David Sacks - the Burn Multiple

https://sacks.substack.com/p/the-burn-multiple-51a7e43cb200

David Sacks of PayPal, Twitter and All in game talks about a burn multiple

Two simple ways to measure capital efficiency are the Hype Ratio and Bessemer’s Efficiency Score:

1. Hype Ratio = Capital Raised (or Burned) / ARR
2. Efficiency Score = Net New ARR / Net Burn

David  think Bessemer has the right idea but prefers to flip the numerator and denominator, so the ratio is an annualized version of the Hype Ratio. 

He  calls this the Burn Multiple:

Burn Multiple = Net Burn / Net New ARR

In other words, how much is the startup burning in order to generate each incremental dollar of ARR?

The higher the Burn Multiple, the more the startup is burning to achieve each unit of growth. 

The lower the Burn Multiple, the more efficient the growth is.

For venture-stage startups, these are reasonably good rules of thumb:

For example, Q1 just ended and it’s time for a board meeting. The startup reports that it burned $2M in the quarter while adding $1M to its ARR. That’s a 2x Burn Multiple — reasonable for an early-stage startup. On the other hand, if the company burned $5M in Q1 to add $1M of net new ARR, that’s a terrible Burn Multiple (5x). It should probably cut costs immediately. That company is spending like a later-stage company without delivering later-stage growth.

Too many startups report their growth without contextualizing it as a function of investment. If extraordinary investment (3x burn or more) is required to deliver that growth, it’s an indicator that product-market fit isn’t quite what it appears to be or there’s some other problem in the business

These are some of the things that can affect the burn multiple and your business

For example:

• A gross margin problem — If the company spends too much on COGS in order to deliver the product or service, its burn will increase rapidly as it scales. If there’s not operating leverage in the business, the Burn Multiple will not improve with scale.
• A sales efficiency problem — If CAC is prohibitive or sales productivity is diminishing, burn will increase relative to new ARR, causing the Burn Multiple to worsen even though growth continues.
• A churn problem — Churn will net against the denominator of the Burn Multiple, causing the multiple to increase. A leaky bucket makes it hard to grow efficiently.
• A growth challenge — If growth is stalling, the company may seek to compensate by spending more on marketing, give-aways, discounts, or promotions. That will be picked up in a higher Burn Multiple, as burn rises faster than new sales.
• A founder leadership problem — If the founder lacks the skill or will to control burn, that will show through in the Burn Multiple.

Burn Multiple by Stage

The Burn Multiple should improve as the startup matures. 

For example, a seed stage company might have a Burn Multiple of 3 because it just started selling. After the Series A, it might drop to 2. After the Series B, when the sales team should be operating at scale, the expectations for efficiency increase even more. 

Eventually, for a company to become profitable, burn must reach 0, which implies that the Burn Multiple should also approach 0 over time.

If the Burn Multiple is going in the wrong direction as the startup matures, that’s a indicator that something is wrong, even though headline growth might still be increasing in nominal terms.

What Founders Can Do

1. they should keep salaries and expenses low in the early days — 

2. strengthen the impression of product-market fit for when they go out to raise a venture round.

3. cut costs, the Burn Multiple doesn’t care about sunk costs and always gives founders the chance to improve.

4. It be worth giving up some revenue (e.g. unprofitable growth) if it brings the Burn Multiple down to a much healthier ratio.

It’s not just about growth  but the efficiency of growth .

It’s an indicator that incremental spend is working 

As everyone in the startup ecosystem scrutinizes their runway and makes tough decisions about how to extend it, the Burn Multiple is a useful rule of thumb for founders and investors alike to keep in mind.

Great advice by my friend Mark Gustowski as you potentially have to navigate a down round

To say that the current capital markets are challenging would be an understatement. 

The tech ecosystem has come out of what can only be described as enormous orchestrated bubble, fuelled by 

• endless printing of money during the pandemic, that ultimately led to 
• high inflation, 
• interest rate hikes, and 
• massive job shedding.

