Burn multiple: formula, worked example and what moves it

The burn multiple is net burn divided by net new ARR over the same period: burn multiple = net burn ÷ net new ARR. It shows how many dollars of cash a company spent to add each dollar of annual recurring revenue, so a lower figure means more efficient growth.

David Sacks of Craft Ventures introduced the metric in his essay The Burn Multiple, describing it as a measure of how much a startup burns to generate each incremental dollar of ARR. Decipher's guide to burn rate and runway covers how to measure net burn itself. This post covers building the multiple quarter by quarter and spotting the quarters that mislead.

The two inputs

Net burn is cash paid out minus cash collected from operations, excluding equity and debt raised. It is a cash figure, not net loss.

Net new ARR is the change in ARR over the period, built from its parts:

Net new ARR = new ARR + expansion - contraction - churn

Take the components from a customer-level ARR waterfall, the same one used for net revenue retention. Bookings, multi-year contract values, services and one-time fees do not belong.

A four quarter worked example

A fictional software company over one year, all figures in $K.

Illustrative figures, not client data.

Two quarters need a closer look.

• Q3 looks like the best quarter. It is not. A large customer paid a $300K annual renewal early, which cut net burn from what would have been $1,350K to $1,050K. Normalized, the multiple is 1,350 ÷ 700 = 1.9x, close to Q2.
• Q4 looks like a collapse. One large customer churned $150K of ARR on top of a normal $50K. Had churn stayed at $50K, net new ARR would have been 650 and the multiple 1,500 ÷ 650 = 2.3x. Worse than Q2, but not a 3.0x business.

The annual figure is total burn over total net new ARR: 5,100 ÷ 2,550 = 2.0x. Averaging the four quarterly multiples gives (2.0 + 1.8 + 1.5 + 3.0) ÷ 4 = 2.1x, which is wrong because it weights a small-ARR quarter the same as a large one.

How to calculate it consistently

• Same period, both inputs. Quarterly burn against quarterly net new ARR. Never trailing burn against a single strong quarter of ARR.
• One ARR definition. If the company changes how it counts ARR (for example, adding usage revenue or a new product line), restate prior quarters or flag the break.
• Report quarterly and annual. The quarterly figure shows direction; the trailing twelve month figure, calculated as sum over sum, smooths lumpy quarters.
• Fix the burn definition. Decide whether loan principal and capitalized development sit inside net burn, and keep it.
• Show reported and normalized side by side. Footnote any quarter with a large prepayment or churn event rather than quietly adjusting it.

What moves the multiple

The denominator moves with go-to-market results: new logos, expansion, and keeping churn and downgrades low. Every dollar of churn has to be replaced before net new ARR grows.

The numerator moves mostly with headcount. Hiring ahead of the ARR that the hires will produce raises the multiple for several quarters before it falls, which is why headcount planning and the burn multiple should be read together. Sales and marketing spend that does not convert into ARR raises it too.

Collection timing moves only the numerator, temporarily. Shifting customers to annual billing up front lowers burn in the quarter cash arrives and raises it in the quarters that follow.

Common distortions

• One-off collections. A large overdue invoice paid in the quarter lowers burn without improving efficiency.
• Annual prepayment seasonality. If renewals cluster in one quarter, that quarter flatters the multiple and the next one penalizes it.
• A big churn quarter. One lost account can double the multiple. Show it, explain it, and show the multiple without it.
• Bookings in the denominator. Using contract value instead of ARR, or counting signed but not yet live deals, understates the multiple.
• Negative net new ARR. If churn exceeds new and expansion ARR, the multiple is negative and meaningless; report the components instead.

Investors tend to recompute the figure from the cash flow statement and the ARR waterfall, and they care more about the trend over several quarters than any single number. A table like the one above, with normalized figures footnoted, answers most of their questions.