Does Losing Money Make Sense?

Yesterday, I looked at HashiCorp and pointed out their NRR and sizable operating losses.

But they sold for north of $6B even with these losses.

I tend to be conservative when it comes to spending company money. But, at the same time, I’m all for positive ROI investments.

Traditionally, you’d like to be able to do an Internal Rate of Return or Net Present Value calculation to determine the “worth” of such losses. But most companies don’t break out their Sales & Marketing line item into the detail needed to do that type of analysis.

So let’s look at a more simplified measure of a company’s “burn”, the Burn Multiple.

Popularized by David Sacks, burn multiple simply asks: “How many dollars of cash are you burning to create one dollar of new recurring revenue?”

With that, let’s apply this concept to HashiCorp.

What Burn Multiple Measures

Burn multiple is defined as:

Net cash burn ÷ net new recurring revenue

In plain terms:

• A 1.0x burn multiple means you burned $1 to add $1 of new revenue.

• A 2.0x burn multiple means you burned $2 to add $1 of new revenue.

Here are some guides for a company’s level of burn mutiple.

• < 1.0x: Elite, growth is self-funding and revenue is compounding faster than cash burn

• 1.0x–1.5x: Strong, efficient growth with clear operating discipline

• 1.5x–2.5x: Acceptable, paying up for growth but still rational if retention is high

• 2.5x–3.5x: Concerning, growth is getting expensive and returns are slipping

• > 3.5x: Poor, cash burn is likely not creating durable new revenue

The Baseline Financial Context

HashiCorp’s topline growth was real, but expensive.

Revenue:

• FY2022: $320.8M

• FY2023: $475.9M

• FY2024: $583.1M

Sales and marketing expense:

• FY2022: $269.5M

• FY2023: $355.8M

• FY2024: $369.2M

Gross margins stayed in the low 80s% range throughout. That matters because gross margin determines how much future cash flow a dollar of revenue can generate.

Sales and marketing intensity declined over time, but in absolute dollars it stayed very high.

Estimating Burn Multiple Without Perfect Data

HashiCorp did not publish burn multiple directly, and it did not disclose clean net new ARR by year. So we have to approximate.

The cleanest way to do that is to:

1. Estimate how much revenue growth came from retention and expansion.

2. Attribute the remaining growth to net new selling.

3. Compare that net new revenue to the company’s cash burn.

This is not perfect, but it is directionally correct.

The Retention Engine Changes Everything

HashiCorp consistently reported net revenue retention around 120% for much of this period, though it compressed closer to the mid-teens by FY2024.

As I talked about yesterday, a 120% net revenue retention rate means:

• $100 of starting revenue becomes $120 the next year.

• That happens before selling anything new.

This is critical for burn multiple analysis because it means:

• A large portion of next year’s revenue does not require new acquisition spend.

• Burn can be justified if it creates revenue streams that later expand on their own.

FY2022: Burn Multiple as Growth Investment

Start with FY2022.

Revenue grew from $320.8M to $475.9M in FY2023, an increase of $155.1M.

If the FY2022 revenue base expanded at 120%, it would have generated about $64.1M of growth on its own.

That implies roughly $91.0M of FY2023 revenue came from net new selling.

FY2022 sales and marketing spend was $269.5M.

That implies a rough revenue burn multiple of:

• $269.5M ÷ $91.0M ≈ 3.0x

On its face, that looks expensive.

But here is where burn multiple must be paired with retention and gross margin.

That $91M was not one-time revenue:

• It carried ~82% gross margins.

• It was attached to customers that historically expanded spend year after year.

If that revenue compounded at even a modest rate for several years, the lifetime gross profit easily exceeded the original burn.

Interpretation:

• FY2022 burn multiple looked high on a single-year basis.

• On a multi-year basis, it likely cleared the bar for being NPV-positive.

FY2023: Burn Multiple Starts to Deteriorate

Now look at FY2023.

Revenue grew from $475.9M to $583.1M in FY2024, an increase of $107.2M.

At a 120% retention rate, the existing base alone would have produced roughly $95.2M of growth.

That implies only about $12.0M of revenue growth came from net new selling.

FY2023 sales and marketing spend was $355.8M.

That implies a rough revenue burn multiple of:

• $355.8M ÷ $12.0M ≈ 29.6x

Even if retention was closer to 115% rather than 120%, the implied burn multiple still looks terrible.

To me, this looks like an inflection point for them.

Why the Burn Multiple Blew Out

Three things likely explain the deterioration.

1. Retention Compression

Net revenue retention declined over time.

When retention falls:

• Each new dollar of revenue compounds less.

• The acceptable burn multiple drops sharply.

High burn multiples only work when expansion is strong and predictable.

2. Spend Shifted From Growth to Defense

By FY2023, a larger portion of sales and marketing spend was likely:

• Supporting renewals

• Preventing churn

• Managing large enterprise accounts

That spend still matters, but it does not show up as net new revenue.

Burn multiple punishes defensive spend, even when that spend is rational.

3. Revenue Recognition Lag

Enterprise contracts often ramp.

Some FY2023 spend may have created bookings that had not yet fully shown up in revenue by FY2024.

That said, the magnitude of the implied burn multiple suggests diminishing marginal returns regardless.

Was HashiCorp’s Burn Rational Overall?

Here are my best guesses:

• Early-cycle burn was likely rational and NPV-positive.

• Late-cycle burn showed diminishing returns and likely drifted toward NPV-neutral or NPV-negative at the margin.

• The aggregate outcome was still positive because the installed base, retention profile, and strategic position remained valuable.

Burn multiple fell off a cliff. But, their still-strong retention and installed base is likely what gave IBM comfort to do the deal.

In addition, historical burn was a sunk cost that built an company IBM could monetize with:

• Better distribution

• Lower marginal sales costs

• Cross-selling into an existing enterprise customer base

In summary, HashiCorp’s sales and marketing spend turned to a point where it was likely ROI-negative when viewed as a stand-alone incremental investment. But, by that time, I’m guessing they had plenty of conversations with potential buyers.

And with money in the bank, the last thing they wanted to do was to shake up their culture with a dramatic re-sizing and/or show a dramatically lower, even if an overall healthier, growth rate.

While their outcome was positive, I still think there’s a different path out there from the VC-fueled growth-at-all-costs approach. Even so, this was a good exercise to challenge my bias!

With that, I’ll see you tomorrow!

Nick