The burn multiple says how much cash a company spends to add one unit of recurring revenue, and the definition decides which side of a band it lands on.
The burn multiple is net burn divided by net new ARR over the same period: how many units of cash the company consumed to add one unit of recurring revenue. An illustrative company that burned 24.0 million of free cash flow in a year while growing ARR by a net 16.0 million has a burn multiple of 1.50x. The same year can be presented anywhere from 1.09x to 1.75x, so the definition matters more than the band.
Worked in full in The Growth Equity Investor by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Growth investors use the burn multiple because it compresses the whole operating model into one question: is the cash going into growth that stays? Unlike CAC payback, it captures every cost line, including research and development and general overhead, and it charges churn against the result. A company can have an attractive payback on new logos and still a poor burn multiple if it is spending heavily outside sales or losing revenue out of the back door.
| Input | Value |
|---|---|
| ARR at start of year | 50.0 |
| New-logo ARR | 14.0 |
| Expansion ARR | 8.0 |
| Churn and contraction | (6.0) |
| Net new ARR | 16.0 |
| ARR at end of year | 66.0 |
| EBITDA | (18.0) |
| Operating cash flow | (20.0) |
| Capital expenditure | (2.0) |
| Capitalised software development | (2.0) |
| Free cash flow (net burn) | (24.0) |
| Cash on balance sheet | 60.0 |
Net burn here is free cash flow before financing: operating cash flow less capital expenditure and capitalised development. Equity raised, debt drawn and interest on the cash pile are left out, because the measure is about the operating engine, not the capital structure.
Burn multiple = net burn ÷ net new ARR, both over the same period
Net new ARR = new-logo + expansion − churn − contraction
In Excel: =-(Op_CF+Capex+Cap_Software)/(ARR_End-ARR_Start)
Net new ARR is 14.0 + 8.0 − 6.0 = 16.0, which takes ARR from 50.0 to 66.0, growth of 32 per cent. Net burn is 20.0 + 2.0 + 2.0 = 24.0. The burn multiple is 24.0 ÷ 16.0 = 1.50x: the company spent 1.50 of cash for every 1.00 of recurring revenue it added, or equivalently it bought 0.67 of ARR with each unit burned.
Read forward, the same figure prices the next raise. With 60.0 of cash and 24.0 of annual burn, runway is 2.5 years, or 30 months. At a 1.50x burn multiple, that cash buys 40.0 of net new ARR if every unit of it is spent, so the next raise has to come before that point. An investor writing the next cheque can test the plan against that number directly: if the plan shows more ARR than the cash can buy at the historical burn multiple, it is assuming efficiency the company has not yet shown.
| Definition | Burn | ARR added | Multiple |
|---|---|---|---|
| Net burn over gross new ARR | 24.0 | 22.0 | 1.09x |
| EBITDA loss over net new ARR | 18.0 | 16.0 | 1.13x |
| Operating cash burn over net new ARR | 20.0 | 16.0 | 1.25x |
| Net burn over net new ARR | 24.0 | 16.0 | 1.50x |
| Underlying burn before billing shift over net new ARR | 28.0 | 16.0 | 1.75x |
The first three rows flatter. Gross new ARR ignores the 6.0 that walked out, which is the opposite of what the measure is for. EBITDA leaves out capitalised development, a real cash cost in most software companies, and the change in working capital. Operating cash flow leaves out the capitalised development and capital expenditure that the business needs to keep shipping product.
The last row is the one diligence should produce. During the year the company moved a group of customers from monthly to annual upfront billing, which pulled 4.0 of cash forward into the period. That is a real working capital benefit, but it happens once. Strip it out and the underlying burn is 28.0, the burn multiple 1.75x, and the cash on hand buys 34.3 of ARR rather than 40.0.
The commonly quoted bands, popularised by David Sacks, read below 1x as amazing, 1x to 1.5x great, 1.5x to 2x good, 2x to 3x suspect and above 3x bad. They are heuristics, not market statistics. In this case the headline sits on the line between great and good, and the underlying figure is plainly good. The band moves with the definition, which is why the definition has to be asked for before the band is quoted.
| Net burn | Net new ARR 8.0 | 16.0 | 24.0 |
|---|---|---|---|
| 16.0 | 2.00x | 1.00x | 0.67x |
| 24.0 | 3.00x | 1.50x | 1.00x |
| 32.0 | 4.00x | 2.00x | 1.33x |
The ratio is asymmetric in its denominator. A 50 per cent fall in net new ARR, from 16.0 to 8.0, doubles the multiple to 3.00x, while a 50 per cent rise, to 24.0, only brings it down to 1.00x. In practice net new ARR is also the more volatile of the two inputs: one large churned account, or one delayed expansion, moves it far more than any quarter's spending decisions move burn.
State the burn multiple with its definition: free cash flow burn over net new ARR, trailing twelve months, with any working capital one-offs removed. Here that is 1.75x, not the 1.09x to 1.50x a pitch could defensibly print. Then turn it round and ask what the remaining cash buys at that rate, because that is the figure the next valuation will rest on. The readiness screen in the free companion files for this book reports each unit-economics metric twice, as reported and as rebuilt, which is exactly the habit the burn multiple needs. For the sales side of the same efficiency question, see how to calculate CAC payback period, and for growth and margin combined, the Rule of 40.
The bands most often quoted, popularised by David Sacks, are below 1x amazing, 1x to 1.5x great, 1.5x to 2x good, 2x to 3x suspect and above 3x bad. They are heuristics, not market data. An illustrative company burning 24.0 to add 16.0 of net new ARR sits at 1.50x, on the line between great and good, and moves to 1.75x once a one-off billing shift is stripped out.
Net new ARR. The question is how much cash the company spends to grow its recurring revenue base, so churn and contraction belong in the denominator. Using gross new ARR of 22.0 instead of net new ARR of 16.0 cuts an illustrative burn multiple from 1.50x to 1.09x and hides a churn problem behind sales productivity.
Runway says how long the cash lasts; the burn multiple says what it buys. With 60.0 of cash and 24.0 of annual net burn, runway is 2.5 years, or 30 months. At a 1.50x burn multiple that cash buys 40.0 of net new ARR before the next raise; at 1.75x it buys 34.3.
This article is one calculation from The Growth Equity Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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