I’m running my startup Ensafer, and burn rate is an important issue. Then I stumbled upon a blog post from Mark Suster about what’s the right burn rate at a startup company. The answer is obviously that there is now right answer, as Suster writes. I found his post so interesting that I decided to give a short summary on my blog. BTW, Mark Suster is one of my favourite bloggers with his “Both Sides of The Table“.
Let me start with a quote on a couple of important definitions about burn rate:
“Gross burn is the total amount of money you are spending per month. Net burn is the amount of money you are losing per month. So if your costs are $500,000 per month and you have $350,000 per month in revenue then your net burn (500-350) is equal to $150,000. The reason that most investors quickly zero in on net burn is that if you have $3 million in your bank account and have a net burn of $150,000 per month you have more than 18 months of cash left provided your net burn stays constant. Conversely if you’re burning $600,000 per month (yes, some companies do) then you only have 5 months of cash left.”
According to Suster the biggest thing to know is that companies who are scaling quickly in revenue, and with a high gross margin, often should invest as much capital in growth as they can manage when they find a product/market fit. When the company is growing at a very fast scale you want to capture market share before competition sets in, according to Suster. Your goal is to invest in the following:
- Engineering: To maintain your product lead
- New locations: To capture markets before others
- Marketing: To capture consumer attention before others do
All of these activities often consume cash in advance of the revenue they generate. So stay ahead of the game.
At the end of his post he’s putting it all together by recommending a framework to guide you:
- Pay close attention to your runway
- Understand how venture debt might shorten your projections
- If Pre-VC be mindful that in tough times capital can take longer to raise
- If you have raised VC make sure you have open communications on funding & plan with your VC the right level of burn & runway
- If you truly are a “growth company” & well positioned then go for it. Just make sure you’re still able to pull the rip cord if need be