Burn multiple answers how much cash you spend for each dollar of net new ARR. Rule of 40 answers whether growth plus margin clears 40%. Early boards run on the first, and later boards add the second. Keep each one at its stage. Not legal, tax, or investment advice.
Two different questions
| Metric | Formula | Best for | Source |
|---|---|---|---|
| Burn multiple | Net burn ÷ net new ARR | Seed–growth companies still burning cash | David Sacks, Craft Ventures, 23 April 2020 |
| Rule of 40 | Revenue growth % + profit margin % | SaaS at scale (Feld: assume ~$50M+ revenue) | Brad Feld, 25 February 2015; Bessemer popularized for cloud |
| Rule of X | (Growth % × multiplier) + FCF margin % | Late-stage / public cloud valuation narratives | Bessemer Venture Partners Atlas |
Empty cells are intentional. Each row is a different publisher answering a different board question.
Sacks built burn multiple by flipping Bessemer’s Efficiency Score (net new ARR ÷ net burn) so burn sits in the numerator. Feld’s Rule of 40 asks whether growth and profit add to at least 40%. Bessemer’s Rule of X keeps the Rule of 40 shape but multiplies growth (~2× private, ~2–3× public) because growth compounds and margin does not.
Burn multiple: formula and bands
Burn Multiple = Net Burn / Net New ARR
Sacks’ worked board example: burn $2M in a quarter, add $1M net new ARR → 2×, which he calls reasonable for an early-stage company. Burn $5M to add $1M → 5×, which he calls terrible and a reason to cut costs immediately.
Net new ARR is new + expansion − contraction − churn for that same period (ending ARR − beginning ARR). Net burn is cash consumed. Financing inflows (equity raises, debt draws) are not “growth.” Pull burn from the cash statement, not from EBITDA.
| Burn multiple | Sacks read (2020) |
|---|---|
| Under 1.0× | Amazing |
| 1.0× to 1.5× | Great |
| 1.5× to 2.0× | Good |
| 2.0× to 3.0× | Suspect |
| Over 3.0× | Bad |
Sacks’ stage guidance in the same essay (not a separate sampled table): a seed company might run around 3× because sales have only started; after Series A it might drop toward 2×; after Series B, when the sales team should be operating at scale, expectations tighten further; toward profitability the multiple should approach 0. If the multiple worsens as you mature while headline growth still rises, look for the leak in margin, sales efficiency, or churn.
Bessemer (Rule of X Atlas): for early-stage venture/growth with negative FCF, Rule of X is less relevant; think in terms of an attractive burn multiple, ideally ~1×–1.5×. Their Company A / Company B sketch: 100% NTM growth with (100%) NTM burn (~2× burn multiple) beats 150% growth with (200%) burn (~3×) at the same Rule of X.
Rule of 40: formula and stage
Rule of 40 = growth rate % + profit margin %
Feld (2015): growth rate + profit should add to 40%. Growing 20% with 20% profit clears it. Growing 40% at 0% profit clears it. Growing 50% and losing 10% clears it. He frames the rule for SaaS companies at scale (assume at least ~$50M revenue), notes it correlates earlier once you have roughly $1M MRR, and prefers EBITDA as the profit baseline while being precise about which profit definition you use.
Bessemer helped popularize Rule of 40 for cloud. In their Rule of X piece they still state the classic form (growth + profit margin ≥ 40%+), then argue that equal weighting misprices late-stage businesses approaching FCF positivity. Their late-2023 public-cloud snapshot: BVP Cloud Index average Rule of 40 ~31%, Rule of X ~50%; top-decile ~48% Rule of 40 and ~80% Rule of X (2.3× growth multiplier).
| Source | What they say about Rule of 40 |
|---|---|
| Brad Feld (Feb 2015) | Growth % + profit % ≥ 40. Scaled SaaS (~$50M+). Prefers EBITDA; say which profit number you use. |
| Bessemer (Rule of X Atlas) | Popularized Rule of 40 for cloud. Late stage: weight growth ~2–3× via Rule of X. Early stage with high burn: prefer burn multiple (~1×–1.5× attractive). |
| Bessemer late-2023 index snapshot | Cloud Index avg Rule of 40 ~31%; top decile ~48%. |
Do not treat a Series A company clearing Rule of 40 only because growth is 120% and margin is −80% as “done.” Feld’s scale caveat still applies. Use burn multiple for the cash question.
