Tom Tunguz has written an interesting blog post on the how the reduction in burn multiples for startups hasn’t lowered revenue growth. (via my Alliance VC colleague Arne Tonning)
Burn multiple is net burn / net new ARR. I.e. the negative cash flow from all of a company’s operations divided with new revenue.
It might seem counter-intuitive that lower costs doesn’t have a direct negative impact on sales. But there are some good reasons.
When a startup has raised a large $10+ million round and aims to grow revenue 100-200 % or more per year, there will be a lot of costs outside direct selling costs for the last quarters and the coming quarters.
Those costs will likely include investment in product R&D that for product and features that will be sold 12-24 months out, additional admin staff, investment in marketing that will bring in leads that can turn into customers in coming quarters, sales people that are not yet at quota, a larger talent acquisition team to hire for coming quarters, new office space to grow into, international expansion with legal, office and hiring costs among other things. And when eyes are on hyper growth, few companies can operate with tight cost control so the general cost level is likely to increase too.
With this in mind, the burn multiple doesn’t really capture sales efficiency, but captures the overall cost ramp for a company in relation to new sales.
This is also the reason why technology companies can improve profitability quickly by slowing down and cutting costs outside core product development, sales and customer success without initially hurting sales. Get cost cuts wrong and stop investing in product development and sales, and it will hurt sales growth at some point.
