What is the Right Burn Rate for your Startup?

Both Sides of the Table

One of the hardest decisions entrepreneurs make when they start a company and raise outside capital is figuring out what an acceptable “burn rate” is. The Basics The starting point — the 101 — is knowing the difference between gross burn and net burn.

What is the Right Burn Rate at a Startup Company?

Both Sides of the Table

I was reading Danielle Morrill’s blog post today on whether one’s “ Startup Burn Rate is Normal. Danielle goes through some commentary from Bill Gurley, Fred Wilson and Marc Andreessen about burn rate and then goes on to discuss her own burn rate and others publicly weigh in. But what IS the right amount of burn for a company? Gross Burn vs. Net Burn. Net burn is the amount of money you are losing per month.

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So What is The Right Level of Burn Rate for a Startup These Days?

Both Sides of the Table

This has led VC & entrepreneur bloggers alike to similar conclusions: start raising capital early and be careful about having too high of a burn rate because that lessens the amount of runway you have until you need more cash. But the hardest question to actually answer is, “What is the right burn rate for your company?” Well if you took that option I would simply advise that you be a little bit more cautious with your burn rate.

High Burn Rates Result in Short Startup Runways

Startup Professionals Musings

Your burn rate is the rate at which that money is being spent, and allows an estimate of how long you can go before refueling (runway). Investors look at your burn rate to see how efficient and effective you are at running the business.

What is the Appropriate Time Horizon of a Financial Model for VC’s

Ask The VC

Early and pre-revenue: Investors are going to be most interested in your near term burn rate and how long their money is going to last. Recognize that your revenue is totally speculative so the “base case” is going to be zero revenue. However, if your revenue is modest, a smart investor is going to look at your gross margin also. In early cases, they are going to focus on cash / monthly-burn-rate.

The 7 Key Metrics Every Business Owner Should Monitor

Up and Running

For example, if you have an eCommerce website , you’ll want to measure unique visitors, referrals, bounce rate, and similar. If you’re running a subscription business , you’ll want to track churn rate, monthly recurring revenue, lifetime value, and so on. What Is Cash Burn Rate?

Market Type and Revenue. 2 Minutes to Find Out Why

Steve Blank

This video describes how “Market Type” affects your revenue and your burn rate. Understanding “Market Type” can save you a ton of money and time.

Burn Rate

charliecrystle.com

Fred posted on Burn Rate today. Instead, we raise cash here and there, hoping to get enough to run things smoothly, and maybe combine it with revenue. It's pretty simple: you have your known ongoing expenses, known revenue (or not), and known investment (or not). You have to manage your cash--the combination of investment and revenue--to cover the expenses on an ongoing basis. So keep a close eye on your cash, your burn, and your revenue.

Rami Korhonen From PlayMySong On Optimizing Your Startup's Burn Rate

ArcticStartup

Your startup's cashflow is obviously crucial to keep your eye on so we spoke to Rami Korhonen, the CEO of PlayMySong, about how he optimizes their burn rate. Month to month their burn rate stays pretty consistent. After we were able to get into the Tekes Young Innovative Companies that allowed us to decrease our burn rate a little bit to make the necessary adjustments to really start taking our product to the market in a bigger way.".

Don’t Get Burned By Your Startup Burn Rate

Startup Professionals Musings

Your burn rate is the rate at which that money is being spent, and allows an estimate of how long you can go before refueling. Investors look at your burn rate to see how efficient and effective you are at running the business. Cash is the fuel of every startup.

5 Steps To Maximizing Your Startup Cash Flow Runway

Startup Professionals Musings

Investors check your burn rate to assess your efficiency, and project your remaining runway before you run out of money and into a brick wall. It doesn’t take a financial genius to recognize that you need to keep your burn rate low.

Unicorpse

Feld Thoughts

Venture capitalist Marc Andreessen warned in a tweetstorm that startups with high burn rates would “vaporize.” I once was on the board of a company that had generated lifetime revenue of $1.5m I get uncomfortable when the net burn rate for a company goes above $500k / month.

The Resetting of the Startup Industry

Both Sides of the Table

The startup industry may be “resetting,” which doesn’t mean a “crash” but rather just a resetting of valuations, timescales, winners/losers, capital sources and the relative emphasis of growth rates vs. burn rates.

