Why Burn Multiple Replaced Growth Rate as the Efficiency Test
Growth rate tells you how fast you are going. Burn multiple tells you how much fuel you are wasting to get there. David Sacks at Craft Ventures popularized this metric because growth-at-all-costs masked fundamentally broken business models for years. A company growing 100% that burns $3 for every $1 of net new ARR is not impressive — it is a bonfire.The formula is simple: net cash burned divided by net new ARR. It captures everything — not just sales and marketing, but R&D, G&A, and all the overhead that CAC conveniently ignores. That is what makes burn multiple more honest than CAC alone.
The Benchmarks That Matter
Where you sit on the burn multiple spectrum determines your board conversation. Below 1.0 is elite — you generate more than a dollar of net new ARR for every dollar burned. Between 1.0 and 1.5 is healthy. Above 2.0 signals compounding inefficiency (Craft Ventures, 2022).| Stage | Target Burn Multiple | What It Signals |
|---|---|---|
| Early ($1-5M ARR) | 1.5-2.0 | Acceptable while finding product-market fit |
| Growth ($10-50M ARR) | 0.5-1.0 | Engine is working, ready to scale |
| Scale ($50M+ ARR) | Below 0.5 | Efficient growth machine |
Where Teams Get the Calculation Wrong
The most common mistake is using gross new ARR instead of net new ARR. If you added $5M in new and expansion ARR but lost $2M to churn and contraction, your net new ARR is $3M — not $5M. Using the gross number flatters the ratio and hides retention problems.The second mistake is excluding stock-based compensation from the burn calculation. If half your engineering team's comp is in equity, your cash burn looks artificially low. Sophisticated investors adjust for this.
How Burn Multiple Connects to Board Prep
Burn multiple is often the first metric investors ask about after ARR growth. It answers the question behind every other question: "Are you building a durable business, or are you buying revenue?" For finance teams preparing board decks, pair burn multiple with magic number and CAC payback to give a complete efficiency picture. Each metric tells a different part of the story — burn multiple is the one that captures all spending, not just go-to-market.Frequently Asked Questions
What is a good burn multiple?
Below 1.0 is elite. Between 1.0 and 1.5 is healthy. Between 1.5 and 2.0 is acceptable for early-stage. Above 2.0 signals inefficiency that compounds over time (Craft Ventures, 2022).
How does burn multiple differ from CAC?
CAC measures cost per customer. Burn multiple measures total cash burned per dollar of net new ARR, capturing all company spending — not just sales and marketing. It is a more honest efficiency test.
What burn multiple should growth-stage companies target?
At the growth stage ($10-50M ARR), target 0.5 to 1.0. Burn multiple is often the first metric investors ask about after ARR growth during board prep.
Put these metrics to work
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