FundraisingFounder's Story
Raising Series A in The Down Market with Datavations
Why the "DIY approach" to Series A fundraising is actually the riskiest strategy.
Loading
Learn about burn multiples – how much cash you spend to generate each additional dollar of ARR. A critical efficiency metric that helps founders justify their spending to investors.
Vlad Cazacu
TL;DR: Burn multiples measure how efficiently your startup converts cash into recurring revenue growth. Aim for below 1.5, with best-in-class companies staying under 1.0. Understanding this metric helps founders justify their cash expenditures to investors and optimize their path to profitability.
As a founder raising capital, you've likely heard investors ask pointed questions about your "burn rate" and "runway." But there's another metric gaining traction in investment conversations that cuts deeper into operational efficiency: the burn multiple.
At its core, burn multiple answers one simple question: How much cash do you burn to generate an additional dollar of Annual Recurring Revenue (ARR)?
The formula is straightforward:
Burn Multiple = Net Cash Burned ÷ Net New ARR
If you burn $100,000 in a quarter and add $50,000 in new ARR, your burn multiple is 2.0. This means you're spending two dollars for every dollar of recurring revenue growth.
Unlike marketing efficiency metrics that focus solely on acquisition costs, burn multiple captures your entire organizational efficiency – from sales and marketing to operations and overhead.
Investors pay attention to burn multiples because they reveal how efficiently you're deploying capital across your entire business. A startup might have fantastic unit economics on paper, but if they're burning through cash on expensive office space, excessive headcount, or inefficient operations, the burn multiple will expose this inefficiency.
Think of it this way: if a company raises $6 million in a pre-seed round and then leases a four-story office with executive assistants for every employee, ping-pong tables, and premium amenities, but isn't channeling that spend toward revenue generation, the burn multiple will reflect this misalignment.
The metric essentially asks: "Are you running an efficient organization for the ARR you're generating?"
Target Ranges:
The logic behind sub-1.0 performance is compelling: if you consistently spend $1 to generate $1 in ARR each month, over a 12-month period you'll have invested $12 and generated $12 in annual recurring revenue. While you're spending cash upfront, you're approaching a breakeven state where your investment pays for itself annually.
Companies achieving burn multiples below 1.0 have typically moved past the infrastructure-building phase and are efficiently scaling their go-to-market operations.
Not all cash burn is created equal. Early-stage companies often need to spend significantly on product development and infrastructure before they can efficiently scale revenue. This upfront investment won't immediately reflect in ARR growth, potentially inflating the burn multiple during these building phases.
The key distinction: Are you burning cash to build the foundation for future growth, or are you burning cash that directly drives current revenue expansion?
Burn multiples can be highly variable month-to-month due to:
This is why most investors focus on quarterly or annual burn multiples rather than monthly figures.
The metric becomes less meaningful when:
The most direct path to improving burn multiples is accelerating ARR growth while maintaining disciplined spending. This might mean:
Review your expense structure with a critical eye:
Consider the timing of major expenses and hires. If you're planning significant infrastructure investments, communicate this context to investors rather than letting a temporarily inflated burn multiple tell the wrong story.
A high burn multiple isn't necessarily a sign of poor management – it might reflect specific circumstances like losing a major contract, causing ARR to decline while operational expenses remain constant. Understanding these underlying drivers is crucial when contextualizing the metric for investors.
Key talking points when discussing burn multiples:
Burn multiples aren't just another vanity metric – they're a window into your operational DNA. For founders, tracking this metric helps optimize capital allocation and build credibility with investors. For investors, it's a quick way to assess whether a company is efficiently scaling or burning cash without corresponding growth.
The goal isn't to achieve a perfect burn multiple overnight, but to understand what drives the number and continuously work toward more efficient growth. In a capital-constrained environment, founders who can demonstrate improving burn efficiency while scaling ARR will stand out in fundraising conversations.
Remember: the metric tells a story, but it's up to you to ensure it's the right story. Context matters, and the best founders use burn multiples as a tool for optimization rather than just a number to report.
Join thousands of founders using our technology to find the right investors and close rounds faster than ever before.
Why the "DIY approach" to Series A fundraising is actually the riskiest strategy.
Learn how warrants instantly affect your ownership and how investors value your company.
Top VC firms in Boston, Massachusetts. Based on industry focus, investment stages, and more.