SaaS Magic Number, Efficiency Score, and Default Alive Test: Is Your Growth Efficient?

Every dollar you spend on sales and marketing either buys durable recurring revenue or evaporates. Most founders cannot say which one it did last quarter — they know the bank balance went down and revenue went up, and they call that growth. But if you spent $400,000 on sales and marketing to add $160,000 of net new ARR, you bought each dollar of revenue for $2.50. That is not a growth engine. That is a furnace with a logo on it.

Three numbers tell you the truth about your growth, and each one answers a different question. The Magic Number asks whether your sales and marketing spend is efficient. The Efficiency Score asks whether your overall burn is efficient. The Default Alive test asks whether any of it matters — whether you will reach profitability before the cash runs out. Here is how to compute all three, what good looks like, and which lever to pull when the answer is bad.

The Magic Number: What Each S&M Dollar Buys​

The Magic Number is the oldest and most quoted SaaS efficiency metric. It measures how much net new ARR one dollar of sales and marketing spend produces:

Magic Number = Net New ARR (this quarter) / S&M Spend (last quarter)

Two details in that formula do most of the work. First, the numerator is net new ARR: new-logo ARR plus expansion ARR minus churned and contracted ARR. A quarter where you closed $300,000 of new business but lost $120,000 to churn produced $180,000 of net new ARR, not $300,000. Using gross new ARR is the most common way founders flatter this metric.

Second, the denominator lags by one quarter. Deals you close this quarter were mostly produced by last quarter's spend — the ads, SDR salaries, and conference booths from three months ago. Comparing this quarter's ARR to this quarter's spend mismatches cause and effect, and it punishes you exactly when you ramp hiring: spend jumps immediately while the pipeline it funds closes later.

A worked example​

Say your Q2 S&M spend was $400,000. In Q3 you closed $250,000 of new-logo ARR, existing customers expanded by $100,000, and churn plus contraction took $50,000. Net new ARR is $250,000 + $100,000 − $50,000 = $300,000.

Magic Number = $300,000 / $400,000 = 0.75

Each dollar of S&M spend bought 75 cents of annualized recurring revenue. Whether that is good depends on the benchmarks below — but notice how the number forces honesty. There is no place to hide churn, and no credit for spend that has not closed yet.

How to read your Magic Number​

Benchmarks shift with the interest-rate weather, but the bands investors use have been stable for years:

• Above 1.0 — excellent. Every S&M dollar returns more than a dollar of ARR within the year. This is the signal to hire into sales and spend more, because the machine pays for itself.
• 0.75 to 1.0 — good. A healthy, investable growth engine. Most fundable SaaS companies live here.
• 0.5 to 0.75 — needs attention. Growth is expensive. Before adding headcount, fix conversion, pricing, or targeting.
• Below 0.5 — fix the funnel first. More spend mostly buys more inefficiency. Pouring budget into a sub-0.5 engine is how startups incinerate a round with little to show for it.

One caveat: very early companies can post absurd Magic Numbers — 3.0, 5.0, higher — because a founder's network closes deals against near-zero spend. That is usually a sign you are under-investing in go-to-market, not a sign of genius. The metric becomes meaningful once you have a repeatable motion and at least a few hundred thousand in ARR.

Mistakes that corrupt the Magic Number​

Three errors account for most misleading readings. First, forgetting the one-quarter lag, which makes ramping quarters look catastrophic and cutting quarters look brilliant. Second, annualizing confusion: net new ARR is already an annualized number, so it does not get multiplied by four; some versions of the formula annualize a quarterly revenue change instead, which is a different computation that should give a similar answer — pick one method and keep it. Third, stuffing non-recurring revenue into the numerator. One-time onboarding fees, services work, and multi-year prepays collected up front are not ARR, and counting them turns a services business into apparent SaaS efficiency.

The Efficiency Score: What Each Burned Dollar Buys​

The Magic Number only grades your go-to-market spend. But S&M is not your only cost — engineering, G&A, and hosting all burn cash too. The Efficiency Score (popularized by Bessemer Venture Partners) grades the whole company:

Efficiency Score = Net New ARR / Net Burn

Net burn is simply cash out minus cash in for the period: how much your bank balance shrank. If you added $300,000 of net new ARR in a quarter while burning $400,000, your Efficiency Score is 0.75 — each burned dollar bought 75 cents of ARR.

You will also meet this metric upside down as the burn multiple — net burn divided by net new ARR. A burn multiple of 2.0 means you burn $2 for every $1 of net new ARR, which is the same statement as an Efficiency Score of 0.5. Investors tend to quote the burn multiple; operators tend to prefer the score, where bigger is better. Learn both so a board conversation never confuses you.

Useful bands for the burn multiple, from the widely cited Bessemer scale:

• Under 1x — great. You add more ARR than you burn. This is efficient growth by any standard.
• 1x to 1.5x — good. Normal for a venture-backed company investing ahead of revenue.
• 1.5x to 2x — suspect. Acceptable briefly while investing in a proven motion, uncomfortable as a habit.
• Above 2x — bad. You are buying growth at prices that imply something structural is wrong: weak retention, an unrepeatable motion, or a cost base built for a bigger company.

Magic Number vs. Efficiency Score: when each one matters​

The two metrics diverge in informative ways. A good Magic Number with a bad Efficiency Score means go-to-market works but the rest of the company is too expensive — the fix is in headcount or infrastructure, not in sales. A bad Magic Number with a decent Efficiency Score is rarer and usually means a small team selling inefficiently, where the fix is positioning or channel mix.

