Burn Multiple = Net Burn/Net New ARR

Live from Schenectady, New York, it's SAS Talk with the Metrics Brothers, Growth and CAC.

And I'm Growth, better known as Ray Reich, founder and CEO of Benchmarkit.

And I'm CAC, better known as Dave Kellogg, independent consultant, EIR at Walderton Capital and the author of Kellogg.

And together we are the Metrics Brothers.

And we go together like gin and tonic on a hot day.

Ah, my favorite drink in college. And it actually brings back these memories of me being a bartender and making just enough in tips to pay for all my expenses, which was often drinking gins and tonics.

Reminds me of when I used to go to Lake Tahoe and try and pay for the trip at the craps tables, which actually worked out surprisingly often. Um, but the main goal is to try and generate more cash than you're spending, uh, which is an interesting way to transition to today's topic, the burn multiple.

Yeah, well, my wife actually asked me about my burn multiple. Sometimes that's my— how my angel investments return capital, Dave, but that's a whole nother story.

Yeah, we don't speak about angel investing with family members, Ray.

Okay, well, maybe we should actually move into today's topic, but before we do that, let's hear a word from our sponsor.

The Metrics Brothers is proudly sponsored by Benchmarkit, the B2B AI and software industry's largest, broadest, and most contextualized benchmarking index. Dave Kellogg and Ray Groth Wright have put the Metrics Brothers podcast on hiatus for the remainder of 2026. All episodes we have ever recorded are still available on your favorite podcasting app. You can reach Dave @Kellogg and Ray on LinkedIn @RayReich. Thank you so much for listening to the Metrics Brothers podcast.

Okay, Dave, you ready to talk about the burn multiple?

Sure, I sure am, Ray. Uh, I'll kick it off right away. The burn multiple to me was first popularized— but the first time I saw it was in a post by David Sachs, about whom we will speak no further. Uh, but it is nevertheless a good article, uh, published on Substack on April 23rd, 2022. 2020. And it's another way to measure capital efficiency at a SaaS company, and I think a darn good one. Before burn multiple came out, there were 2 or 3 other ways, one of which he actually linked to, which is me, called the hype ratio, which was kind of a tongue-in-cheek post I did where I basically said startups take venture capital and turn it into either light or heat. And basically it could be generating a lot of light but no heat. And Domo was actually my example. And you just took the amount of they raised and divided by ARR, and they had raised like 10 or 15 times ARR. And I said, oh, they're converting— you know, a VC-backed startup is an organism that converts venture capital into either light or heat, and you want one that's making lots of heat, not so much light. And Domo was a counterexample. So I called that the hype ratio.

And then our friends at Bessemer do what they always do, Dave, which is define a metric upside down.

Go for it, Ray.

Exactly. So even though, you know, I love Byron Dieter and I love the cash conversion score, what they do on the numerator, they put your current total ARR, and then they divide that by your total capital raised to date minus cash in bank. So with that example, let's say you're doing $100 million of current ARR, and you've raised $200 million, but you have $100 million in that bank. It's $100 million over $100 million. So it's a 1x. So, but it's—

Correct.

Opposite of the hype ratio.

Yeah, so, so there's 2 things different between it and the hype ratio. One is adjusting for cash that's remaining, right? Because the hype ratio kind of assumes you spend everything. It's just how much did you raise divided by how much your ARR is, and it kind of assumes you spent it all. Um, the Bessemer cash conversion source says, hey, wait a minute, you may have raised $100 million but only spent $50 million, or raised $200 million and only spent $100 million. So let's look at how much you spent, and in classic Bessemer fashion, we're going to put ARR on the top and put how much you spent on the bottom. I could— because Bessemer does this all the time, I call these extraction ratios because I needed to get a way to think about them, because to me it's so intuitive to do it the other way. Um, so I call this an extraction ratio of the total amount of money you spent, $100 million. How much ARR did you extract from it? And in your example, it was $100 million, so the cash conversion score would be 1, by the way, as would the hype ratio in this particular case if you had spent all the cash, or if you had spent $100 million, if you raised $100 and spent it all.

