⚠️ You’re in the Danger zone
Finding Product/Market fit
If you assume that you need six months of data to show a trend, you only have six months to find product/market fit.
This means you must prioritise high ROI growth initiatives. Drop anything without an immediate uplift, and monitor your unit economics. Growth at all costs is dead.
Capital efficiency
If you don’t reach default alive, it’s unlikely you will be able to fundraise. Keep the team small, it buys you time and keeps you nimble (under ten as a guide).
Fundraising
If you plan to fundraise, you may be doing it at the lowest point of the economic downturn.
🚧 This is not good
Finding Product/Market fit
If you assume that you need six months of data to show a trend, and six months to fundraise, you don’t have long to find product/market fit.
This means you must prioritise high ROI growth initiatives. Drop anything without an immediate uplift, and monitor your unit economics. Growth at all costs is dead.
Capital efficiency
If you don’t reach default alive, it’s unlikely you will be able to fundraise. Monitoring your burn multiple as you grow is more important than before. Keep the team small, it buys you time and keeps you nimble.
Fundraising
If you plan to fundraise, you may be doing it at the lowest point of the economic downturn.
🥴 This is okay
Finding Product/Market fit
If you assume that you need six months of data to show a trend, and six months to fundraise, you have ample time. This is not a time to be conservative though; invest in your team and set ambitious (+30%) monthly growth targets.
Capital efficiency
Reaching default alive is still important as it’s unlikely you will be able to fundraise without it. You have the time to optimize your burn multiple as you grow - this is important now if you’re venture-backed.
Fundraising
You have time to create a good fundraising plan. Shortlist 20 investors you want on your cap table and form relationships with them early!
Monthly burn rate is the amount of cash you're spending every month. These are outgoings or expenses like salaries, subscriptions, rent, etc. Moving money between accounts or inter-company transfers do not contribute to your cash burn as they aren't leaving your business.
The burn rate calculation uses the starting balance at the beginning of the time period and the closing (or current) balance at the end of the period. For example, a closing balance of $200,000 in January and closing balance of $100,000 in May means you burned ($200,000 - $100,000) / 4 = $25,000 on average every month.
burn rate = (start balance - end balance) / number of months
Burn rates are important for learning whether a business is spending too much. Venture-backed startups will raise large amounts of funding and investors expect to see a healthy amount of spend over time.
The gross burn rate is simply the average amount of spend on expenses made per month. That's it. For example, if you're spending $1,000 one month, $1,400 the next then $1,200 the month after, your gross burn rate is ($1,000 + $1,400 + $1,200) / 3 = $1,200. This is equivalent to the first calculation but uses spend rather than balances.
If your end of month balances reflect the final amounts left in your bank accounts after any revenue or income, then the calculator above is showing you your net burn rate. Net burn is gross burn but includes incoming cash, so it may be slightly lower if you're generating revenue.
Runway is the number of months left from today until you hit a balance of zero. By knowing your cash burn rate and current balance, you can calculate runway using a simple formula.
months of runway = current balance / burn rate
Understanding a startup's runway is important for timing funding rounds and balancing efforts between increasing revenue and decreasing burn. A high company burn rate will reduce runway and lower the chances of survival.
The average startup will have around 12-18 months of runway between funding rounds, but this is very dependent on the industry, nature of the business and spend strategy. Average burn rates are harder to predict as companies obtain different amounts of capital.
High burn rates are not necessarily a bad thing. It should hopefully demonstrate a company is appropriately investing its capital in, for example, wages and marketing efforts that feed back into increasing revenue so that it can reach profitability sooner.
