the burn multiple

Hey there,

Dragos here, from Project Arrow, where we guide founders with what to do and who to talk to in order to get funded and accelerate their startups.

Let’s talk about capital efficiency - what’s a simple benchmark to consider for early stage startups looking to raise capital?

The reality check first - you are likely already aware that the lower the market traction, the lower the chances investors will be interested in your business. Particularly in this environment, it is rather difficult to raise without showing a profitable operation or at least growing revenues on weekly basis - the macro is bad and all the interest switched to AI, which can be a good selling angle, if you have it.

Secondly, particularly because of the bad economy, fundamentals matter more than ever - that simply means building something people want and vouching it with their wallets. Yes, it sounds easier said than done but the sooner you generate money, the better. Ideally, the revenue should be higher than the expenses, but truth is that in the beginning you will always spend more than what customers pay you, and you won’t be breakeven.

What you can do, in this case - have a plan to show how you can switch to profitability and how long it would take. One way is that instead of spending more acquiring expensive customers, focus on the more profitable ones, with the downside that the growth rate will stall. Scenario analysis is your friend and will keep you on your toes and while having this planning prepared, you will likely go in the market and acquire any customer you find, at higher costs, as you need to get feedback on your product and de-risk the business. That’s how it works.

Back to that benchmark - here’s an easy way to calculate the efficiency of your spend, especially when you build software startups: the burn multiple.

The burn multiple is a KPI that indicates the company's net cash burned (cash spent minus financing or investment received) by its net new ARR (Annual Recurring Revenue) in a given period.

So if you spent $500k in a year and at the end of it you have ARR of $100k - that’d be a burn multiple of 5.

Investors will tell you that a good pre-series A SAAS startup has a burn multiple lower than 2. The number tends closer to 1 when your startup already achieved product market fit - pre-PMF that number is usually higher. That’s because you already spend on getting at an MVP while the GTM money is gone for trials and errors on various channels, and it’s not unusual to learn about burn multiples higher than 10. After raising series A the burn multiple can increase again as you are searching for economies of scale - i.e. acquire customers at a higher CAC that would be spread out over their LTV period, and then that’d transform into pure profits afterwards.

But, at pre-seed and seed, when you’re still searching (and paying accordingly) about what works and not and what customers are looking to pay for, that burn multiple should be in the 5-10 range. That’s in the case of a SAAS when you’re able to produce a 1.0 product - the multiple can be even higher the product development requires more resources i.e. you build an expensive piece of machinery, or a factory.

Sounds complicated? It’s not. Whenever in doubt about what investors are after, traction is king, and profitability is queen and they just love those - if you have them combined with a generous TAM and a decent team, that could be an easy-to-sell pitching story for investors. Just don’t forget to throw in there some AI too. 😊

Give me a shout if you need help with the PMF or optimising for the burn multiple. Or simply for an outside opinion about what you do - hit reply and ask away, don’t be shy. And don’t forget that helping startups at early stage is our bread and butter - you can join our program from here.

Community

Startups recently seeded
If you want a full list of interesting startup raises from all over Europe, you can go check Monday CET. Here we have a selection of the coolest ones:

🇩🇪 Documenso - digital signing platform (Hamburg)
🇦🇹 Symflower - SAAS tool used for testing computer source code in a fully automated way (Linz)
🇫🇷 Batis - SAAS for admin and management of construction sites (Paris)
🇳🇴 Sloyd - AI-based tool that helps anybody make 3D creation easier (Oslo)
🇸🇪 Parlametric - automated tool interpreting customer and sales conversations (Lund)
🇬🇧 Future Plus - platform that provides a benchmark sustainability score and provides an associated roadmap (London)

Did you just raise funding for your startup? Hit reply and we’ll feature it here.

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