Venture Capital puzzles, solved step by step

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  1. 011In your head, no calculator: a SaaS company has ARR of Rs 42 crore growing 65% a year, net burn of Rs 3.1 crore a month, net new ARR last quarter of Rs 6.2 crore and Rs 55 crore of cash. What are next year's ARR, the quarterly burn multiple and the runway?Mental maths and speed testsCoreVista Equity PartnersAustin · 2021

    Try it first

    What is the quarterly burn multiple?

    Show the worked solution

    About Rs 69.3 crore of ARR, a burn multiple of 1.5 and about 18 months of runway. 42 x 1.65 is 42 plus 21 plus 6.3. A quarter's burn is 9.3, and 9.3 over 6.2 is 1.5 because both are multiples of 3.1. Cash of 55 over 3.1 a month is a shade under 55 over 3, so about 17.7 months.

    How do you multiply by 1.65 without a calculator?

    Break the awkward multiplier into pieces you already know. A shopkeeper adding 65% to a Rs 42 cost does not multiply by 0.65; he adds half, then a bit more. 65% is 50% plus 15%, so 42 x 1.65 is 42 plus 21 plus 6.3, which is Rs 69.3 crore. Fifteen percent is itself 10% plus half of that again: 4.2 plus 2.1. Every step is a halving or a shift of the decimal point, which is fast and hard to get wrong out loud.

    Why does the burn multiple need care before any arithmetic?

    Because the two inputs come in different periods. Burn is quoted per month and net new ARR per quarter. A burn multiple divides the cash burned by the new annual recurring revenue added over the same stretch of time, so three months of burn, Rs 9.3 crore, goes over the quarter's Rs 6.2 crore. Then notice that 9.3 is 3 x 3.1 and 6.2 is 2 x 3.1, so the ratio is exactly 3 over 2, or 1.5. Interviewers choose numbers like these on purpose; spotting the common factor is part of the test.

    Round first, then correct: three answers in under a minuteNext year's ARR42 x 1.65= 42 + 21 + 6.3(the base, half, then 15%)Rs 69.3 crBurn multipleQuarterly burn 3 x 3.1 = 9.39.3 / 6.2 = (3 x 3.1) / (2 x 3.1)(match the periods first)1.5Runway55 / 3 = 18.33.1 is 3% more than 3,so shave 3%: about 17.7~18 monthsThe slip: monthly burn over quarterly net new ARR, 3.1 / 6.2 = 0.5, looks three times better than it is.Both halves of a burn multiple must cover the same period.
    Splitting 1.65 into 1 plus a half plus 15% gives Rs 69.3 crore of ARR, matching periods turns the burn multiple into 9.3 over 6.2, which is 1.5, and rounding 3.1 down to 3 then shaving 3% gives about 17.7 months of runway.
    The relationship
    BM=3×3.16.2=1.5Runway=553.1≈17.7 months\text{BM} = \frac{3 \times 3.1}{6.2} = 1.5 \qquad \text{Runway} = \frac{55}{3.1} \approx 17.7 \text{ months}
    3 x 3.1net burn over one quarter, Rs crore
    6.2net new ARR added in the quarter, Rs crore
    55cash in the bank, Rs crore
    What it says in wordsPut burn and new revenue on the same period before dividing, and divide cash by monthly burn for runway.

    What do you say once the three numbers are out?

    Check them against each other, because that is what a growth investor does next. Growing ARR by Rs 27.3 crore next year needs about Rs 6.8 crore of net new ARR a quarter, a little above the Rs 6.2 crore just achieved, so the 65% plan is plausible but not banked. At a 1.5 burn multiple that growth costs about Rs 41 crore of burn in the year, and with Rs 55 crore of cash and about 18 months of runway, the company will want to raise again within roughly a year, before the runway gets short. That one sentence turns arithmetic into a view on the company.

    Where candidates lose it

    The costly slip is dividing the monthly burn by the quarterly net new ARR and announcing a burn multiple of 0.5. It makes the company look three times more efficient than it is, and the interviewer chose mixed periods to see whether you notice.

    The second loss is going silent while you calculate. Say the shortcut as you use it: half, then fifteen percent; three parts over two parts; fifty five over three, then shave a little.

    What the interviewer asks next

    • If net burn rises 20% next year while ARR grows 65%, what happens to the burn multiple if net new ARR grows in step with ARR?
    • How much cash should the company raise to have 24 months of runway at the current burn?
    • Is a burn multiple of 1.5 good for a company of this size, and what would change your view?

    Asked at Vista Equity Partners, Private Equity, Austin, 2021 (Wall Street Oasis): Mental math and tech/SaaS-specific sector insights