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Burn Multiple 101: How to Determine Your Startup’s Survival Horizon
Burn multiple is a metric that shows the ratio of a company's spending to its revenue indicating how efficiently it is using its funds
Published on 26 Sep 2023
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You’ve spent months pouring your heart, soul, and savings into your startup. Now it’s time to determine if it’s built to last. One of the most useful metrics is your burn multiple – how long your current funding will last at your current burn rate.
This quick and easy calculation could save your startup. Your burn rate is how much money you’re spending each month to operate your business. Take your total funding and divide it by your monthly burn rate. The result is your burn multiple – how many months your funding will last if nothing changes.
A higher this is, it means more runway and flexibility. Most experts recommend at least a 9 to 15-month multiple for an early-stage startup. A lower multiple, and you’ll need to cut costs or raise additional funding fast.
What Is Burn Multiple?
Burn multiple refers to how long a startup’s funding will last. It’s calculated by dividing the total funding amount by the monthly burn rate (the amount a startup spends each month).
Why is this metric important? Simply put, the higher your multiple, the longer your startup can survive without additional funding. A higher number gives you more time to achieve key milestones and increases your chances of raising follow-on funding. It also means you have a buffer in case things don’t go as planned.
On the other hand, a low multiple, like 3-6 months, puts pressure on startups to raise funding quickly before the money runs out. This can weaken your negotiating position with investors. As a rule of thumb, most startups aim for at least a 12-month multiple to give themselves enough runway.
The Origins of Burn Multiple and David Sacks
David Sacks, co-founder of PayPal, coined the term “burn multiple”, which refers to how long a startup’s funding will last if expenses remain unchanged.
Calculating Your Burn Multiple
To determine your burn multiple, follow these steps:
- Calculate your monthly expenses. Add up all costs to operate your business for one month including rent, salaries, marketing, and other bills.
- Determine how much funding you have access to, like cash on hand, lines of credit, investor funds, or loans.
- Divide your total funding by your monthly expenses. For example, if you spend $100,000 per month and have $1.2 million in funding, your burn multiple is 12 months ($1.2M / $100K).
- Make adjustments as needed. If expenses increase or additional funding comes in, recalculate this metric. A higher multiple means more runway for your startup.
Ideal Burn Multiple
- A burn multiple below 6 months is dangerous and additional funding should be priority
- 6-12 months is moderately risky; look for ways to decrease spending and increase funding.
- 12 months or more provides stability and time to scale and gain traction.
By frequently checking your multiple, you’ll gain insight into how long your startup can survive and operate. Take action to extend your horizon, whether cutting costs, boosting sales, or raising more capital. With diligent financial management, you can achieve lift-off.
Read more: How to Calculate Burn Rate
Real World Examples:
Real-world examples of companies and their burn multiples can help illustrate how this metric works in practice.
When Uber first launched, it had a high burn multiple as it spent heavily on marketing, expansion into new cities, and driver/customer incentives and promotions to gain market share. At one point, Uber’s multiple reached as high as 12-15x. As the company has matured, it has dropped to 3-5x over the past couple of years.
Like Uber, Airbnb initially had a high burn multiple, around 10-12x, as it expanded globally and invested in growth. Airbnb’s multiple has since declined to 2-4x in recent years as revenue has scaled and the company has achieved greater operating efficiency.
In summary, a company’s multiple provides insight into how much capital is required to fund operations and growth. Newer companies typically have higher burn multiples, while more mature companies generally have lower multiples, ideally below 5x. Tracking this metric for a startup over time can be a good indicator of how efficiently it is scaling and progressing towards profitability.
Using Burn Multiple to Extend Your Startup’s Runway
Once you have calculated your burn multiple, you can use it to determine how long your startup has before running out of cash, also known as your “runway” The higher your multiple, the longer your runway.
Extend Your Runway
There are a few ways to extend your runway:
- Increase your funding. The most obvious way is to raise more capital from investors. This provides more cash to fund operations.
- Reduce operating expenses. Cut costs in areas like office space, payroll, marketing, and outsourced services. Eliminate any wasteful spending.
- Increase sales or revenue. If your company can ramp up sales, the additional income will help offset costs. You could also pursue new revenue streams to diversify your model.
- Improve efficiency. Streamline processes to minimize waste and maximize productivity. Automate where possible. Crossval’s financial modeling tool is an example of how technology can improve efficiency.
Monitor Your Burn Rate
Once you’ve taken steps to extend your runway, continue tracking your burn rate monthly to ensure it’s sustainable. Make adjustments as needed to keep your burn multiple at a minimum of 6-12 months of runway. Some key metrics to monitor include:
- Cash flow: Track how much cash is coming in vs. going out each month. Cash flow needs to remain positive.
- Sales growth: Look for upward trends in new customers, contracts, subscribers, etc. Declining growth is a warning sign.
- Cost ratios: Compare your costs of operating vs. revenue generated. Costs should not exceed revenue.
- Key performance indicators: Monitor metrics that directly impact your cash burn like new trials, churn rate, customer acquisition cost, etc.
With diligent tracking and quick action, you can ensure your startup has ample runway to continue operating and the flexibility to pivot as needed. This metric provides key insights, but constant monitoring is what helps keep the fire under control.
Read more: How to Start a Startup: A 10 Steps Guide
What is a “burn multiple”?
A burn multiple refers to how long a startup’s funding will last if expenses remain unchanged. It’s calculated by dividing the total amount of funding by the monthly cash burn rate.
Why should you calculate your burn multiple?
Knowing this metric allows you to understand how long your startup can survive without additional funding. It gives you an estimate of your “runway” so you can plan ahead and avoid running out of cash.
What is a good burn multiple?
A burn multiple of 6-18 months is typical for an early-stage startup. A longer runway, around 12-18 months, is safer and allows more time to raise additional funding. However, a shorter runway around 6-9 months is more common and forces startups to focus on growth and new funding sources.
How often should you recalculate your burn multiple?
You should recalculate your burn multiple at least quarterly as expenses, revenue, and funding change. Recalculating regularly allows you to monitor how your runway is changing and make adjustments as needed. For example, if your multiple decreases significantly, you may need to cut costs or accelerate fundraising efforts.
What are some ways to improve your burn multiple?
There are a few ways:
- Reduce monthly expenses and operating costs. Cutting unnecessary spending is the quickest way to lower your cash burn rate and extend your runway.
- Increase revenue. Generating more revenue through sales or other income will directly improve your burn multiple by offsetting expenses.
- Raise additional funding. Bringing in more funding, whether through investors or other sources, will increase your total cash balance and extend the time your startup can operate.
- Find ways to operate more efficiently. Improving efficiency in areas like hiring, marketing spend, and resource allocation can lower costs and improve your burn multiple over time.
As an entrepreneur, calculating your burn multiple is critical to understand how long your startup can survive without additional funding. Now that you’ve learned the basics of determining your burn rate and runway, use this knowledge to your advantage. Continually revisit your key metrics and cash flow statements to identify any areas you can optimize to extend your runway. The longer you can operate, the more opportunities you’ll have to gain traction, build momentum, and become profitable.
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