Early on, watch the Magic Number: it tells you whether the engine works at all. As the company grows past a few million in ARR, the Efficiency Score takes over, because at scale the question is not whether sales works but whether the whole operation converts capital into durable revenue.

The Default Alive Test: Will You Make It Before the Money Runs Out?​

Both metrics above assume you survive long enough for efficiency to matter. The Default Alive test, from Paul Graham's 2015 essay of that name, checks the assumption. The question:

If your expenses stay flat and your revenue keeps growing at its current rate, do you reach profitability before your cash runs out?

If yes, you are default alive: survival does not depend on raising more money, and you can fundraise (or not) from strength. If no, you are default dead: on your current trajectory the bank account hits zero first, and something has to change — growth, costs, or a new round.

Note what the test assumes. Expenses flat: no new hires, no raises, no new tools. Growth continuing at its current rate: if revenue grew 8% last month, it grows 8% next month, compounding. These assumptions are deliberately simple. They are not a forecast; they are a tripwire. The point is to force the conversation while there is still time to act.

Running the numbers​

Take a startup with $1.2M in the bank, $200,000 in monthly expenses, and $120,000 in monthly revenue growing 10% per month. Monthly net burn today is $80,000, so naive runway is 15 months. But revenue compounds: at 10% monthly growth, revenue crosses $200,000 in about six months, after which the company is profitable and the remaining cash is never needed. Default alive — with room to spare.

Now change one input: growth is 3% per month instead of 10%. Revenue reaches $200,000 only after about 18 months, but the cash runs out around month 13 (burn shrinks as revenue grows, which stretches runway a little past the naive 15). The lines cross in the wrong order. Default dead — and the gap tells you the size of the problem: you need faster growth, lower costs, or roughly six-plus months of additional cash to close it.

Build this as a simple month-by-month projection, not a single formula: starting cash, flat expenses, revenue compounding at the trailing growth rate, cash declining by the monthly shortfall. The month revenue crosses expenses versus the month cash crosses zero is the whole answer. Recompute it every month, because the growth rate is doing most of the work and it changes constantly.

What to do if you are default dead​

There are exactly three levers, and the test does not care which one you pull:

1. Grow faster. Raises the revenue line so it crosses costs sooner. Hardest to do on demand, but the only lever that improves the company rather than shrinking it.
2. Cut burn. Lowers the expense line — and every dollar cut extends the zero-cash date directly. This is the lever fully in your control, which is why runway math so often ends in a reduction plan.
3. Raise money. Moves the zero-cash date outward. Note the trap: raising as a default-dead company means negotiating with a visible deadline, which is the weakest possible position. The test is most valuable run 12 months before you need the answer, not two.

The most common mistake is treating fundraising as the default plan while never running the test. Companies that discover they are default dead with four months of cash have one option (a rushed round or a panicked cut). Companies that discover it with fourteen months have all three.

Putting the Three Together in Your Books​

None of these metrics is computable from a vague general ledger. The Magic Number needs clean S&M spend for the prior quarter; the Efficiency Score needs true net burn; the Default Alive test needs a trustworthy monthly revenue trend. All three fail the same way: from expense accounts that mix categories and revenue accounts that mix recurring with one-time.

The fix is structural. Give sales and marketing its own expense subtree, separated from customer success, engineering, and G&A — misfiled headcount is the usual corruption, since a success manager booked to S&M inflates the denominator while an SDR booked to G&A flatters it. Split revenue into new, expansion, churned, and non-recurring postings so net new ARR is a query, not a spreadsheet project. In a plain-text ledger that structure looks like this:

2026-07-01 * "Q3 S&M payroll"
  Expenses:Sales-Marketing:Payroll  85,000.00 USD
  Assets:Checking
 
2026-07-15 * "Q3 paid acquisition"
  Expenses:Sales-Marketing:Advertising  40,000.00 USD
  Assets:Checking
 
2026-09-30 * "Q3 new-logo ARR booked"
  Income:ARR:New-Logo  -250,000.00 USD
  Assets:Accounts-Receivable

With postings shaped this way, last quarter's S&M total and this quarter's ARR components are each one balance query away, and the Magic Number takes minutes at every close instead of a forensic week before the board meeting. If you are new to ledger-style accounting, the documentation walks through accounts, postings, and balance queries from zero, and the Fava dashboard turns the same ledger into income statements and trend charts without exporting anything.

Mistakes That Make Efficient Growth Look Inefficient (or Vice Versa)​

A final set of traps, from watching these metrics computed in the wild:

• Channel blending. One blended Magic Number can hide a 1.5 paid-search motion subsidizing a 0.2 outbound motion. Compute the number per channel before deciding where the next dollar goes.
• Services revenue in ARR. Implementation fees and hourly work collected alongside subscriptions inflate the numerator with revenue that will never renew. Strip them out before dividing.
• Prepay timing games. A multi-year deal paid up front is still one year of ARR per year, no matter when the cash arrived. Booking the cash as ARR manufactures fake efficiency this quarter and a fake collapse next year.
• Headcount timing. A rep hired in March rarely closes before June. Judging a ramp quarter's Magic Number without the lag — or without giving hires time to ramp — punishes exactly the investment the metric exists to encourage.
• Ignoring contraction. Downgrades and seat reductions are churn with better manners. Net new ARR nets them; forgetting them flatters retention and both efficiency metrics with it.

Compute all three numbers from your last closed quarter this week: the Magic Number from S&M spend and net new ARR, the Efficiency Score from net burn, and the Default Alive projection from current cash, flat expenses, and trailing growth. Whichever one looks worst names your next move — fix the funnel, trim the burn, or accelerate growth before the cash clock forces the choice.