Finance
Capital efficiency
How much net new ARR (or revenue) a company generates per dollar of net burn over the same period.
In plain English
Are you turning the money you raise into revenue, or just spending it? Higher is better — it's the single best signal that growth is being earned, not bought.
Example
Q1: net new ARR = $400k, net burn = $500k. Capital efficiency = 0.8. A ratio above 1.0 at pre-Series-A is excellent; above 0.5 is healthy; below 0.3 means you're spending dollars to make pennies.
Formula
Capital efficiency = Net new ARR / Net burn (measured over the same period — usually a quarter or trailing 12 months)
Why it matters
Investors increasingly use capital efficiency as a primary diligence lens (especially after 2022). A company with 0.7 capital efficiency and $2M ARR is often more attractive than one with 0.2 efficiency and $5M ARR — because the first can become profitable without raising again, and the second can't. At series A, target 0.5+; at series B, target 0.7+; at series C, target 1.0+. Burn multiples (the inverse) are an equivalent way to express the same idea.
Common mistakes
- Computing on gross new ARR instead of net new ARR (ignores churn — flatters the number)
- Comparing companies at different stages without normalising; efficiency naturally improves as fixed costs amortise
- Treating one quarter as a trend; use trailing 12 months for a fairer read