Growth alone is no longer enough for investors. Anyone raising capital or running a portfolio company today has to show how much growth each burned euro produces. Two metrics have become the standard: the burn multiple and the Rule of 40. Both can be calculated from a few numbers and show immediately whether a SaaS business model grows efficiently.
Key takeaways
- The burn multiple relates net cash burn to newly added recurring revenue. The lower, the more efficient.
- The Rule of 40 adds growth rate and profitability. From 40 per cent upward a SaaS company is considered healthy.
- Both belong in every investor report and in the preparation of a funding round.
Burn multiple: what does each new euro of revenue cost?
The burn multiple answers a simple question: how much cash does the company burn to win one euro of new annual recurring revenue (ARR)?
Formula: burn multiple = net burn of the period ÷ net new ARR of the period
An example: a company burns 1.5 million euros in a quarter and grows its ARR by 1.0 million euros in the same period. The burn multiple is 1.5. Each new euro of ARR therefore costs 1.50 euros of cash.
How to read the result
Common rules of thumb from venture practice: a value below 1 is considered excellent, between 1 and 2 good to acceptable, from about 2 it becomes critical, and above 3 growth is considered very expensive. These values are guidance, not a hard rule. Early stages may sit higher; later on investors expect improvement.
Rule of 40: growth and profitability together
The Rule of 40 states that the sum of revenue growth and profit margin should be at least 40 per cent.
Formula: Rule of 40 = revenue growth (%) + profit margin (%)
Companies usually use the EBITDA margin or the free cash flow margin for the margin. What matters is that you fix the definition and keep it consistent. A company with 50 per cent growth and a margin of minus 15 per cent scores 35. One with 20 per cent growth and a 25 per cent margin scores 45.
When the Rule of 40 fits
The metric is most meaningful for growing SaaS companies above a certain size. In very early stages with small revenue, both values fluctuate strongly, and the burn multiple is the better guide.
How the two metrics work together
The burn multiple looks at the efficiency of customer acquisition, the Rule of 40 at the overall picture of growth and result. A company with a low burn multiple but weak growth often misses 40. One with high growth and a high burn multiple has a good Rule of 40 but burns capital that may be missing at the next round. Only both values together show whether the business model holds.
Growth is only an argument if it is not bought at a disproportionate price. The burn multiple makes that visible.
Common pitfalls in the calculation
- Inconsistent definitions: Net burn, net new ARR and margin must be calculated identically in every report, otherwise comparisons are worthless.
- One-off effects: Large one-time payments distort the burn of a single quarter. Also use a rolling average across several quarters.
- ARR rather than revenue: The burn multiple refers to recurring revenue, not to total booked revenue including one-off projects.
- Missing data basis: Without clean accounting and a customer list with contract data, neither metric is reliable.
What you can do now
Calculate both values for the last four quarters and write down the definition. Add the figures to your monthly investor reporting and compare them with the targets in the budget. How long your existing capital lasts is shown by the runway calculator. How a monthly report for investors is structured is described in the PE reporting package.
Common questions
What is a good burn multiple?
As a rule of thumb, a value below 1 is excellent and between 1 and 2 good to acceptable. From about 2 investors look more closely, and above 3 growth is considered very expensive. The values depend on stage and market conditions.
How do I calculate the Rule of 40?
You add annual revenue growth in per cent and profit margin in per cent, usually the EBITDA or free cash flow margin. If the sum is 40 or higher, the company is considered healthy.
Does the Rule of 40 apply to early-stage startups?
Only to a limited extent. With small revenue, growth and margin fluctuate strongly. In early stages the burn multiple together with the runway is the more meaningful metric.
Read on
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