Burn Rate
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Burn rate refers to the speed at which a company spends its cash reserves before it starts generating positive cash flow. It is most commonly used in the context of startups and early-stage companies that are operating at a loss while investing in growth. Burn rate is typically expressed as a monthly figure.
In depth
There are two types of burn rate: gross burn, which is the total amount of cash a company spends each month, and net burn, which is gross burn minus any revenue coming in. Net burn is the more critical figure because it reflects the actual rate at which cash reserves are being depleted. Dividing total available cash by the monthly net burn rate gives the company's runway — the number of months it can continue operating before running out of money.
Burn rate is one of the most closely watched metrics by startup founders and investors alike. A high burn rate isn't inherently problematic if the company is growing rapidly and deploying capital efficiently, but it becomes a serious concern when growth doesn't justify the spend. Managing burn rate requires balancing aggressive investment in growth with the discipline to extend runway long enough to reach the next funding milestone or profitability — a miscalculation here is one of the most common reasons early-stage startups fail.
A worked example
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Let's consider a real-world example of an early-stage technology startup that has recently closed a seed funding round and needs to understand how long its cash will last.
The startup has $1,200,000 in the bank after closing its seed round. Its monthly costs are as follows:
Salaries: $60,000
Office and infrastructure: $10,000
Marketing and growth: $15,000
Software and tools: $5,000
Gross Burn Rate:
Gross Burn Rate = Total Monthly Expenses
Gross Burn Rate = $60,000 + $10,000 + $15,000 + $5,000 = $90,000 per month
The startup is also generating $20,000 in monthly revenue from early customers.
Net Burn Rate:
Net Burn Rate = Gross Burn - Monthly Revenue
Net Burn Rate = $90,000 - $20,000 = $70,000 per month
Runway:
Runway = Cash in Bank / Net Burn Rate
Runway = $1,200,000 / $70,000 = approximately 17 months
The startup has roughly 17 months of runway. Knowing this, the founding team can plan backward from that deadline to determine when they need to begin their next fundraising process, which milestones they need to hit to attract investors, and whether any cost reductions are needed to extend runway if progress is slower than expected.