Burn Multiple Metric
Definition
Burn Multiple Metric
The burn multiple metric divides net cash burned in a period by the net new recurring revenue added in that same period. It prices growth rather than celebrating it — a company can grow quickly and still be an inefficient use of capital.
Growth rate alone says nothing about cost. Two businesses adding the same recurring revenue can consume very different amounts of cash doing it — and only one of them is building something that scales.
The ratio makes that visible in a single figure. A result of one means a dollar burned for each dollar of new recurring revenue; a result of three means three dollars burned for the same outcome.
Its usefulness comes from being hard to flatter. Cutting marketing lowers burn but also lowers new revenue — so the ratio only improves when the underlying economics improve.
The ratio travels badly between stages, too. A company investing ahead of a product launch will show a poor multiple for entirely defensible reasons, so the figure needs context reported alongside it.
Key takeaways
- The ratio is net cash burn divided by net new annual recurring revenue for the same period.
- Lower is better, and the figure is meaningless for a business that is not burning cash.
- It resists the usual adjustments, because cutting spend also cuts the denominator.
- It is a management metric, not a recognised accounting measure.
How it works
Both terms need defining before the ratio means anything. Net burn is cash out minus cash in over the period, excluding financing. Net new recurring revenue is new and expansion revenue minus churned and contracted revenue.
Using net rather than gross on the denominator is the important choice. A business adding large new accounts while losing existing ones has a poor burn multiple even when its new business numbers look impressive.
Timing mismatches are the usual source of a misleading reading. Cash spent this quarter often produces revenue two quarters later, which is why a trailing twelve-month figure is steadier than a single quarter.
| Term | Included | Excluded |
|---|---|---|
| Net burn | Operating and capital cash outflows | Equity and debt raised |
| Net new revenue | New plus expansion, less churn | One-off services revenue |
| Period | Quarter or trailing twelve months | Mixed periods across terms |
| Currency | Constant rates | Unhedged movement as growth |
Commentary in venture financing commonly groups results into bands, with ratios below one treated as strong and ratios above two treated as a warning. Those bands are convention rather than any published standard, and they vary by stage and sector.
The revenue side rests on recognised accounting. IFRS 15 governs revenue from contracts with customers, and the metric is derived from those figures rather than reported alongside them.
The cash side follows ordinary bookkeeping choices. The United States Small Business Administration notes that the cash method records a transaction “once payment has been received”, which is what the burn side actually measures.
Examples
The ratio separates businesses that growth rates make look identical. The three cases below show an efficient grower, an expensive one and a case where the metric does not apply.
A software business adds recurring revenue while holding spending flat. Strong net revenue retention means expansion does much of the work, so the multiple falls without any cost action.
A marketplace grows at the same headline rate on heavy paid acquisition. Rising customer acquisition cost pushes the multiple above two, and the growth rate alone never showed it.
A profitable business calculates the ratio and finds it undefined. With no net burn there is no numerator, so annual recurring revenue growth and margin are the relevant measures instead.
Related terms
The metric sits in the language of venture financing, and the entries below cover the surrounding funding and market terms rather than the calculation itself.
- Venture capitalist: the investor audience the ratio is most often reported to.
- Equity fund: a pooled vehicle assessing capital efficiency across a portfolio.
- Capital market: where the cost of the capital being burned is ultimately set.
- Capital loss: the outcome a persistently high multiple tends to produce.
FAQ
What counts as a good burn multiple?
Convention treats below one as strong and above two as concerning, but the bands shift by stage and sector. Direction over several quarters matters more than any single reading.
Why use net new revenue rather than new bookings?
Because churn is part of the economics. A business replacing lost revenue with new revenue has burned cash to stand still.
Does it work for profitable companies?
No. With no net burn the ratio is undefined, and margin and growth measures become the relevant view.
Over what period should it be measured?
A quarter for operational review and trailing twelve months for anything external. Monthly figures swing too widely to interpret.
Should one-off services revenue count?
Generally not. Including it flatters the denominator with revenue that will not recur and distorts comparison between periods.
Is it an accounting measure?
No. It is a management ratio derived from recognised figures, and it should be labelled as such wherever it is published.
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