Efficiency Ratio on Startups

It is possible to check if your startup is profitable? How can you know if the capital you invest generates profitability? And how can I be sure that investors will continue to trust my company or not?.
In this article, I will show you an indicator to answer these questions and a scale of it to be able to read the Efficiency Ratio on Startups and the future scenario regarding the choice of it by investors.

Startups: How to measure the Efficiency Ratio?

To begin with, it is important to mention that the more the economic crisis deepens and expands, the more it is necessary to measure whether the capital invested in the company’s growth is efficient. In other words, knowing at what cost I make my company grow, and at what cost my product and/or service is consumed in the market, in other words, it is inadmissible not to know if my company is profitable or not.

To do this, David Sacos developed a ratio that he calls Burn Multiple, which he teaches us in his article “The Burn Multiple”:

Burn Multiple: Net Burn / Net New Annual Recurring Revenue

This ratio shows how much the startup invests or burns to generate income.

And to measure the efficiency of capital through this ratio, he developed a scale:

Of course, in the Startup world, times are different according to the stage in which it is found. A startup in its beginnings, after a pre-seed and seed round, invests a huge sum of capital, which generates practically no results, since it is mainly in the Research and Development stage, assembling its team and establishing itself legally.

Therefore, at this stage, it is practically impossible to use an indicator and a scale to know if my capital is profitable or not. What if, it is advisable to reduce costs from the beginning, being pragmatic when investing in resources.

In the Growth Stage and Expansion stages, investors look at whether the company is generating genuine cash flows from the activity with which it can also be financed, and this is a crucial factor for fund analysts to decide whether or not to grant capital. to the Startup in the next round. Therefore, in these stages, the Burn Multiple should be low and the ideal is always zero.

In other words, as the startup matures, the efficiency ratio must decrease.

Final Thoughts

Today, in this context of an economic crisis in which investors are more cautious when investing funds in an emerging company, the startup must consider not only growth but mainly that growth is efficient.

It is no longer about capturing capital and burning it in the short term to place the product and/or service on the market, but now this process must be efficient and rational, that is, sell more units at the lowest possible cost, just as the economy from its inception.