And we're going to give some different examples later in today's episode. But then, you know, that's really looking at kind of life to date. But then there's the kind of efficiency on an ongoing operations perspective. And Bessemer once again created a metric called the efficiency score, and that was looking at net new ARR in a particular period and dividing that by net burn. And that's the efficiency score, correct, Dave?

So as usual, it's another Stranger Things metric living in the Upside Down. But, but, but yes, so, so, and that's a much more useful metric, right? Like both the hype ratio and the cash conversion scores were what I would call inception-to-date metrics, right? Okay, over the entire history of the company, how much money have you raised? How much money is left in the bank? Therefore, we assume you spent the rest. How much— what's your ending ARR right now? And we're gonna either put one on the top or one on the bottom, but we're gonna make some sort of ratio out of that. And that's only useful as an inception-to-date metric. And as a company gets older, it kind of gets less meaningful because at some point you go to almost cash flow breakeven and you start generating cash. Um, so it's a good early stage metric maybe, but, but, but I like the, the spirit of the burn multiple, even though it's upside down, is let's talk about last quarter or let's talk about last year and say in the last quarter, I'll say, how much did you burn and what did you get for it? And notably net new ARR, right? I don't want to get involved here. This is not a sales productivity metric like CAC where I might defend it on just new ARR, right? I'm not trying to measure the business. I'm trying to measure how good your sales and marketing efforts are at generating ARR. So I might look at just new, not net new, right? But here we are trying to measure the business and how this business burns capital. So we want to look at net new. Right, inclusive of churn, that is, right? New ARR minus churn ARR, basically. And we want to look at your, your burn. How much did you spend?

Okay, so Dave, let me— let's take a step back because we threw a lot of data out there. So the burn multiple, the formula is you take net burn, and we'll define what that is in a minute, in the numerator, and you divide that by net new ARR for a period— month, quarter, annual. That's the burn multiple. Correct.

Oh, actually, this one's not upside down. I take it back. I get so confused with the BESMR metrics. Is this one upside down or not? It's not upside down. It's correct. We're putting burn on top and ARR on the bottom.

Yeah. BESMR, the efficiency score has net new ARR on top, Dave.

Yeah, got it.

And then David says—

I'm sorry. I apologize to the audience right now. This is why I hate the BESMR metrics. I still stand by the fact that you have to think of them as extraction ratios. But burn multiple, as defined by David Sachs, is defined in our opinion correctly with burn on the top and net new on the bottom.

Okay, so let's move on to net burn, which we agree is on the top, the numerator. How do you calculate net burn, Dave?

Yeah, so this, this— we can make this arbitrarily complicated, and, and I think we will in a minute, but I'll just tell you how I do it. Which is for most early-stage startups, it's literally just a change in the bank account balance. Like I just say, what was your bank account balance on December 31st? What was it— or sorry, you know, December 31st, what was it on March 31st? Give me those 2 numbers and I can see how much it changed, right? That to me is burn. Now, when we talk about financial statements, we can get that off financial statements. Interestingly enough, the easiest place to get it is off the bottom of a statement of cash flows where they actually just say change in cash balance.

Right.

And for most startups, if you haven't raised money in a quarter or you haven't taken debt, that's it. You just need the change in cash balance. Now, if you just say you raised a bunch of money, well, we want to exclude that from the analysis. So if you start with 10, raise 5, and end up at 9, then you burn 6, not 1, right? Because you raised 5, right? But, but from, you know, startups don't raise money in most quarters. So the easiest way is to get this is just look at the change in the cash balance across the time period.

Yeah, so that is a simple way, but can we nerd out for a minute?

Go for it. I'll let you, I'll let you lead us in the nerd activity, Ray.