Could it have been avoided with foresight and measured fiscal policy? Sure but let’s not let a good fiscal management in the way of government elected terms. 

But what does this mean for our startup sector? Well if you raised during the bubble well done, hopefully you raised enough to give you another 24-30 mths of runway. If you didn’t, and you find yourself going to the well again in the next 12 months, be prepared for down-rounds. Valuations have dropped, from Meta and Stipe through to startups.

Is it all bad? Not necessarily, it’s a normalisation of the market and valuations but I do worry about the 2021 and 2022 investment vintages, returns are going to be a real challenge for them.

Cash is king 

So what now? What do VCs like Mandalay Venture Partners look for in a deal? Well for starters you better be sure to be raising for 18 months or more, preferably 24 to see you through the current period. Austerity means slowing growth, managing burn and understanding the all important ‘burn multiple’. 

Growth for growth sake is no longer the metric, it’s now efficiency of growth that will make you stand out. 

If you’re a founder you best get your head around the concept of ‘burn multiple’ really fast. Investors will be looking at your spend (burn) vs your revenue and doing back-of-the-napkin assessments to ascertain how sustainable your business is going to be. 

So when raising Seed to Series-A and beyond, consider the following:

👍🏼18 months runway is ok, 24 months is better 

👍🏼cap salaries and remunerate via ESOPs that can reduce burn 

👍🏼if new markets are exceeding a burn multiple of 3-4, reconsider for now

👍🏼managed growth is ok, cash is king

👍🏼mark to market regularly 

This is not the environment you want to be raising in twice in the same 18 months. Money is going to get tighter as interest rates continue to rise to curb inflation. It’s going to be hard to attract dry powder as venture returns become less attractive with other capital allocation assets. 

Learn about the concept of burn multiples in austere times (see attached article). Great opportunities will still be funded but we are no longer in a ‘blitz-scale’ era; your growth and market strategies need to reflect that. 

A good investor will help navigate these waters. We don’t expect founders to understand all the underlying macro economic issues, but it is our role to help you chart a sustainable path forward. 

Don’t be afraid to ask questions, test assumptions or reach out as it’s the best way for us to get through this together. 

#startup #capitalmarkets  #tech #investment #venturecapital #venture

https://www.linkedin.com/posts/mgustowski_the-burn-multiple-activity-7043569756246851584-Kcpk?utm_source=share&utm_medium=member_ios

How to become a centre of influence

 Billy Connolly talking business planning 

and 

what people said about Ivan Kaye's talk on "becoming a centre of influence" about how to become a centre of influence 

Ineffective Marketing and how to stand out in Social Media

A great post by Steve Ballantyne 

                                  

Are you being stimmied by ineffective marketing?

• Ineffective marketing is like an awful first date.
• It's pushy and tells you what you should want.
• Puts its own needs before yours.
• It's insensitive.

 

There is no incentive to stick around. 

 

On the other hand, an ideal first date can lead to a second date and a long-term relationship.

 

Here's how to do it: 

• Be attentive to what your audience wants.
• Anticipate their needs – because you paid attention to who they are.
• Be mindful of the message you send, both in language and appearance.
• Woo your audience, not your ego, to create lasting relationships.

#marketing https://www.linkedin.com/posts/sballantyne_marketing-activity-7038931977751707649-vpX8?utm_source=share&utm_medium=member_ios

How do you stand out in Social Media - Insta , Linkedin and Facebook?

              

On Wednesday the 29th March , join Sydney’s leading Social Media Gurus as they share their secrets on how to stand out in Social Media. 

Holi Jade - talking InstagramKaren Tisdell - talking Linkedin and Matthew Mackow talking Facebook 

This will be a face to face event (in Lindfield ) and on Zoom. 

This is a forum not to be missed….. even if you take home one takeaway…. This could be a game changer.  

https://events.humanitix.com/standing-out-in-social-media-instagram-linkedin-facebook-bbg-lindfield-chapter