A burn multiple is the amount of cash burned by 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)|
- 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).
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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.
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+.
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.