Because, you know, I spent some time on Investopedia making sure I knew the different types of cash flow statements, right? So one is, which you should use for the burn multiple, is cash flow from operating activities. And to your point, not only does it exclude financing activities, it would also exclude investment activities, including capital investments. So if you decided to build your data center, buy a bunch of hardware, and you spent $50 million to do that, you'd exclude that $50 million of spend in that quarter because that's an investment activity. In other words, a capital investment. So you're using—

Well, hang on, Ray. There's 2 different things you're saying there, and I just want to slightly precise them. On the statement of cash flows, so this is now back to my MBA many, many years ago, there's 3 sections on the statement of cash flow. Right. The 3 sections are cash flow from operating activities, cash flow from investing activities, cash flow from financing activities. And to me, property, plant, and equipment, that data center you cited, would be included in the investment activities because that's what it is. And it would be kind of excluded from operating activities because building a data center is not an operating activity. So I'm with you. And I think what you're trying to— well, let's do the 3rd one, cash flow from financing activities. is what I talked about in my example. So I think we started at 10, we raised 5, and ended at 9. Then that $5 million would be financing activity in the quarter where we raised the money. And in my opinion, we would exclude that from the analysis. I think in your opinion, you just use cash flow from operating activities. If you want to get this off the cash flow statement and not at the bottom of it, you go to the top and look at the first section, which is operating activities.

Exactly right. We're totally aligned. We just used a different way to explain it. Totally agree.

And by the way, Ray, for most companies, CapEx— there's not a lot of CapEx.

Not—

people aren't really building data centers these days. And look, if you're capitalizing R&D or capitalizing sales commissions, then I would back that out. I, I would actually include that cash that got spent in your net burn figure, which by the way, you could either get it by first putting it into investing and then pulling it out, or just looking at the change in cash balance at the end.

I agree. Do you think it would be okay to maybe do a couple examples, or do you think we've already covered that okay, Dave?

Uh, let's do them slow because we did them fast before. We'll give you 2 examples of how to calculate the net burn because ironically this is actually not a well-defined metric. And, and the first place people go to is a statement of cash flows to figure out what it is, but it's never quite clear where to look. Um, and I'm just going to do simple examples because for most startups it's simple. We start a quarter with $8 million of cash in the bank. We end with 7. Do the simplest case. We had $1 million in net burn, and I can get it by just looking at the bottom of the cash flow statement. What was our bank balance when I started? What was it when I ended? Did I raise any money? No. Did I do any CapEx? No. Good. Don't think about it. So next example, we start with $8 million in the bank. We end with 15.

Hmm.

Well, either we generated a lot of cash, which startups typically don't do, or we raised some money. And in reality, we go look at, oh gosh, we raised $9 million in that quarter. So we started with $8 million in the bank. We ended with 15, but we raised 9. That means we had 8 to start plus 9 is 17. We ended with 15, therefore we burned 2. So those are 2 concrete examples of how to get what people call net burn. And as Ray mentioned, in most cases, it'll be cash flow from operations. You might use free cash flow, which is cash flow from operations minus CapEx. You might get it just by changing cash. But, um, yeah, thoughts, right?

You know, first of all, no free cash flow in the burn multiple calculation, right? We don't use it. However, I think you just brought up an amazing topic for a future episode. I think we should do one on free cash flow because there are similarities.

Yeah, I get wrapped around the axle on free cash flow. Um, and by the way, it is an important metric because it gets used in the Rule of 40, among other things. Um, and I think as we talked about in another episode, people also, also look at free cash flow margin. Um, so we should talk about free cash flow, what's different about it between cash flow and operations, and notably EBITDA. And that will be a fun, deep swamp marsh march through cash flow.

You know, I think we might need to be like Karl Rove, or was it Tim Russert, who held up the board and actually showed people when we're talking about that episode.

Okay, okay, we do that. We can do that, right?

So now we talked about the numerator in the Byrne multiple. And that's the net burn. Now let's talk about net new ARR and how to calculate. You mind if I take that one?

Yeah, go for it, Ray.

Okay, so to me, it's at a very high level, is to change an ending ARR. So whatever you ended this quarter minus what you, um, had the previous quarter. Or you could look at it as new ARR minus churn ARR. And then if you break that down, new ARR is really New logo ARR plus expansion ARR, and then you have to subtract both downsell ARR and lost ARR, which is churn ARR. So it's 4 variables: new logo ARR, expansion ARR, downsell ARR, and lost ARR. And that gives you net new. We aligned?

