A burn multiple is the amount of cash burned compared to annual recurring revenue (ARR). For example, if a company burns $10MM to add $30MM ARR the burn multiple is 3.0x. Higher burn multiples are worse and imply the company will run out of money faster. This is a better measure of overall efficiency compared to LTV/CAC because it encompasses all costs (burn).
What’s a good burn multiple? (Source a16z)
| ARR | 25th Percentile (Bad) | 50th Percentile (Median) | 75th Percentile (Good) |
|---|---|---|---|
| $0-$10MM | 3.8x | 1.6x | 1.1x |
| $10MM-$25MM | 1.8x | 1.4x | 0.8x |
| $25MM-$75MM | 1.1x | 0.7x | 0.5x |
| $75MM+ | 0.9x | 0.5x | 0x |
See also:
- This is a useful measure to help run a startup during a recession since companies wit a high burn multiple will need to raise money but availability of capital declines (inflation causes downward pressure on startup valuations).
- David Sacks talks more what burn multiples correlate to in this essay
- Net magic number
Links to this note
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Running a Startup During a Recession
Startups are a microcosm of the economy and we can observe that things are changing quickly towards a recession footing. The effects of inflation on valuations are readily apparent, but we also see that things were too good to be true and investors and late stage companies exploited it.
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Startup Sales Win Rates Decreased
According to the Lightspeed sales benchmark report for 2023, win rates decreased for 42% of companies surveyed. The larges decreases happened for initial sale prices of $250k+.
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A collection of benchmarks for B2B businesses (mostly relevant for early-stage SaaS).
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What Founders Should Know About Interest Rates
Between 2008 and 2021, the market was operating under zero-interest rate policy (ZIRP). That changed in 2022 back to historically normal interest rates (5-6%) set by the Federal Reserve.
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Four Levels of Product Market Fit
First Round Capital has a helpful guide to product market fit that helps to orient founders so they can focus on the right things. Rather than a binary, yes/no, evaluation of product market fit, the guide discusses different levels.
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Saas Revenue Per Employee Benchmarks for B2B Companies
A useful metric for SaaS businesses is the amount of Annual Recurring Revenue (ARR) per employee. A high revenue per employee implies the efficiency of the business and is a proxy for it’s ability to break-even or become profitable (the majority of expenses for tech companies is people). As the business starts to scale, revenue per employee is expected to increase.
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Net magic number is a measurement of go-to-market (GTM) efficiency for SaaS businesses. A magic number less than 1.0 indicates the business will lose money on each customer. Top SaaS businesses making less than $25MM in revenue per year have a magic number of 1.7 according to benchmarks from Iconiq Capital as in their business returns 1.7x for every sales and marketing dollar they spent to acquire customers.