Burn Rate & Runway Projection

Understanding Burn Rate and Runway

Burn rate refers to the rate at which a company consumes its cash reserves before generating a positive cash flow from operations. It is a critical metric for startups and early-stage companies that are typically operating at a loss while they build their product and acquire users. Your burn rate essentially tells you how fast you are spending the money you have raised or saved.

There are two types of burn rate to be aware of: gross burn and net burn. Gross burn is your total operating costs each month. It's simply the sum of all your expenses. Net burn, on the other hand, is the total amount of money your company is losing each month, calculated by subtracting your monthly revenue from your monthly expenses. When investors ask about your burn rate, they are almost always referring to your net burn.

How VCs Evaluate Runway

Runway is the amount of time (usually measured in months) your company has before it runs out of cash, assuming your current net burn rate remains constant. Venture capitalists and investors pay close attention to this metric because it dictates when you will need to raise another round of funding. The general rule of thumb is the "18-month fundraising rule." Investors like to see that their capital will provide at least 18 months of runway, allowing you 12 months to achieve significant milestones and 6 months to raise the next round.

Default Alive vs. Default Dead

Paul Graham coined the terms "default alive" and "default dead." A default alive startup is one that, assuming its expenses remain constant and its revenue growth continues at its current trajectory, will achieve profitability before running out of cash. A default dead startup will run out of money before reaching profitability unless it raises more capital or drastically cuts expenses. Knowing where you stand is crucial for making informed business decisions.

Reducing Burn Rate and Extending Runway

If you find that your runway is getting too short (e.g., under 6-9 months), you need to take action. The most direct way to extend runway is to reduce your burn rate. This can involve cutting non-essential expenses, renegotiating contracts with vendors, or, in more severe cases, reducing headcount. Another approach is to increase revenue, but this is often harder to do quickly. Sometimes, a "bridge round" of funding from existing investors is necessary to extend your runway just enough to reach a key milestone that will allow you to raise a proper subsequent round at a favorable valuation.

It's important to monitor your burn rate and runway constantly. Things can change rapidly in a startup, and you need to be prepared to adjust your spending based on your actual performance compared to your projections.

Using our burn rate calculator, you can instantly see how your current cash balance, revenue, and expenses translate into your net burn and runway. The projected cash balance chart gives you a clear visual representation of your financial trajectory, helping you understand precisely when you need to act.

Frequently Asked Questions