We are, right? And I know I got you to do something there that's not intuitive to you because I know you, amongst other people, use churn specifically to mean lost. And just because we often wade into terminology here, I use churn as a kind of capstone term. Oh, there's churn ARR, stuff that makes ARR go down. It comes in 2 flavors: churn from lost accounts, churn from shrinking accounts or downsell, right? And I do the same on new ARR. Oh, there's 2 types of new ARR: churn new ARR from new accounts and new ARR from existing accounts, aka expansion. And Ray very kindly used churn as a capstone term. And I just highlight this because a lot of people use churn to mean specifically lost ARR, but then I don't know what to call the parent. That's always my problem. Well, what do you call the other thing, right, if you want to add the 2 together?

Hmm, negative ARR.

How's that? Yeah, what do you actually have a name for it? What do you call it if I said, hey Ray, what's the total stuff that leaked out last quarter? All the downsell plus all the churn. I think you also call it churn, probably circularly, but that— but I don't know, that's a lot of people do. Yeah, I call it—

hey, That's a combination of my downsell ARR and my churned ARR. That's how I do it.

And you don't name it?

Yeah, no, I don't name those 2 together. It's like I got 2 kids, I don't name them one name.

Children. Okay, well anyway, you heard it here first, guys. Um, and that is, uh, that is a difference, and a lot of people get wrapped around the axle there. But mine is more symmetric, I'd say. Ray's is probably more commonplace.

Okay, Dave, we got about 4 minutes left here. So we talked a lot about how to calculate burn multiple and what it is, but what's a good burn multiple? And I'm going to ask you to define that. Is a good burn multiple based upon my burn multiple for last period, like last quarter, or is it a life-to-date measurement? Which is it?

Well, first, people use the term both ways, so we need to be careful that we understand which we're talking about. I would argue that Bessemer's cash conversion score is defined as an inception-to-date metric because it says total cash raised, right? And that's your clue that that's inherently an inception-to-date concept. The burn multiple, I think, is actually more useful because it's not defined— it's defined as a time period metric, a year or a quarter, um, and, and therefore you know what you're talking about, uh, and, and because there are some downsides to inception-to-date metrics. There's also some interesting stuff Bessemer has done, but But ultimately, we're here to talk about burn multiple, and I use it either for quarters or years. And a good one is anything under 1. I wouldn't even say good, that's very, very good. If you, if you can increase ARR by more than you burn, that's going to put you under 1, um, and that's great. So you're, you're basically spending less than a dollar in net burn to get a dollar or more of net new ARR. That's amazing, we'll call it. One of these are David Sacks's terminology. 1 to 1.5 is great. 1.5 to 2x is good. So that means if you're, you know, if you grew ARR by $2 million but spent $4 million to do it, David Sacks would still call that good. I'm not sure that's still true today, right? I, I think the world and the change may have shifted that scale forward one entire notch. You know, like now he calls it— he goes amazing, great, good. For 1, 1.5, and 2, I think it's kind of amazing, good, and maybe suspect, right? The whole scale should get shifted up one. And then he says between 2 and 3 is suspect, which I think it very much is. And then over 3 is bad, which I think over 3 is what's the don't bother knocking on the VC's door or whatever. At some point they won't take the meeting. And if you're burning $3, $4, $5, Um, it better be a platform play at the end of a large investment cycle. That's probably the only way you could do it, right?

I agree. And one of the other lenses I look at, of course, is the benchmarking annual, um, benchmarking where we had 936 companies this year. The median, so 50% higher, 50% lower, burn multiple was 1.5 for the entire population. And in 2022, the median for the entire population was 1.8. So it got better. It's still not great, but at least it got better year over year.

It's literally exactly what I said. I didn't know this, but you just shifted David Sachs's scale up a row, right? Uh, because he's calling 1.5 great and you're saying it was median, and median is more good than great. Um, so, so I think your data is more timely and more accurate, Ray, and you're saying basically 1.5 is median Bottom 25% starts at 3.1, which is getting bad. Yeah.

Yep.

Yep.

And the top 25%, so the top quartile started at 0.4, which is really good.

