How to control startup burn rate? How can you get control of and optimize your startup burn rate?
Burn rate is one of the most fundamental metrics in startups. It will make or break your venture.
In fact, burn rate, and running out of money are still not only really why startups fail, but consistently the biggest risk.
Understanding your burn rate is vital. As is knowing how investors view it, versus just from your perspective. You must get the pros and cons of high burn rates. Plus, how to control yours, and cut it back when the need arises.
The Ultimate Guide To Pitch Decks
What Is Startup Burn Rate?
Burn rate is one of the most commonly used metrics in startups. Put simply; it is how much cash your company is burning.
There are technically two variations of burn rate. Gross burn, and net burn rate.
The gross burn rate is how much cash your company is spending each month. Net burn is how much negative cash flow your company is bleeding each month. Which is calculated by subtracting your expenses from any positive revenue coming in.
Both are important. Knowing how much is being lost each month to stay in business is vital to know. Overall expenses show how you are spending, and what liabilities there are in the business.
See How I Can Help You With Your Fundraising Efforts
See How I Can Help You With Your Fundraising Efforts
Startup Burn Rate & Runway
A startup’s burn rate is used to calculate its ‘runway’.
Runway refers to how many months a company can continue to keep operating with the money it currently has in the bank.
So, if your burn rate is $100k a month, and you have $1M in the bank, you have 10 months of runway left.
It is critical that startups constantly keep an eye on their runway. It is vital for beginning new fundraising campaigns in time. As well as being sure to raise enough to last until another round can be closed.
When you are out there pitching, you can be sure that inquiring about your runway will be among the most common questions that startup investors will have.
Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
When A High Burn Rate Is Acceptable To Investors
While it may be counterintuitive to traditional business and mathematical sense, recent years have seen high burn rates being trendy with Silicon Valley investors.
Growth is essential in business, especially for startups. More spending can certainly help spur more growth. That may include spending more on marketing, hiring, the development of new products, and expanding into new markets.
In some cases, a high burn rate in the short term may seem essential in order to make things work and to survive. Such as achieving the minimum required mass to make a platform or marketplace startup work. As can be beating the competition. Either by getting bigger than them faster, or starving them of business.
A high upfront burn rate may also be acceptable if there is exceptionally high long-term customer value. Along with very high customer retention rates. Just be very careful that the value and returns are really there.
Startup Burn Rates & Fundraising
Whether you know how to control a startup burn rate is one of the things potential investors want to know. That’s when you are out there fundraising and pitching.
While your burn rate may barely be mentioned in your pitch deck, investors will ask. You need to be prepared to answer well and explain.
Your burn rate can be used to justify a raise. Either because you need more money from current investors in an extension round, or because it is low and you are in a healthy and profitable position.
Your burn rate and the runway are also relevant to how much you need to raise to get to another round. If you forecast you will be burning $1M a month over the next year, then you will likely be raising at least $12M to $36M just to get through.
Pay close attention to your runway, and stay ahead of it. It can take a lot longer to get investors onboard and get a round closed than you might think. If you get down to just a month or two of payroll left in the bank, then investors can demand just about any terms they want.
If you don’t take it, you’ll be out of business. In contrast, if you have a long runway, you will be negotiating from a position of strength and will be able to demand better terms.
When Startups Need To Reduce Their Burn Rate
While there may be moments when a high burn rate is acceptable, there are also certainly going to be times when a startup urgently needs to reduce its burn rate.
Perhaps the most obvious time when expenses and burn rate need to be cut are when there is a crisis or other events, unexpected cut forecasts, and impact income. That may be pandemic lockdowns like COVID, economic recessions and depressions, or disruptive competition and changes in customer behavior and demand.
Lasting through to closing another round of funding is another of these moments. This is tough. This is a period when you need your company to be growing faster and more consistently than ever. Though, if you don’t make it through due diligence and to getting that money in the bank, you are out of business.
Periods of financial crisis, credit droughts, and when capital markets tighten up can make this even more pressing. You may find you have to survive a lot longer without new cash coming in than you anticipated. Knowing how to control startup burn rate can be a huge asset.
