Burn Rate: The Complete Guide for Startup Founders
Burn rate is the rate at which your startup spends cash. It's the most critical metric between you and running out of money.
If you don't know your burn rate, you're flying blind.
What is Burn Rate?
Burn rate measures how quickly your company is spending its cash reserves. It's typically expressed as a monthly figure.
Formula:
Burn Rate = (Starting Cash - Ending Cash) / Number of Months
There are two types:
Gross Burn Rate
Total monthly cash outflow, ignoring revenue.
Gross Burn = Total Monthly Operating Expenses
If you spend $150,000/month on salaries, rent, and operations, your gross burn is $150,000.
Net Burn Rate
Monthly cash outflow minus revenue.
Net Burn = Gross Burn - Monthly Revenue
If you spend $150,000 but bring in $50,000 in revenue, your net burn is $100,000.
Most investors care about net burn rate.
Why Burn Rate Matters
- Determines Runway: Cash / Net Burn = Months until death
- Signals Efficiency: High burn + low growth = trouble
- Informs Fundraising: You need to raise before you're desperate
- Guides Hiring: Each hire increases burn permanently
Benchmark Burn Rates by Stage
| Stage | Monthly Burn | Notes | |-------|-------------|-------| | Pre-seed | $10K - $50K | Founders + contractors | | Seed | $50K - $150K | Small team (3-8) | | Series A | $150K - $500K | Building product + GTM | | Series B | $500K - $2M | Scaling sales + eng | | Series C+ | $2M+ | Rapid expansion |
These are US-based SaaS benchmarks. Your mileage may vary.
The Burn Multiple
A more useful metric than raw burn rate:
Burn Multiple = Net Burn / Net New ARR
| Burn Multiple | Assessment | |---------------|------------| | < 1x | Excellent efficiency | | 1x - 2x | Good | | 2x - 3x | Acceptable for early stage | | > 3x | Concerning |
A burn multiple of 2x means you're spending $2 for every $1 of new ARR. That's acceptable early, but needs improvement.
How to Reduce Burn Rate
1. Audit Every Expense
Go through bank statements line by line. You'll find:
- Unused SaaS subscriptions ($50-500/month each)
- Over-provisioned cloud resources
- Redundant tools doing the same thing
2. Delay Non-Essential Hires
Each engineer costs $150K-250K/year fully loaded. Each hire should have a clear ROI.
3. Negotiate Everything
- Ask vendors for startup discounts (most have them)
- Negotiate payment terms (net 60 instead of net 30)
- Consider annual prepay for discounts on critical tools
4. Right-size Your Office
Remote or hybrid can save $1,000-2,000/person/month in expensive cities.
5. Outsource Non-Core Functions
Contract work for:
- Design
- Content
- DevOps (part-time)
- Finance/accounting
Burn Rate Red Flags
šØ Danger signs:
- Burn increasing faster than revenue
- Less than 6 months runway without clear path to extend
- Burn multiple consistently above 3x
- Cash reserves declining faster than projected
- Hiring ahead of revenue
Calculate Your Burn Rate
Use our Runway Calculator to:
- Calculate current burn rate
- Project when you'll run out of money
- Model different scenarios
- Plan your fundraising timeline
The Rule of 40 Connection
For later-stage companies, burn rate connects to the Rule of 40:
Revenue Growth Rate + Profit Margin >= 40%
If you're growing 60% YoY, you can sustain -20% margins (high burn). If growing 20%, you need +20% margins (profitable).
Key Takeaways
- Know your net burn rate - check it monthly
- Track burn multiple - more useful than raw burn
- Maintain 12-18 months runway minimum
- Start fundraising at 9 months runway
- Every dollar saved is a dollar that extends your life
Related Tools:
- Runway Calculator - Project your death date
- Unit Economics Calculator - Ensure profitable growth
- Equity Calculator - Understand dilution from raises