Home · Guides · Burn multiple & Rule of 40
Guide · ~6 min read
Two numbers an investor can compute in ten seconds and use to decide whether your growth is efficient. Both are blunt on purpose. Both are widely misread by founders who apply late-stage benchmarks to an early-stage company.
The burn multiple asks the single most honest question in growth-stage diligence: how much cash did you set on fire to add one dollar of recurring revenue?
"Net cash burned" is your free cash flow when it's negative (cash from operations plus investing — before fundraising). "Net-new ARR" is the increase in ARR over the year. Lower is better, because it means each new dollar of revenue cost you less cash to win.
Free cash flow −$810,036 (a burn), net-new ARR = $1,802,508 − $403,200 = $1,399,308. Burn multiple = 810,036 ÷ 1,399,308 = 0.58× — under one dollar burned per dollar of new ARR, which is efficient.
| Burn multiple | Rough read |
|---|---|
| Under 1× | Excellent — each dollar of ARR cost less than a dollar of cash |
| 1× – 1.5× | Efficient |
| 1.5× – 2× | Acceptable, watch it |
| Over 2× | Expensive growth — investors will probe hard |
Why investors love it: unlike CAC or LTV, the burn multiple is almost impossible to game. It uses real cash out the door and real ARR added — two numbers that are hard to dress up. If your model turns cash-flow positive, the burn multiple drops to 0 (you're adding ARR without burning), as the sample does from year two on.
The caveat: a very low burn multiple can also mean you're under-investing in growth. Read it against your growth rate — burning little while barely growing isn't a win.
The Rule of 40 is a rule of thumb from public software investing: a healthy company's year-over-year growth rate plus its free-cash-flow margin should sum to at least 40. It says you can trade growth for profit or vice versa, but the sum should clear the bar.
| Sample company | ARR growth | FCF margin | Rule of 40 |
|---|---|---|---|
| Year 2 | 138.7% | −0.5% | 138 |
| Year 3 | 101.2% | 14.9% | 116 |
| Year 4 | 86.2% | 17.6% | 104 |
| Year 5 | 78.2% | 19.3% | 98 |
Every year clears 40 by a wide margin — because the growth rate is enormous. That's the honest problem with the Rule of 40 for early companies: it's a late-stage screen. A company growing 100%+ will always look like a Rule-of-40 champion no matter how much cash it burns, because the growth term swamps everything. As growth normalizes toward 30–50%, the profitability term starts to bite and the number becomes meaningful.
Lead with the burn multiple early — it's the number that separates efficient growth from cash-fueled growth, and it's honest at any stage. Bring in the Rule of 40 as you approach Series B and growth cools, where it actually discriminates. Quoting a Rule-of-40 score of 138 at pre-seed doesn't impress a good investor; it signals you're reaching for a metric that doesn't apply yet.
ModelKit derives the burn multiple and Rule of 40 from the same integrated cash-flow statement and ARR bridge as the rest of the model — so the efficiency numbers are grounded in cash that actually moves, not a separate estimate.
Request the kit — $149 See the metrics tabEducational material only — not investment, legal, financial, accounting, or tax advice, and not a valuation opinion. Figures are illustrative outputs of a deterministic model; benchmark ranges are common rules of thumb, not targets.