Efficiency metrics: burn multiple, magic number and rule of 40

Growing ARR is not enough. Two companies can both print 80% year-over-year growth while one spends $0.80 of net burn per new ARR dollar and the other spends $3. Efficiency metrics answer: how expensive was that growth?

This section covers the four numbers that show up in board packs after SaaS metrics: burn multiple, magic number, company-level CAC payback, and the Rule of 40, plus the T2D3 growth narrative. Pair them with burn and runway for cash survival and with valuation for how markets price the result.

Net burn is cash out minus cash in. Net new ARR is new + expansion − contraction − churn. The ratios compare those two changes.

One company, four numbers

Fictional B2B SaaS. Starting ARR a year ago $8.0M, ending $12.0M, net new ARR $4.0M, net burn $5.0M. Q4 ARR $12.0M / Q3 $11.2M, Q3 S&M $0.9M, annual S&M $3.2M, gross margin 78%, FCF margin −18%.

Growth %          = (12 − 8) / 8 = 50%
Burn multiple     = 5.0 / 4.0 = 1.25×
Magic number      = ((12.0 − 11.2) × 4) / 0.9 ≈ 3.56
CAC payback       ≈ 3.2 / (4.0 × 0.78) × 12 ≈ 12.3 months
Rule of 40        = 50 + (−18) = 32

Read as a board: growth is efficient on cash and S&M, but we still miss Rule of 40 because we are investing ahead of FCF. Next levers: hold burn flat while ARR compounds, or trim G&A once magic number stays above 1 on a trailing basis.

Concepts in this section

Step	Concept	What it answers
1	Burn multiple	How many dollars of cash per dollar of new ARR?
2	Magic number	Is S&M efficient enough to hire more sales?
3	Company CAC payback	How many months to recover S&M via gross profit?
4	Rule of 40	Do growth and profit add up?
5	T2D3 and tradeoffs	What shape of growth, and how do the metrics fight?

One company can look heroically efficient on magic number and sick on burn multiple. Read the set, not a single dial. When leadership says "grow faster," ask at what burn multiple. When sales wants headcount, ask for trailing magic number — and use prior-quarter S&M, because today's pipeline was bought yesterday.

Common mistakes

Gaming burn multiple with junk ARR. Next quarter's churn unwinds it.
Hiring off one magic-number spike. Use trailing three quarters. Use prior-quarter S&M.
Calling Rule of 40 a pass while burn multiple is 3×. The sum hid the cash cost.

Key takeaways

Burn multiple = net burn / net new ARR. Under 1× is great; over 2× is usually a problem.
Magic number annualizes QoQ ARR growth over prior-quarter S&M. 1.0 or above suggests scalable GTM spend.
Company CAC payback folds S&M, net new ARR and gross margin into months. AI COGS lengthen it.
Rule of 40 = growth % + profit margin %. Declare the profit metric. Stage-adjust.
T2D3 is a shape mnemonic. Capital markets decide how strictly efficiency is graded.