Which one goes in the board pack
Still burning, Seed to early growth. Lead with burn multiple for the last quarter and trailing trend. Show net burn and net new ARR as separate lines so the board can see which side moved. Sacks calls the multiple a catch-all: gross margin problems, sales inefficiency, churn, and founder burn discipline all show up in it.
Approaching scale / preparing a later raise. Add Rule of 40 with an explicit profit definition (Feld: EBITDA baseline; Bessemer often uses FCF margin in Rule of X). If investors quote Rule of X, show the multiplier you used (~2× private per Bessemer).
Pre-revenue. Sacks: if net new ARR is zero, burn multiple does not compute. Keep burn low and get to first revenue. Do not invent a substitute ratio for the slide.
Labeled board sketches
Sketch A: early Series A SaaS. Cash burn $1.8M in the quarter. Net new ARR $1.0M. Burn multiple = 1.8× (Sacks “good” band). YoY ARR growth 90%, FCF margin −70%. Rule of 40 = 20. Have the board argue the 1.8× trend and the path toward ~1.5×. A 20 Rule of 40 at this stage is no reason to celebrate or panic.
Sketch B: growth-stage SaaS. Cash burn $3.0M, net new ARR $2.5M → 1.2× (Sacks “great”). Growth 55%, FCF margin −10%. Rule of 40 = 45. Both metrics can sit on one page. Say the periods match.
Sketch C: same Rule of 40, different Rule of X (Bessemer logic). Company G: 30% growth, 15% FCF → Rule of 40 = 45, Rule of X (2×) = 75. Company M: 15% growth, 30% FCF → Rule of 40 = 45, Rule of X (2×) = 60. The Rule of 40 matches, and Bessemer argues investors should value G higher. Use this only when you are in a late-stage valuation conversation.
Mistakes that waste a board meeting
Showing only Rule of 40 while still burning hard. Bessemer and Sacks both point early boards at burn relative to net new ARR.
Mixing periods. Monthly burn over annualized ARR, or TTM burn over one quarter of net new ARR, produces a comforting number that means nothing. Lock one window.
Calling EBITDA “net burn.” Burn multiple is a cash question. Capex and capitalized software can sit outside operating loss.
Averaging Sacks’ seed ~3× with Bessemer’s ideal ~1×–1.5× into “aim for 2× forever.” Show each source. Your trend toward the tighter band matters more than a blended target.
Cutting growth that still clears an efficient multiple. Sacks notes it may be worth giving up unprofitable growth if it brings the multiple down. Bessemer warns late-stage operators not to starve efficient growth for FCF theater. Both are stage-specific calls, so say which stage you are in.
Sources
- David Sacks, The Burn Multiple (Craft Ventures / Medium) — 23 April 2020. Formula; $2M / $1M = 2× example; tier chart; seed ~3× → post-A ~2× stage guidance; catch-all failure modes.
- Brad Feld, The Rule of 40% For a Healthy SaaS Company — 25 February 2015. Growth + profit ≥ 40; ~$50M+ scale; EBITDA preference.
- Bessemer Venture Partners, The Rule of X — Rule of 40 restated; Rule of X formula and ~2× / ~2–3× multipliers; early-stage prefer burn multiple ~1×–1.5×; late-2023 Cloud Index ~31% / ~50% and top-decile ~48% / ~80%.
Related
- Finance, metrics & runway
- Library
- When to hire the first VP of Sales
- Series A leadership hiring sequence
- VP Sales equity: Seed 0.5–2%, A 0.3–0.8%
Your board will judge capital efficiency. Founders who have defended a burn-multiple turn or a Rule of 40 path in a raise will pressure-test your board pack in a FounderNexus session.