How To Control Your Startup’s Burn Rate
1. Effective Financial Modeling
Use financial modeling and forecasting to accurately anticipate your expenses and spending needs. Especially in relation to the goals and milestones you want to achieve.
Know what it is going to take to hit those objectives, and avoid being sidetracked and spending wildly on things that aren’t directly taking you there.
2. Create Budgets
Create a budget to plan your spending. Be sure to work with your board and department heads to allocate reasonable budgets to each area of your operations. Be sure everyone is on board with them, knows how much they have to work with and not, and what they are expected to achieve with that budget.
3. Be Disciplined In Your Spending
Be sure that you rigorously stick to the budgets that you’ve created. If you don’t, your burn rate will get out of control fast. Everything can go downhill quickly from there.
4. Be Sure You’ve Built In A Financial Cushion
One thing you will quickly learn in business, if you haven’t already, is that everything takes longer than you think, and costs more than you think.
Avoid letting this financially ruin you by building a cushion and budget for this in advance. This will help ensure that you don’t go over your budget and lose control of your burn rate when the unexpected happens. Because you can count on that happening. So, take the time to understand how to control startup burn rate.
How To Minimize Your Startup’s Burn Rate
When it is time to cut your burn rate, there are a variety of measures a startup can take to get it under control.
This includes the following.
1. Make Layoffs
Laying off employees is one of the most obvious ways to cut costs and your burn rate in a big way, and quickly.
Some have laid off thousands, or even half of their teams, in order to get their burn rate back under control.
It can be one of the toughest things that you’ll have to do as a founder. Though if you look at it as saving the business and mission, and put it in the proper perspective, it will be much easier.
Great and loyal talent is hard to find and even harder to keep. So make cuts wisely. Rather than continue to demoralize the remaining team members, it is better to make big cuts once, and then keep moving forward with the right size team.
One way to do this is to consolidate positions. For example, you may be able to consolidate your SEO, copywriting, PR, and marketing strategy, all into one role for a while.
2. Optimize Your Marketing
Do not cut marketing in times like these. It will just speed up your demise. Rather optimize it, and focus on what is going to produce the best results and highest ROI.
You may need to start from scratch with a new plan and hire new people. Before you do, be sure to ask your current team what’s wrong, and what could be done better.
Knowing how to run the business economically is only one of the strategies for ensuring success for your company. If you’re ready for more information about why startups succeed, check out this video I have created.
3. Optimize For Conversions
Marketing and gaining traffic, or even leads, is one thing. That’s the easy part. Getting actual sales is a different thing.
Be sure to optimize for conversions. Even before launching new marketing and advertising campaigns. Optimize your website, PR, and sales process. Question everything. Don’t just copy others. Be sure the data supports your plan.
For example, TikTok, Facebook, and Google Ads may not be producing any real sales. Nor may you be demanding prospects go through demos before they buy from you. They may not be right for you.
Test before you scale new things.
4. Kick The Office To The Curb
You don’t need an office. You do not need an office with in-house employees that waste most of their day on everything else but work and are incentivized to fill seats or clock hours, rather than being their most productive, and doing their best work.
Even Twitter recently announced it was closing its offices in Seattle and had stopped paying rent on its HQ in San Francisco.
If it’s possible to build a $40B plus business without physical offices to cage your team in, then they are just a vanity luxury that you cannot afford.
Instead, when you do get your team members together, focus on team building and bonding experiences. Whether that is archery, kayaking, hiking, glamping, or eating together.
In this process, you will eliminate all associated in-house employee costs and liability.
5. Optimize Insurance
Values of things change fast. So do the appetites of different insurers. Review your coverages and potential discounts, and shop around for better deals.
6. Cancel All Subscriptions
There is a great chance that both your company and your founding team as individuals have numerous subscriptions you rarely use. Including a variety of software subscriptions. It may be easiest to cancel them all. Then evaluate the solutions that offer integrated answers to your real needs and daily usage.
Working out how to control startup burn rate gets you halfway there.
Burn rate is one of the most important metrics in startups. Be sure you know what your burn rate is, how investors view it, and when to burn more or get your spending under control fast.
Fortunately, there are many ways to control your burn rate. As well as to reduce your burn to improve your company’s financial health, and stay ahead of the curve.
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