Are you a SaaS company looking to grow your business and attract investors? Then you’ve probably heard of the term “burn multiple.” But what exactly does it mean, and how can it benefit your company? In this easy guide, we’ll break down the concept of burn multiple and show you how it can be used to measure the health and potential of your SaaS company. So sit back, grab a coffee, and let’s dive in!
It’s calculated by dividing your net burn by your net new annual recurring revenue (ARR).
This matters for SaaS companies because it helps you understand whether or not your business is capital efficient
The higher your burn multiple is, the more inefficient with capital your startup is operating; conversely, if your burn multiple is low you are running an efficient operation!
What Is a Burn Multiple?
A burn multiple is a ratio that measures how much money you spend to acquire customers. It’s an important metric for SaaS companies because it can be used to measure success, and it helps investors determine whether or not they should invest in your company.
This calculation is useful because it helps you determine whether or not your business is profitable and whether it needs to raise more money soon or not.
Why Does a Burn Multiple Matter for SaaS Companies?
If you’re considering raising capital from investors, one of the first things they’ll want to know is what kind of return on investment (ROI) they could expect from investing in your business.
A high burn multiple means that each customer brings in enough revenue for the company, so there’s still money left over after paying for customer acquisition costs.
This makes it easier for investors to see how much growth potential would be if their investment paid off well enough.
Burn Multiple Formula
Burn multiple formula is created by SaaS expert and Craft Ventures founder David Sacks to see how efficiently a company grows rather than simply how fast they are growing.
The formula looks like this:
Burn Multiplier = (# of new customers in the past month) / (# of existing customers in the past month)
In other words, it’s a measure of how much money you spend on acquiring new customers over your existing ones.
How to Calculate a Burn Multiple
The burn multiple is the amount of time it will take for a company to run out of cash, given its current burn rate. For example, if your company has $10 million in revenue and a $1 million monthly burn rate, your burn multiple is 10 (the number of months you can last).
Burn Multiple = Monthly Burn Rate / Annual Revenue
To calculate how long your business can survive with its current financials:
- Calculate your monthly burn rate by dividing your annual operating expenses by 12 months. This gives you an average monthly daily expense (e.g., $100K / 12 = $8333).
- Multiply this number by 2X-3X times higher than industry standards; this is usually enough padding so that even if everything goes wrong, there’s still some runway left before running out of money completely
A Quick Burn Multiple Example: What Is a Good Burn Multiple for SaaS Companies?
Burn multiple is a way to measure how quickly you’re burning through your cash. It’s calculated by multiplying your annual recurring revenue by the number of months in a year (12) and dividing that by your monthly burn rate. For example:
A company with a monthly burn of $100k and a net new ARR of $50k would have a burn multiple of $100k/$50k = 2.0.
For every dollar they lose each month, they add $0.50 of ARR.! This might seem silly at first glance and not sustainable. However, keep in mind that most software companies are valued at a multiple of ARR (historically 6-10x depending on many other factors); if the company loses $1 to increase enterprise value by $3 ($0.50 ARR x 6x valuation multiple), then it starts to make more sense.
Learn More About SaaS Accounting With Mighty Startup
Congratulations, you’ve read the guide! Now that you know what a burn multiple is and how it works, you can use this information to help your SaaS company. Remember a burn multiple is just one of many critical SaaS metrics and it’s important to consider all relevant metrics based on your startup’s specific situation.
If you need help with SaaS accounting or are just looking for more information, don’t hesitate to contact Mighty Startup. Our team of seasoned professionals would be more than happy to help you.
