Thinking About Thinking

Burn Rate Norms

Posted in Technology, Venture Capital by larrycheng on December 16, 2009

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.


5 Responses

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  1. julespieri said, on December 17, 2009 at 12:23 am

    Geez, our burn rate is so low it merits a separate category. Investors always call us capital efficient but I have to admit I did not appreciate exactly HOW efficient we are until I saw this chart! Thanks Larry. I am going to hit this point harder in my next pitches.

    OK, tomorrow it’s donuts for the whole team, on the company.

    • larrycheng said, on December 17, 2009 at 8:49 am

      Go crazy Jules! 🙂 I knew you guys would be in the low burn category – I’m sure you run it more like a bootstrapped business than a VC-backed one. Kudos to you.

  2. Lee Hower said, on December 17, 2009 at 5:09 pm

    Good ranges for norms IMO. As a total outlier, at our worst point at PayPal (late 2000) we were burning in excess of $10M *a month*. This was a different time, in that we’d raised $100M venture round at the peak of the bubble in early 2000, and the majority of cost wasn’t staff or overhead but rather direct costs associated w/ processing credit card payments and fraud liability. And ultimately we translated all that usage into significant revenue and profit.

    But I sincerely doubt many startups today would have either the capital base or investor/BOD willingness to ever reach that level of net expenditure.

    • larrycheng said, on December 17, 2009 at 5:15 pm

      $10M per month?! That is impressive Lee. Did PayPal have a negative gross margin or something? That is hard to do for a young company. There have definitely been successful companies with big burn rates. Akamai certainly had huge capex. Salesforce was burning plenty of cash at $100M in revenue. I wonder how those companies would look today if they were started in this environment. Capital is tougher, but there’s always capital for companies that look like they’re going to be gamechangers.

  3. Esther Swaggerty said, on March 3, 2010 at 6:38 pm

    Nice Post. I searched the entire net for something like “Burn Rate Norms Thinking About Thinking”. Thx a lot, it helped me out.

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