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What is the Burn Rate for startups?
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Burn rate is the rate at which cash is decreasing. Especially in early stage startups, it’s important to know and monitor burn rate as companies fail when they are running out of cash and don’t have enough time left to raise funds or reduce expenses. As a reminder, here’s a simple calculation:

Monthly cash burn = cash balance at the beginning of the year minus cash balance end of the year / 12

It’s also important to measure net burn vs. gross burn:

Net burn [revenues (including all incoming cash you have a high probability of receiving) – gross burn] is the true measure of amount of cash your company is burning every month.

Gross burn on the other hand only looks at your monthly expenses + any other cash outlays.

Investors tend to focus on net burn to understand how long the money you have left in the bank will last for you to run the company. They will also take into account the rate at which your revenues and expenses grow as monthly burn may not be a constant number.

See also Fred Wilson on burn rate.

by Wooden (2,800 points)

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