When investors and entrepreneurs talk about “burn rate”, they’re generally referring to the amount of cash a company consumes through its normal operations every month. For many venture-backed companies, they have a negative burn rate meaning that they are expending more cash than they are collecting. The obvious rationale to burn cash is that by spending more now, your company will be able to grow revenue faster, acquire market share and separate from the competition.
Investors will talk about “high burn rate” companies, “capital efficient” companies, companies that are “burning too much”, etc. But, how does this translate to hard numbers? Here’s my rule of thumb:
- Cash Flow Positive: If the company is growing and cash flow positive – congratulations. The model has been proven, you never have to raise capital again.
- $0–$250k burn rate: This is still a “capital efficient” company – a $10M round could last 3–4 years which is an eternity.
- $250k-$500k burn rate: This is average. Many young venture-backed companies are in this zone. A $10M round lasts 1.5–2.0 years.
- $500k-$750k burn rate: This is on the high side. You could be accused of “burning too much”. A $10M round lasts a 1.0–1.5 years. That’s a tight timeframe to create value.
- $750k-$1M burn rate: This is a “high burn rate” company. A $10M round doesn’t even last a year. There’s no room for error.
- $1M-$2M burn rate: Many investors won’t touch a company burning this much. The exception is if the spend is due to aggressive marketing against a known acquisition model that is profitable against the lifetime value of a customer.
- $2M+ burn rate: Most investors will run like the wind.
While some sectors such as biotech, cleantech and communications services don’t follow these norms – it’s a pretty good benchmark for most emerging technology companies.