Burn Rate Norms

Thinking About Thinking

When investors and entrepreneurs talk about “burn rate”, they’re generally referring to the amount of cash a company consumes through its normal operations every month. For many venture-backed companies, they have a negative burn rate meaning that they are expending more cash than they are collecting. 0–$250k burn rate: This is still a “capital efficient” company – a $10M round could last 3–4 years which is an eternity.

Numbers Can Ruin A Good Story

A VC : Venture Capital and Technology

But at some point, you will have numbers; users, user growth, revenues, and revenue growth. You will also have a burn rate. As I was reading Josh Kopelman ‘s excellent post on the seed boom and Series A bust , I got thinking of some words of wisdom Mike Arrington once shared with me. He said “numbers always ruin a good story.” ” What Mike meant by this is you can raise a seed (or Series A) on a story.

What Is The Appropriate Time Horizon Of A Financial Model for VC’s?

Ask The VC

Early and pre-revenue: Investors are going to be most interested in your near term burn rate and how long their money is going to last. Recognize that your revenue is totally speculative so the “base case” is going to be zero revenue. However, if your revenue is modest, a smart investor is going to look at your gross margin also. In early cases, they are going to focus on cash / monthly-burn-rate.

What Is The Appropriate Time Horizon Of A Financial Model for VC’s?

Ask The VC

Early and pre-revenue: Investors are going to be most interested in your near term burn rate and how long their money is going to last. Recognize that your revenue is totally speculative so the “base case” is going to be zero revenue. However, if your revenue is modest, a smart investor is going to look at your gross margin also. In early cases, they are going to focus on cash / monthly-burn-rate.

What Everyone Should Take Away from Twitter’s 8% Staff Reductions

Both Sides of the Table

But like many companies over the past five years it hired aggressively and probably had some degree of straying off of a core strategy and some amount of excess jobs relative to its current revenue forecasts and opportunities. ” It goes like this: What is your net burn rate?

Strategy Roundtable For Entrepreneurs: Non-dilutive Financing Through Revenue Sharing

ReadWriteStart

This partnership speaks to a core philosophy of the program where we encourage entrepreneurs to get as much customer validation as possible before raising too much money, use other people's channels if you can get to them, don't burn too much cash, and all that good fiscal conservative stuff.

Why You Need to Ring the Freaking Cash Register

Both Sides of the Table

The company with no revenue and a $150k burn rate that raised $2.5 I often wonder why they didn’t find a way to bring in some revenue to cover costs. Newsflash – if you had $75k revenue / month you’d have 8 months cash left in stead of 4.

Driving Corporate Innovation: Design Thinking vs. Customer Development

Steve Blank

Startups operate quickly – at a speed driven by the urgency of a proverbial gun-to-their-head called “burn rate.” their burn rate (the amount of money they’re spending monthly minus any revenue coming in) and.

8 Good CFO Attributes That Every Entrepreneur Needs

Startup Professionals Musings

Every team member, from engineer to CEO, lives or dies based on cash flow, so the more they can tune their activities to revenue and expenses, the more valuable they become.

8 Questions Before You Join Or Invest In A Startup

Startup Professionals Musings

From my perspective as an investor, I recommend that every founder needs to know the answers to these questions, be open and honest in answering them thoughtfully, and without making excuses: What is the current runway and burn rate?

One (round) and Done

Bryce Dot VC

And not just a token “ramen” level of profitability: The startup is profitable, with January revenue of 10x its burn rate and sales expected to be in the millions for the quarter. we are seeing this trend at an increasing rate. Reliance on revenue keeps them close to their customers. And it rewards that early, and often painful, focus on revenue and sustainability with less dilution and more optionality.

10 Incentives For Entrepreneurs To Bootstrap Their Startup

Gust

Count on several months of effort and costly assistance to court investors, with less than a 10% success rate. At least wait until later, when you ready to scale, and have some “leverage” based on a proven business model, some real customers, and real revenue. Image via Pixabay.

