Your burn multiple, or how much you spend to generate each dollar of new Annual Recurring Revenue (ARR), says a lot about your company’s efficiency and valuation potential.
Burn multiple is especially relevant for VC-backed companies that are on the path to breakeven but continue reinvesting in growth rather than prioritizing short-term profitability.
This article breaks down how to calculate the burn multiple, what good benchmarks look like for software as a service (SaaS) companies at different stages, and how buyers may interpret this metric during M&A or fundraising conversations.
What is your burn multiple? Formula and definition
Burn multiple is a capital efficiency ratio that shows how much cash a company spends to generate each dollar of new ARR. It gives founders and investors a simple way to evaluate whether growth is efficient or if it’s coming at a high cash cost.
The metric was popularized by David Sacks, a well-known SaaS investor, co-founder of PayPal and the founder of Craft Ventures. Many of his frameworks have become widely used across the SaaS industry.
How to calculate the burn multiple
The formula for burn multiple is straightforward:
Burn Multiple = Net Burn ÷ Net New ARR
To make the metric useful, each part of the equation needs to be defined clearly:
- Net Burn: Your cash outflow minus your cash inflow for the period. This reflects how much cash the company actually used.
- Net New ARR: The period-over-period increase in annual recurring revenue. This is the amount of new ARR the company added in that same window.
Example
Consider a SaaS company with:
- Net Burn: $1.2M for the quarter
- Net New ARR: $600K added in that same quarter
Using the formula: $1.2M ÷ $600K = 2.0x
A 2.0x burn multiple means the company spent $2 in cash to generate $1 of new ARR.
Benchmark tiers
David Sacks provides a simple way to interpret the ratio
Good burn multiple benchmarks by growth & stage
Data from Scale Venture Partners, Capchase, and CFO Advisors shows that burn multiples improve as SaaS companies scale. Younger companies tend to burn more while they work toward product-market fit, while more mature SaaS businesses benefit from pricing power, operational leverage, and a more predictable recurring revenue base.
Benchmark summary table: Burn multiple by ARR stage
Sources:
Benchmarking SaaS Growth and Burn - ScaleVP
B2B SaaS Metric Benchmarks 2024 - SaaSCan
SaaS Company Benchmarks - Burn Multiple - CapChase
Why burn multiple matters in M&A and fundraising
Buyers might use burn multiple to assess discipline and scalability, as it gives them a clear view of how efficiently the company turns cash into recurring revenue and whether the current growth model could continue without relying on repeated injections of capital.
Investors may also interpret burn multiple as a signal of management quality: When the ratio improves over time, it often reflects stronger operational control and focus, and those attributes increase confidence in both fundraising and M&A settings.
However, burn multiple also works alongside metrics like the Rule of 40, CAC payback, and gross margin. Together, these metrics help buyers understand the overall quality of growth, while the burn multiple isolates how efficiently that growth is being financed.
Since 2022, the market has generally shifted toward rewarding efficient, predictable growth rather than aggressive expansion. Buyers today may place more value on margin protection and disciplined investment than on speed alone.
VC and PE buyers can interpret high burn differently. Some venture investors might accept higher burn if it’s clearly tied to durable ARR expansion or new-market entry. PE buyers, however, often take a more conservative position. They may see high burn as a sign of distress or prefer assets that are already cash-flow positive.
Is burn multiple relevant for AI companies?
A recent 20VC x SaaStr conversation between Harry Stebbings, Jason Lemkin, and Rory O’Driscoll highlighted how AI is changing the way investors interpret classic SaaS metrics. Lemkin, one of the most active SaaS investors of the past decade, and O’Driscoll, a longtime investor at Scale, both noted that AI-native companies are growing at speeds that don’t always fit neatly inside traditional efficiency frameworks.
Their discussion pointed to a key shift: AI companies often show strong burn multiples because they grow so fast, yet their underlying unit economics can be far less stable. Iconiq’s recent State of Software report found that AI-native companies under $100M ARR had significantly worse free cash flow margins than traditional SaaS, but sometimes looked "efficient" on paper simply due to explosive ARR expansion.
Both investors emphasized that burn multiple remains useful, but it now needs more context. For AI-driven businesses, investors are paying closer attention to whether:
- ARR is real and not inflated by early incentives
- Gross margins remain healthy despite compute costs
- Net retention is sustainable
- The business avoids heavy, ongoing capex requirements
The practical takeaway for founders is this: AI hasn’t made burn multiple irrelevant, but it has made it insufficient on its own. For non-AI SaaS companies, this means strong fundamentals still matter, but investors may be more selective. For AI-native companies, improving efficiency is important, but buyers will also look deeper into the quality of revenue, the durability of demand, and the long-term economics of the model.
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How to reduce burn multiple for your SaaS company without slowing growth
1. Double down on what’s working
Reallocate spend from low-ROI experiments to channels or customer segments with predictable payback. The goal is to concentrate resources where conversion rates and retention are strongest.
2. Make your go-to-market engine work smarter
Use conversion data to align sales and marketing spend with the channels that consistently produce high-quality ARR. This helps maintain growth without increasing acquisition costs.
3. Grow your team at a pace your revenue can support
Scale headcount in proportion to recurring revenue rather than projected growth. Consider how AI can help your team maximize their productivity, while potentially reducing your hiring expense. Maintaining organizational leverage has a direct impact on burn efficiency.
4. Strengthen your monetization strategy
Improve pricing, packaging, or upsell motions to increase net revenue retention. Expanding ARR without proportional cost increases is one of the most effective ways to improve burn multiple.
5. Improve retention to lift ARR organically
Lower churn and expand existing customer relationships. Growth from the current base requires far less investment than new acquisition, which directly improves burn multiple.
6. Optimize capital allocation ahead of an exit
Prioritize initiatives that can demonstrate efficiency improvements within 6–12 months. Buyers often focus on recent trends, so showing clear progress can strengthen the valuation narrative.
Why burn multiple isn’t everything
Regardless of whether a company is AI or not, burn multiple is most useful when it's viewed alongside other metrics such as gross margin, retention, and cash runway.
You can still run into liquidity risk with a "good" burn multiple. A 1.0x ratio may look strong on paper, but if gross margins are thin or cash reserves are limited, efficiency alone won’t solve short-term cash needs.
Burn multiple also assumes that key operating fundamentals are healthy. In most SaaS models, the math works best when gross margins are around 75–80% and net revenue retention is 100% or higher. If your business falls short on either of these, your target burn multiple should be lower to reflect the added risk.
Finally, burn multiple doesn’t account for market conditions or the availability of outside capital. In periods when fundraising is difficult or capital is expensive, even efficient growth can become hard to sustain, which is why buyers will always weigh burn multiple alongside broader financial and market signals.
Positioning burn multiple in your exit narrative
When preparing for a sale, the way you frame burn multiple matters just as much as the number itself. Buyers want to understand the story behind the metric, not just the output of the formula.
If your burn multiple is higher than benchmarks, explain the "why." Founders can often show that elevated burn was intentional, for example when it is tied to entering a new market or expanding the product.
Buyers also care about the trend. A burn multiple that improves over the past several quarters usually carries more weight than a single point in time. Highlighting this trajectory helps demonstrate operational control and momentum.
Linking efficiency to credibility is another important piece. Showing how improvements in spending discipline, hiring, or go-to-market focus have reinforced the business can strengthen buyer confidence. It signals maturity and control rather than reactive cost-cutting.
Finally, show a reasonable path to breakeven. Buyers want visibility into how the business could operate with greater efficiency post-transaction. At L40°, we help founders build this narrative so metrics like burn multiple support valuation discussions. Contact us today.
