Two important concepts for any startup
Burn rate is how much money your company is spending each month.
So that means that your burn rate is simply the amount that comes into your bank account, minus the amount that goes out, for each month. This number is usually pretty constant. If there is some variability you can average over several months to get a good representation of your monthly burn rate.
For startups, the burn rate is going to be a negative number. This is the amount you are “burning” each month to stay in business.
Runway is how long you have until you go bust.
To calculate your runway, take the amount of money you have in the bank and divide it by your average monthly burn rate. This is how long your startup could continue to function if no more money came in the door.
Accordingly, runway is stated in months. For example, you might say: “we have 10 months of runway.” In that case that would mean that if you stopped having any additional income, your startup could sustain its current burn rate for 10 months.
Let’s work this example backwards to see if it makes sense. You have 10 months of runway. Let’s say your burn rate is $10k per month. That would mean that you have $100k in the bank. Make sense?
Why these numbers matter
These two numbers are crucial metrics for startups and you should know what they are for your company at all times.
These two numbers will be two of the first things investors ask about.
You may even find that prospective employees ask about these before they are willing to join your startup. After all, choosing to work for one company means choosing not to work for countless others. Even if they are getting a paycheck it’s still an investment. High performing employees know that they have options and will want to be sure they are not betting on a sinking ship.
Runway also tells you when you should start raising funds again. As your runway shortens, your leverage with prospective investors goes down and their leverage goes up. Or to put it bluntly: the less money you have in the bank the more desperate you will become.
Ideally, you want to have 6 months to a year of runway when starting the process of raising money. Investment rounds can be slow and the earlier you start these conversations, the better.
One tactical consideration is on marketing focus. Startups rightly tend to focus on things that generate revenue first and foremost. This means that vanity achievements like getting an article in Techcrunch may be a lower priority. But if you know you have a year of runway and want to start raising money in the next few months, it might be worth switching your marketing energy into efforts that will get your company in front of more VCs.
That’s my dead simple rundown on burnrate and runway for startups. Hope it was helpful.