With rising interest rates rates, there’s a new sheriff in town for all businesses. That’s called efficiency.
Efficiency is now especially important for startups, who are always running fast to a cliff.
When, as a typical startup, you have instant death within 18 to 24 months, that’s really scary. When you reach the edge of that cliff, you either leave – or you don’t. And in this new environment of rising interest rates, access to capital is being reduced and investors are “fleeing the riskiest companies,” meaning emerging companies are in an even more precarious position. They don’t have the luxury of hiring too many people or not the right people. Such mistakes will only accelerate their movement off the cliff and their death.
The gold standard is a burn multiple of one – for every dollar you burn, you add a net new dollar in subscription revenue.
As startups born or growing during the last recession, including Airbnb and Facebook, have proven, efficiency can put you on the fast track to massive success, even in tough times. Still, many startups have much higher burn speeds than necessary. Just look at Fast, a one-click software startup that burned $10 million a month. Earlier this year, Fast shut down abruptly after it ran out of more than $120 million in funding.
Avoiding this fate requires a radically different approach. Now you have to ask yourself: how can we slow down the speed at which we reach the cliff of death? Can we convert this into free money?
It can be very difficult for a young company to adopt this mindset, especially given the demands that venture capitalists place on top-line growth. But that mindset is what you need to grow your business efficiently in a recession — and hiring at the burn multiple is a proven way to expand your runway while still achieving lofty growth goals.
Calculate your fire multiple and understand when to reduce it
David Sacks, the godfather of the burn multiple, explains that burn multiple is the net burn/net new annual recurring revenue (ARR). This ratio indicates how efficiently you are adding revenue. As Sacks points out, the beauty of the burn multiple is that it’s an aggregate metric. You can manage your entire business around it. If you have a churn problem, a growth challenge, a problem that fits the product market, it’s all baked into burn multiple. The number doesn’t lie. If you have recurring revenue, burn multiple is the gold standard for evaluating your business.