What is it: The burn multiple measures a company's capital efficiency. It is calculated by dividing the net cash burned (cash used by the company) by the net new annual recurring revenue (ARR) generated within a specific period. A lower burn multiple indicates better capital efficiency and suggests the company effectively manages its expenses while generating revenue.
Why is it important: The burn multiple is essential because it measures how efficiently a company uses its capital. A high burn multiple can indicate that a company needs to generate more revenue to cover its expenses.
Formulas: Yes, there is a formula associated with the burn multiple. The formula is as follows:
Burn multiple = (Net cash burned) / (Net new ARR)
How can this be used for startups: Startups can use the burn multiple to track their capital efficiency and ensure they are not burning through their cash too quickly. They can also use the burn multiple to compare their performance to other startups in their industry.