David Sacks’ classic post on Burn Rate Multiple is A+ and a key metric for every venture-backed startup. It simplifies a lot of complexity into one metric.
That if you’re venture-backed, then yes you do have money to spend (and burn) — up to a point. But the best startups burn less each month than they bring in from new bookings and revenue (a Burn Multiple of 1x or less).
However, I’ve seen this metric now misused by many venture-backed startups as a magical health meter for a “good enough” burn rate. Why? Well, at a practical level, it assumes the next round is coming.
- You can still run out of money even at 1x
- You can still run out of money with a “good” Burn Multiple
- The math on Burn Multiples sort of assumes you have 75%-80% gross margins (see my convo with David Sacks on this below). Much below that, and your Burn Multiple needs to be lower
- The math on Burn Multiples sort of assumes you have 100%+ NRR. Much below that, and your Burn Multiple needs to be lower.
- The Burn Multiple math, most importantly, still assumes you can raise another round
A Burn Multiple of 1x or less is relatively efficient, but it’s still a burn.
If you aren’t 95%+ sure you can raise another round, Zero Cash Date is even more important.
More on Zero Cash Date here: