What is a Good Burn Rate for Startups?

The burn rate, or speed at which your startup spends its cash to cover operating expenses, is a key metric that you’ll want to track as a founder. However, there’s no universal burn rate that your startup should strive for — a “good” burn rate depends on a variety of factors, such as funding stage, growth trajectory and your strategic goals.

What’s more, there’s a fine line between spending to grow and spending too much, which can prematurely exhaust your cash reserves. The bottom line is that a good burn rate is more about context than it is anything else. Early startups tend to burn more cash to build their business, while startups in their later stages of evolution often see spending align with revenue growth. Some startups may even strive for more cash runway during periods of uncertainty to help offset any challenges that could arise.

Bottom line: Burn rate is a key metric that’s essential for both investor conversations and internal planning. Managing it properly should be a priority and not an afterthought for your startup.

What is Burn Rate and Why Does It Matter?

Burn rate refers to the rate at which a startup company spends its cash before achieving profitability or a positive cash flow. Think of it as your startup’s “cash clock.” It’s especially important for early-stage startups that operate at a loss as they scale and gain market share, particularly when planning fundraising rounds to stay solvent. A healthy burn rate is a sign of good financial health to investors and helps guide founders in making crucial decisions about spending and growth.

It’s estimated that nearly 30 percent of all startups fail because they run out of cash too quickly, a stat that underscores the importance of properly managing your burn rate and cash runway. It’s a metric that is often heavily scrutinized during due diligence to assess your startup’s risk and sustainability.

How to Calculate Burn Rate

From gross burn rate to net burn rate, there are various types of burn rate that you should be aware of and know how to calculate. Gross burn rate, for instance, is the total monthly operating expenses, which include salaries, rent, software and marketing costs. Net burn rate, conversely, is calculated by subtracting monthly expenses from monthly revenue. Think of it like this: While gross burn helps inform your total cost, it’s net burn that offers the more realistic overall picture of your cash runway and serves as a key indicator of how long you can survive before you need more funding. Use the burn rate formula consistently so the trend in monthly burn rate stays visible.

Gross burn is more important for pre-revenue startups, while net burn tends to be more important for more mature startups that are generating income. The formulas for each are as follows:

• Gross burn rate = Total monthly operating costs
• Net burn rate = Total operating costs – total revenue

Burn Rate Calculation Example

Here’s a burn rate calculation example that SaaS startup founders should be able to relate to: Let’s say you have $50,000 in salaries, $10,000 in rent, $15,000 in software costs and $25,000 in marketing costs. Add up all these operating costs, and you’d have $100,000 worth of gross burn.

To calculate the net burn, you’d need to first determine your revenue over the same period. For the sake of this example, let’s say that it’s $30,000. Subtract the $30,000 from the $100,000 gross burn, and your net burn is $70,000.

Consider calculating your net burn on a monthly basis and using averages to model 3 to 6 months into the future, accounting for variability. This can better help you forecast and determine when you need to start thinking about fundraising again.

What is a Good Burn Rate by Funding Stage?

There is no universal “good” burn rate — good is largely defined by the stage of your SaaS startup and the funding stage it will be entering.

For instance, a seed-stage startup should aim for a cash runway of 12-18 months. This means that your monthly burn should be anywhere from 1/12 to 1/18 of your total cash, allowing you enough time to establish product-market fit before the next fundraising round. Seed-stage net burn is typically between $50,000 and $100,000 per month as companies seek to gain market share.

Series A burn rates may be even higher as startups look to scale their operations. Series A funding typically ranges from $150,000 to $300,000 per month.

As your startup enters growth stages, it’s likely to burn even more cash, possibly as much as $500,000 to $1 million per month. However, this burn also likely correlates with revenue.

