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quiz1 min readLesson 7.10

Financial ratios for startups

Finance — Read the Numbers · 15 min

Financial ratios for startups differ from traditional company ratios. The most important: Gross Margin (product economics), Burn Multiple (capital efficiency), Rule of 40 (growth + profitability balance), Magic Number (sales efficiency).

Burn Multiple

Burn Multiple = Net Burn / Net New ARR

<1x = amazing. 1-2x = good. >2x = concerning. Measures how much you burn to add $1 of ARR.

Rule of 40

Rule of 40 = Revenue Growth Rate + EBITDA Margin

Should be ≥40%. E.g., 60% growth + (-20%) margin = 40. ✓

Key Takeaways

  • Burn Multiple: <1x amazing, 1-2x good, >2x concerning.
  • Rule of 40: Growth % + EBITDA Margin % ≥ 40.
  • Pre-revenue: focus on burn rate and runway.
  • Post-revenue: focus on gross margin and capital efficiency.

Frequently Asked Questions

A company growing at 100% with -70% EBITDA margin. Rule of 40 score?

Answer: 30

100% + (-70%) = 30. Below 40 — needs to improve efficiency or growth.

Burn Multiple of 0.8x means:

Answer: For every €1 burned, you added €1.25 of ARR — very efficient

Burn Multiple < 1x means you're adding MORE ARR than you're burning cash. Very capital efficient.

Which ratio matters most for a pre-revenue startup?

Answer: Burn rate and runway

Pre-revenue, you have no revenue ratios. Burn rate and runway determine survival.