Investors increasingly judge startups on efficiency, not just growth. Two simple ratios cover most of it: the magic number for sales and marketing, and the burn multiple for the company as a whole.
The magic number
New annual revenue from the quarter (revenue increase × 4) ÷ last quarter's sales and marketing spend.
New annual revenue
($1,300,000 − $1,100,000) × 4equals$800,000
Magic number
$800,000 ÷ $600,000equals1.33
The burn multiple
Net cash burned in the period ÷ net new ARR in the same period. It counts every cost, including product, support and administration, not just sales and marketing.
If the company above burned $500,000 of cash in the quarter while adding $800,000 of net new ARR, its burn multiple is 500,000 ÷ 800,000 = 0.63. It spent 63 cents of cash for each dollar of new annual revenue.
Reading the numbers
- Magic number above about 0.75: sales and marketing spend is working.
- Burn multiple below 1: very efficient growth. Between 1 and 2 is commonly treated as good; above 3 is a warning sign.
- These are rules of thumb that investors popularized, not fixed standards. Compare your own trend over several quarters.
When they disagree
A strong magic number with a weak burn multiple means sales works, but other costs are high: often a large product team or expensive infrastructure. A weak magic number with a fine burn multiple usually means the company is simply spending little on growth.