Guest Post: Beware The Post Money Trap

A VC : Venture Capital and Technology

Users or revenues or whatever the most relevant metric for your business wind up not growing as fast as you think or worse yet hitting a temporary plateau, possibly even a small setback just as you need to raise more money. Your burn rate is pretty much the same thing. Unless you are super disciplined on how you spend the money you will have a higher burn rate the more you raise which makes subsequent funding harder (instead of easier).

Entrepreneur Business Forecasts Are Not Black Magic

Startup Professionals Musings

Yet every business requires revenue and volumes, as certainly as it requires a product to sell. Doubling revenue each year is a good target. Project your cash burn rate to keep at least 18 months between venture capital or angel investments.

Should Startups Care About Profitability?

Both Sides of the Table

70–80% of the costs of most startups are employee costs so what you’re really talking about when a company is unprofitable is that they are growing their staff ahead of their revenue. They don’t want high burn rates but they will never fund slow growth.

8 Ways An Investor Pitch Differs From A Product Pitch

Startup Professionals Musings

Your customers don’t care if you are targeting a billion-dollar market and growing at double-digit rates, but investors will skip small or shrinking opportunities. Projected revenues and expenses over the strategic period.

3 Ways Structure Can Take Your Tech Startup To New Heights

YoungUpstarts

by Gadiel Morantes , chief revenue officer at Early Growth Financial Services. Use burn rate as an example. If you don’t understand how much money your company is burning through each month, how can you expect to intelligently talk about your fiscal health?

IP 38

Validate The Pedigree Of A Startup Before You Jump

Startup Professionals Musings

From my perspective as an investor, I recommend that every founder needs to know the answers to these questions, be open and honest in answering them thoughtfully, and without making excuses: What is the current runway and burn rate?

Death By Revenue Plan

Steve Blank

You would think that would be enough to get wrong, but entrepreneurs and investors compound this problem by assuming that all startups grow and scale by executing the Revenue Plan. All discussion focused on “missing the revenue plan.”. Revenue Plan Needs to Match Market Type.

An Inside Scoop on the Funding Environment and What it Might Mean for You

Both Sides of the Table

Collectively we chose growth and the market was rewarding high growth rates over any other factor so we felt that we ought to bring in an experienced CEO who had taken companies public, who had led large, international sales organizations and who was poised to take Invoca to the next level.

10 Incentives For Entrepreneurs To Bootstrap Their Startup

Startup Professionals Musings

Count on several months of effort and costly assistance to court investors, with less than a 10% success rate. At least wait until later, when you ready to scale, and have some “leverage” based on a proven business model, some real customers, and real revenue.

Every Entrepreneur Dreams Of A Startup Without Risk

Startup Professionals Musings

Then you walk the delicate balance between burn rates, revenue flows versus expenses, investment in marketing, and employees. Outside of dreams, there is no real business opportunity without risk.

Entrepreneurs Today Don’t Need A Big Budget To Start

Startup Professionals Musings

With a little help from a friend, you can handle expenses, revenue, and payroll, with QuickBooks or a similar package. These steps alone can reduce your monthly burn rate by at least $10K.

8 Ways To Prepare Your Startup For Obstacles Ahead

Startup Professionals Musings

Common financial metrics include burn rate, gross margin, revenue growth and net profit. You also need a sales pipeline, customer acquisition costs and marketing costs as a percent of revenue.

How much should a growing SaaS business burn?

David Cohen

As an investor, I’m often asked what sort of burn rate is appropriate for a growing company. For SaaS companies in this situation, my rule of thumb for burn guidance is to have a one year ratio of net burn to net new MRR. In other words, if you are growing through $30K of net new MRR, I’d be comfortable as an investor with you burning $360K a month (30,000 x 12 = 360,000). Your $30K of net new MRR pays back this months burn over the next year.

.Net 23

Your financial health snapshot: the key metrics you need

Up and Running

Keep an eye on both your monthly burn rate and any major payables to make sure you’re financially viable in the immediate future. If you are running a monthly net loss, you need to closely monitor how much of your expenses aren’t being funded from revenues.

The growth imperative (but beware)

Seth Levine's VC Adventure

It was a great chance to compare notes, meet far flung colleagues (“cousins” as we sometimes refer to employees at different portfolio companies) and discuss a variety of topics effecting companies selling with a recurring revenue model. increase in revenue multiple.