance that when your company spends money, it results in sustainable growth.
However, you can learn about your company’s capital utilization in a few other ways as well.
Whereas Burn Multiple is an indicator of a startup’s financial health, another metric VCs use, Hype Factor, measures the opposite. Hype factor compares the size of the investment a VC firm made in a company with that company’s actual ability to generate ARR. A high hype factor is correlated with mismanagement of capital, as the startup hasn’t proven their business model well enough to justify the size of the investment.
Here’s the formula:
While SaaS companies vary in the ways they use capital (for instance, a company may have very high development costs), it’s rarely a smart bet for an investor to put in, say, 5x the ARR of a company. Mid-2022 investor consensus was that hype factor should be around 1.5, as noted in the chart below.
|1.5 – 2.5
|2.5 – 3.5
|3.5 – 5
Cash Conversion Score
Whereas burn multiple is a snapshot of how efficiently a SaaS business is growing today, cash conversion score measures efficient growth historically. It tells the story of how well a company has used its capital in the past and, according to some, offers clues about what might happen in the future. Here’s how it’s calculated:
The investors at Bessemer Venture Partners, who use this metric when evaluating prospective investments, evaluate cash conversion score as follows*:
|Cash Conversion Score
Annual Churn Rate
Annual Churn Rate measures your success at retaining your current users or subscribers. It’s expressed as follows:
Churn rate is a good complement to burn multiple because burn multiple measures how good your company is at generating new ARR, while churn rate measures how good your company is at retaining its current ARR. Once you have some scale, achieving a low churn rate is arguably more important than achieving a low burn multiple, as keeping customers is more valuable than generating new ones.
Here is our read on what qualifies as a “good” annual churn rate among the investor community:
|Annual Churn Rate
|10 – 12%
|12 – 15%
|15 – 20%
Because user acquisition is so critical to a SaaS startup’s success, a key indicator of success is its sales & marketing team’s ability to pay for itself in a reasonable period of time. The simplest way to measure that is to record the average length of time it takes for a new customer to pay the cost of their own acquisition. If it costs $20k to acquire a customer, how many months will it take for that customer to have paid $20k to the company? Here is the formula:
Despite prioritizing the burn multiple metric, Sacks himself uses CAC payback when evaluating potential portfolio companies. That’s because, while burn multiple is an excellent snapshot of capital efficiency over the last year, CAC payback is an indicator that you’re still on the right track.
Here is Sacks’ conception of a good CAC payback period:
Strategies for Reducing Burn Multiple
Achieving a low burn multiple in a SaaS environment is a function of two factors: (1) product-market fit and (2) sales & marketing efficiency.
Creating an exceptional product and tailoring it to the market’s needs requires dedicated founders, a clear vision, and thoughtful operations. It is more art than science.
Sales & marketing, however, is more science than art. With the correct research and team members, you can find low-CAC marketing channels, test them, and invest in the ones that generate ARR. Further, you can hire, train, and motivate your sales team using established practices. While not easy, getting your sales and marketing performing is straightforward.
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