Burn rate
burn rayt
How fast a startup spends cash each month. Gross burn is total spending. Net burn subtracts revenue. The clock on your runway.
Burn rate is how much cash your company spends per month. Gross burn is total monthly spend: salaries, rent, cloud hosting, marketing, everything. Net burn subtracts revenue: if you spend $500k/month and earn $200k/month, your net burn is $300k/month.
Net burn is the number that matters. It tells you how fast your bank account is shrinking. A company with $6M in the bank and $300k/month net burn has 20 months of runway. That is 20 months to reach profitability, raise more money, or shut down.
Investors obsess over burn rate because it determines how long their investment lasts. A Series A investor who puts in $10M wants to know that money will last 18-24 months. If the company burns through it in 12 months without hitting milestones, the next round will be painful.
Examples
A Series A startup reviews its burn.
The startup spends $400k/month on salaries, $50k on cloud infrastructure, $30k on office, and $20k on marketing. Gross burn: $500k/month. Revenue is $150k/month. Net burn: $350k/month. With $7M in the bank, runway is 20 months.
A board meeting about controlling burn.
The CEO reports net burn increased from $200k to $350k over three months after hiring an enterprise sales team. Revenue has not moved. The board asks: "When does this investment start generating pipeline?" If the answer is more than two quarters away, the burn rate is a problem.
Burn rate during a downturn.
In 2022, investors told portfolio companies to cut burn and extend runway to 24+ months. A company burning $800k/month with $10M in the bank had 12.5 months. They cut to $500k/month through layoffs, extending runway to 20 months. The cuts bought time to reach profitability.
In practice
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Frequently asked questions
What is a healthy burn rate?
It depends on your stage and growth rate. A company growing 3x year-over-year can justify higher burn than one growing 50%. The rule of thumb: your burn should give you at least 18 months of runway after your last fundraise. If you have less than 12 months, you should be actively cutting costs or raising money.
What is the difference between gross burn and net burn?
Gross burn is total monthly spending. Net burn subtracts revenue. A company spending $500k/month with $200k/month in revenue has $500k gross burn and $300k net burn. Net burn is what determines how fast your cash disappears.
Related terms
How many months a startup can operate before running out of cash. Cash in the bank divided by monthly net burn.
Total monthly cash expenditure before any revenue. Every dollar that leaves the company's bank account.
Monthly cash spending minus monthly revenue. The actual rate at which your bank account is shrinking. The number that determines runway.
The actual movement of cash in and out of your business. Different from revenue because it includes timing of payments, not just accrual accounting.
The revenue and cost associated with a single customer. Profitable unit economics mean each customer generates more revenue than they cost to acquire and serve.
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