Burn Multiple
Net cash burned divided by net new ARR added — how much cash is consumed to produce a unit of recurring revenue.
What it asks
Burn multiple is net cash burned in a period divided by net new ARR added in the same period. It answers one question: how many dollars of cash did it take to produce a dollar of new recurring revenue? Lower is better, and unlike most efficiency metrics it is difficult to improve cosmetically.
Burn multiple = net burn ÷ net new ARR. Its virtue is that it is net on both sides. Churn raises it, unprofitable growth raises it, and cash spent anywhere in the business counts — so it is much harder to flatter than a metric restricted to sales and marketing.
It is undefined when growth is flat or negative
How to read it
Use net burn, not gross. Net burn is cash out minus cash in, which is what actually consumes the balance.
Use net new ARR, not bookings or gross new. Substituting gross new removes churn from the calculation and defeats the point of the metric.
Read it over several quarters. A single quarter containing one large deal or one large payment is noise.
Pair it with runway. A good burn multiple with six months of cash is still an urgent problem, and the ratio cannot see the balance sheet.
Compare against your own trend rather than a published figure. The widely cited bands are conventions rather than measured thresholds.
Where it misleads
It penalises deliberate investment that has not yet produced revenue. A company building a product for a new segment will show a poor multiple for the period that decision is being made in, correctly and unhelpfully.
It is blind to contract structure. Annual-in-advance billing improves cash flow and therefore the multiple without any change in the underlying business.
It says nothing about gross margin. Two businesses with identical multiples can have very different unit economics underneath.
At very small ARR the denominator is tiny and the ratio swings wildly on individual deals.
RELATED TERMS
Annual Recurring Revenue (ARR)
The annualised value of recurring subscription revenue at a point in time. A run rate, not a measure of revenue earned during a period.
Rule of 40
A heuristic that revenue growth rate plus profit margin should sum to at least forty, used to judge whether growth and profitability are in a defensible balance.
Net New ARR
The change in ARR over a period: new plus expansion minus contraction minus churn. The headline growth number.
Magic Number
A sales efficiency measure comparing new recurring revenue produced to the sales and marketing spend that produced it.
Gross Margin
Revenue minus cost of goods sold, as a percentage of revenue. Whether the business model scales.
COMMON QUESTIONS
- What is burn multiple?
- Net cash burned in a period divided by net new ARR added in the same period — how many dollars of cash it took to produce a dollar of new recurring revenue. Lower is better. Its strength is that both sides are net, so churn and spending anywhere in the business count, making it much harder to flatter than sales-and-marketing-only measures.
- How is burn multiple different from the magic number?
- The magic number compares new ARR against sales and marketing spend only; burn multiple compares it against all cash burned. Burn multiple is therefore the harsher and more complete measure — a company can post a respectable magic number while burning heavily on product, support and overhead, and only the burn multiple shows it.
- What is a good burn multiple?
- Lower is better and under 1 means you are adding more recurring revenue than you are burning cash, which is a strong position. The frequently quoted bands are operating conventions rather than measured thresholds, so we do not publish them as targets. Your own trend across several quarters is the more reliable comparison.
- What happens to burn multiple if growth is flat?
- It becomes undefined or infinite, because the denominator is at or below zero. That is the metric behaving correctly rather than breaking — a business burning cash without adding recurring revenue cannot be scored on cash efficiency per dollar of growth, and the absence of a number is itself the finding.
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