Yeah, it's really good. Now, and this is an indicator that ZIRP is over, right? People are putting a lot of effort into— I think it's because a lot of companies— I'm guessing some of your companies were positive. I don't know how a positive cash flow company reported. They give you a negative number. Oh, they did. You'd see negative 20. So you've got companies in here that were positive cash flow and they reported a negative burn multiple, which is correct.

Yeah, but then we've got our friends at that top-tier venture capital firm, Andreessen Horowitz, and they— their benchmarks always, they amaze me, right? I always like, are we sure this isn't top decile or top quartile? But did you look at that chart, Dave?

Yeah, so, so I don't know if their benchmarks are designed to impress other VCs or make founders feel bad, um, but, but they typically come in well above the normal. And their benchmarks are kind of amazing. This is from a recent report by them. And they're saying that I'm going to call it good, the 50th percentile. And they're saying 1.5x is good, which by the way, is actually consistent with you in this case. Their great is 0.8x, which is not as good as yours. Yours is 0.4. So I don't know, Ray. I don't know.

But they do that based upon size of company, Dave. So if you look at Their portfolio between $25 and $75 million, their median burn multiple is 0.7 and their top quartile is at 0.5.

True. And by the way, I think they're right to split it by size. Yes. So while there are many things I could criticize them about, many, many now today, um, I think one of the things they do right is split the burn multiple by size because it very much— as you get bigger, you should be converging more on cash flow positivity. So I think they're right to do that. I think they're much more set a high bar. I don't think this is a whole bunch higher than yours though. I, I, I, I don't know if you do. You've spent more time with the data.

Yeah, they're a little bit better into $25 million to $75 million and above $75 million than our cohort, but not that much. We're talking about—

But do you have many people that size in your benchmark? Are you still— are you going that high?

Yeah, over $75 million, we had about 18 to 19 companies.

All right, okay. So, so you didn't used to do that, I don't think. I used to think of your benchmark more as a small private company thing, and now it sounds like you've got more bigger companies.

Yeah, but if you look at that distribution curve, it truly is a bell distribution curve. It's, you know, it's 400, 500 here in that, you know, $5 to $20 million, and then much lower on opposite ends of that.

All right, let's wrap this up with a quick look at Bessemer's Cash Conversion Score, which I'll take the lead on. They published this in a recent report. They have their classic article on CCS where they did some regressions. You could look at that later because they predict IRR based on CCS, cash conversion score. Here, uh, they're just telling us again by size what your cash conversion score should be. Reminder, this is in the upside down, so these are all backwards. Um, they're saying 0.5x if you're less than $10 million, 0.5x if you're less than $25 million, 0.6x if you're up to $50 million, 0.8x up to $100 million, and 1.0x above $100 million. And if you invert all these, what they're— I think it's— what is it saying? It's saying extract 50— if you're a $10 million company, you should be getting 50 cents per dollar in, which is a burn multiple of 2, which is consistent with David Sacks' original post. It may be a little bit old data. I'm wondering if this data isn't old.

Yeah, I think the Bessemer data may be about 2+ years old.

That's my take when I reconcile it to yours and Andreessen's. And also we both know when they wrote the CCS post. And I'm wondering if they actually redid the math. Maybe they did, maybe they didn't. But this would be consistent with kind of the older view. So let me try and net this out because I don't want to confuse people more than we usually do. I think Ray and I collectively think if your burn multiple is 1.5 or less, you're doing pretty good. If it's 1.0 or less, you're doing great. And if you're below a half, you're— You're rock stars. Please mail us an order form to buy shares. Just kidding.

You know what, I'm impressed, Dave. When I first put together today's episode in my mind, I said, how are we going to do more than 15 minutes on this? We're at 22 minutes and we covered so much. So I think this is going to go to the producer.

Good.

Well, that's awesome. So let's put it in the can and we'll see everybody next week. I think we're going to talk about the OneStream IPO because that, that's new breaking news. So we want to get that covered quickly. So I think in our next episode after this, we're going to do OneStream.

Okay, Edgar, here I come to read another S1. See you later, Dave.

Take care. See ya.

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