What is the Ideal Cash Burn Rate? Finance Experts Weigh In
What is the Ideal Cash Burn Rate? Finance Experts Weigh In

April 27, 2023

Accounting & Finance, For Startups

What is the Ideal Cash Burn Rate? Financial Experts Weigh In

Donny | Graphite - Startup Accounting Services

Donny Tyra, Director at Graphite

As a startup, understanding and tracking cash burn is crucial to your long-term success. A cash burn rate is the rate at which organizations spend their cash reserves. Managing your burn rate wisely helps you plan future funding rounds and avoid running out of money prematurely. 

However, many startups struggle to find a reasonable cash burn rate to track and follow. You need to spend money in order for your business to grow. But if you spend too much too quickly, you could end up out of business before your startup reaches its full potential.  

Cash burn is also an important consideration when it comes to fundraising. Investors look at cash burn rate when evaluating startups they’re interested in. You need to keep your finances under control so investors remain confident in your leadership skills as a startup founder. 

One of the biggest challenges here is that there’s no definitively ideal cash burn rate. Every startup is unique and will need to burn through cash at a different pace.

To tackle this challenging topic, I rounded up several of Graphite’s finance experts, as well as our Founder Paul Bianco. Everyone has expertise in different areas of the startup ecosystem. 

Hopefully, sharing our team’s insights will help you determine the best way to handle cash burn so your startup can achieve success.

The VC Perspective: Keep Your Operations Lean

 

Paul | Graphite - Startup Accounting Services

Paul Bianco
CEO and Former Venture Capitalist

I encourage startups to operate on a very lean budget and keep their cash burn rate as low as possible to get their product to market. Ideally, you want to move away from capital markets and start generating revenue as quickly as possible. 

In this turbulent economy, there’s a lot of uncertainty among investors. 

You could have a great business and still struggle to attract investors due to factors outside of your control. Running a lean business is reassuring for VCs, and going to market quickly means you won’t have to rely on them for long. 

In the beginning, startups should keep their teams small and be selective about where they invest their money. For example, hiring a large sales and operations team gets expensive quickly, so having your CEO handle important sales tasks will help keep your costs down.

Additionally, it’s important to be open to different income streams to offset your cash burn rate. We’ve worked with SaaS startups that pursue consulting engagements, which helps them move away from the capital market and start generating revenue faster. 

Once you’ve brought your product to market, you can start to increase your cash burn rate threshold and invest further in growing your organization. This next phase of growth and investment may include outsourcing your accounting to free up your team’s time for sales and development.

The Controller Perspective: Consider Your Long-Term Goals

Donny | Graphite - Startup Accounting Services

Donny Tyra
Director of Technical Accounting

The ideal cash burn rate is difficult to quantify. Ultimately, you want to focus on burning less cash than the value you’re producing with your work. 

Many startups focus on the immediate future when thinking about cash flow, but it’s also helpful to think about your future goals and how you expect to grow. You want to consider how your cash burn rate will affect returns for both you and your investors. 

If your startup reaches a $20 million valuation, but you’ve spent $20 million in the process, you haven’t generated any returns. Startups should look for ways to increase their value without overspending in the process. 

Breaking your spending down into milestones will help you keep your cash burn rate in check. In the early days of your startup, your funding rounds will be your biggest milestones, although this will change after your product hits the market. 

Consider how much money you need to keep your organization running and generate value between these milestones. It’s important to leave some cash runway between funding rounds to meet payroll and handle any unexpected expenses. As your startup grows, keep in mind that you can use convertible notes or SAFE notes to extend your cash runway. 

This startup template will help you get ready for VC funding.

The CFO Perspective: Extend Your Cash Runway

Chris Vroman
Fractional CFO

Your cash burn rate should allow for 18 to 24 months of runway until you close another fundraising round or until your organization becomes cash positive, whichever comes first. This gives you enough time to reach important growth milestones before having to launch a new round of fundraising. 

In the past, a 12-month cash runway between fundraising rounds was the norm, but the fundraising process has changed over the past few years. Cash runways have gotten longer to accommodate these changes. Not only has the fundraising process gotten longer, but investors have also become more discerning. 

If you burn through your cash reserves in less than 18 months, you won’t have much time between funding rounds. This makes it very difficult for your company to keep growing. 

In my experience, every aspect of running a startup is harder, more time-consuming, and more expensive than you expect, so you need a cushion to keep you afloat when the unexpected happens. 

 

The Founder Perspective: Your Cash Reserves Are Your Lifeguard

Josh Leider
Head of Growth and Former Startup Founder

At my previous startup, we didn’t have an understanding of how long our cash runway was because our books were inaccurate. At one point, my co-founder and I both had to forego our salaries to keep the company afloat. In the end, this misunderstanding of our cash burn really hurt the business.

A cash burn rate is one of the most important metrics for startup founders to track, particularly in this turbulent market. Your cash reserves are your lifeguard, and understanding how much you have left to spend and when you’re going to run out of money is key. 

While there isn’t an ideal cash burn rate, you want to make sure that your accounting is accurate, as inaccurate books will lead to an inaccurate view of your cash position. Garbage in, garbage out. You also want to make sure you have a cushion to help you survive any ups and downs you encounter along the way.

Investing in your accounting and continuously monitoring your cash burn rate will help you make accurate projections and avoid missteps and mistakes.

 

Your Ideal Cash Burn Rate is Determined by Context

Your ideal cash burn rate will depend on a variety of factors, including:

  • What your organization does.
  • Where you fit into the current market.
  • Which growth goals you want to achieve. 

Bringing in an expert with proven experience in scaling startups will give you a clear and reliable plan for your cash burn strategy. 

Graphite provides expert accounting and CFO guidance to help you navigate the ups and downs of being an early-stage startup. Use our startup financial model template to get started, and reach out to learn more about our services. 

Need CFO or Accounting Help?

Born out of a VC fund, Graphite fully understands the strategic and financial needs of high growth companies. If you need accounting support or simply have a question about accounting at your company, feel free to connect with us!

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