Burn multiple is net cash burn divided by net new ARR over the same period. It measures the cash used to add each euro of annual recurring revenue. Compare several quarters, then separate spending from new sales, expansion and churn to find what changed; the example below does that step by step.
What is the burn multiple formula?
Burn multiple is net burn divided by net new ARR, both measured over the same period, usually a quarter. Net new ARR is new plus expansion minus contraction and churn. Lower is better: the less cash it takes to add each euro of ARR, the healthier the growth.
burn multiple = net burn / net new ARR net new ARR = new + expansion - contraction - churn
Net burn is cash out minus cash in from customers. Net new ARR is the change in annual recurring revenue over the quarter. A company that burns €2M in a quarter and adds €1M of net new ARR has a burn multiple of 2, which is Sacks' own example in The Burn Multiple.
One company, four quarters
The example is a B2B software company with about €600,000 of ARR at the start of the year. Its burn multiple rises from 1.00 in Q1 to 1.66 in Q3, then falls back to 1.11 in Q4. Figures are per quarter.
| Q1 | Q2 | Q3 | Q4 | |
|---|---|---|---|---|
| Cash out | €300,000 | €320,000 | €330,000 | €335,000 |
| Cash in from customers | €150,000 | €162,000 | €172,000 | €185,000 |
| Net burn | €150,000 | €158,000 | €158,000 | €150,000 |
| New ARR | €150,000 | €145,000 | €150,000 | €150,000 |
| Expansion ARR | €30,000 | €30,000 | €25,000 | €30,000 |
| Churn and contraction | -€30,000 | -€55,000 | -€80,000 | -€45,000 |
| Net new ARR | €150,000 | €120,000 | €95,000 | €135,000 |
| Burn multiple | 1.00 | 1.32 | 1.66 | 1.11 |
What is a good burn multiple?
By David Sacks' ranges for venture-stage companies, a burn multiple under 1x is amazing, 1x to 1.5x is great, 1.5x to 2x is good, 2x to 3x is suspect and over 3x is bad. Lower is better, and the table below sets out the bands.
| Burn multiple | Sacks' label |
|---|---|
| Under 1x | Amazing |
| 1x to 1.5x | Great |
| 1.5x to 2x | Good |
| 2x to 3x | Suspect |
| Over 3x | Bad |
He also expects the number to fall as a company matures. His illustration is a seed company around 3 because it has only just started selling, around 2 after the Series A, and lower still once the sales team is working at scale. Pre-revenue, the ratio does not compute at all, because there is no net new ARR to divide by.
On those labels, this company never has a bad quarter. Q3 at 1.66 is still "good". The trend is the warning: from 1.00 to 1.66 in two quarters, at a stage when it should be improving. Sacks makes the same point: a multiple moving the wrong way as the company matures means something is wrong, even while headline growth continues.
How do you take a bad burn multiple apart?
To take a bad burn multiple apart, check net burn and net new ARR separately, because a ratio can worsen when the top grew or when the bottom shrank. In the example, net burn barely moved between Q1 and Q3 while net new ARR fell from €150,000 to €95,000, so the denominator is the problem.
Net burn went from €150,000 in Q1 to €158,000 in Q3. Spending grew by €30,000, and cash from customers grew by €22,000. That side barely moved.
Net new ARR fell from €150,000 to €95,000. New sales held at €150,000 and expansion dipped by €5,000. Churn and contraction went from €30,000 to €80,000.
A quick way to confirm the cause is to recalculate Q3 with one thing held at its Q1 level. With Q1's churn, Q3 net new ARR would have been €145,000, and the multiple 1.09. With Q1's net burn, the multiple would have been 1.58. Churn explains almost all of the change.
Sacks lists churn among the problems the burn multiple catches: it comes straight off the denominator, so the company pays to win customers and then loses the revenue they brought. In this example most of Q3's churn was a single large customer leaving, which is a concentration problem as much as a retention one. When one customer is too big covers how to spot that before it happens.
What changed in Q4
The team did not cut spending. It went after the churn: account reviews with the largest customers, and fixes for the reasons that departing customers gave. Churn came down to €45,000 and the multiple went back to 1.11. Cutting €50,000 of spending would have brought Q3 to about 1.14, a similar result, but it would have left the leak in place.
Where burn is the side that moved, the fixes are on the spending side, and Sacks points out that cost cuts show up in the very next period's multiple. Cutting costs without cutting muscle covers how to choose what goes. He also notes that some revenue may be worth giving up if it costs more to serve than it brings in.
How do you get the burn multiple wrong?
Four mistakes distort the burn multiple: mixing periods, using new ARR instead of net new ARR, ignoring timing in net burn, and reading one quarter. Each is avoided by putting both sides on the same quarter, counting churn, noting unusual prepayments and showing at least four quarters.
Mixing periods. Monthly burn divided by quarterly net new ARR makes the multiple look three times better than it is. Put both sides on the same quarter.
Using new ARR instead of net new ARR. Leaving out churn is the easiest way to flatter the ratio, and in this example churn is the part that matters most.
Ignoring timing in net burn. Net burn is cash, so a quarter in which several customers prepay annual plans shows lower burn and a better multiple than the business really earned. If prepayments were unusually high or low in a quarter, say so next to the number.
Reading one quarter. One large deal or one lost customer can swing a quarter either way. Show investors at least four quarters, and explain any quarter that looks out of line.
Working it out for your own company
You need two things every quarter: net burn from the bank, and the movement in ARR split into new, expansion, contraction and churn. The burn multiple calculator does the division and places your figure in Sacks' bands. For the ARR side, what is MRR explains how to track the four movements. If your multiple is high because growth is slow rather than burn being high, the rule of 40 gives investors a second view that trades growth against profitability.
Plainhub does not calculate burn multiple. It keeps net burn and MRR current as you record money and customers, flags top-customer concentration at 30% or more of MRR and shows which customers you have marked at risk, Keep quarterly cash-burn totals and ARR movements separately; the app shows current monthly figures rather than the period history needed for this ratio.