How Burn Multiple Reveals Efficiency

Burn multiple is a metric that measures your SaaS startup’s capital efficiency by showing how much cash you’re burning to generate each dollar of ARR. A low burn multiple (1-1.5) tends to indicate a highly efficient operation that requires less money to grow revenue, while a higher multiple (greater than 2) signals inefficient spending and issues with product-market fit, sales or even cost control. Tie this back to customer acquisition cost and lifetime value to validate whether spending is translating into durable revenue.

However, a higher burn multiple isn’t always a bad thing. If a high rate is reflective of aggressive and efficient growth or strategic investments, it can present favorably.

The formula for determining the burn multiple is as follows:

• Burn multiple = Net cash burn / Net new ARR

How Burn Rate Connects to Cash Runway

How fast your startup burns through cash has a direct impact on the amount of capital it has on hand between fundraising rounds. While burn rate measures the pace a SaaS startup goes through its cash reserves, the cash runway demonstrates the number of months that your startup can continue operating with its capital.

To determine your months of runway, use this formula:

• Months of runway = Cash on hand / monthly net burn

It’s suggested that startups maintain at least 18-24 months of runway if they’re working with extended fundraising timelines. However, you may want to ensure an even longer period during uncertain times. Once your startup reaches the 9-12 month zone of runway remaining, it’s time to begin the fundraising process.

Factors That Influence Your Startup’s Burn Rate

There are more factors beyond basic operational costs that impact your SaaS startup’s burn rate. There’s payroll, which can account for 60-70 percent of burn for many startups. There are also varying vendor payment terms and customer billing cycles that can impact cash flow timing.

For instance, Net 30 means that payment is due in 30 days, while Net 60 means it’s due within 60 days from the invoice date. While Net 30 leads to quicker cash flow, it also results in less customer flexibility. Net 60 provides more cash flow, but can strain supplier finances.

SaaS startups tend to burn through cash more slowly than other types of startups, which is another key factor that can influence your burn rate and strategy.

When a Higher Burn Rate Makes Sense

Higher burn rates aren’t always bad things. At times, your SaaS startup can justify a higher burn rate by demonstrating strong unit economics and proving a strong product-market fit. If growth metrics support fast spending, many investors will even encourage it. However, keep in mind that you shouldn’t just spend money for the sake of spending it. A higher burn rate only makes sense when each dollar that’s spent is able to generate a measurable return.

How to Reduce Burn Rate Without Sacrificing Growth

How can your SaaS startup optimize cash flow without losing momentum? There are several strategies to consider enacting, such as:

• Negotiate annual customer contracts to improve cash flow timing. This can significantly improve cash flow timing and allow your startup to structure payments for quicker receipt or better alignment with your expenses. This can boost liquidity and reduce the risk of payment delays.
• Implement a robust process for auditing software subscriptions and vendor agreements for consolidation opportunities. This is a key component of software asset management and vendor management. It can help eliminate unnecessary expenses, ensure compliance and optimization, and improve forecasting and budget accuracy.
• Emphasize prioritizing spending that directly contributes to revenue. Reduce non-essential expenses or postpone non-critical purchases, while prioritizing investments in areas that drive growth. Just be sure to cut inefficiencies that won’t impact customer value.

Take Control of Your Burn Rate Before Investors Ask

Are you ready to take better control of your burn rate? Graphite Financial is here to help. As a full-service financial provider that specializes in working with startups, we’ll help you proactively assess and optimize your burn rate in a way that signals financial maturity to investors. Graphite’s fractional CFO services help support startups in modeling scenarios, extending runway and preparing for due diligence. We work with all types of startups and can align our professionals to serve those in industries where they have specific experience, thereby offering more value.

Contact Graphite today for more information and to schedule a consultation. We’re standing by and ready to conduct a burn rate assessment tailored to your startup’s unique needs and funding stage. Contact us today for more information.

FAQs

What is considered a healthy burn rate for a seed-stage startup?

Generally, a seed-stage startup should aim for a cash runway of 12-18 months. This means that your monthly burn should be anywhere from 1/12 to 1/18 of your total cash, allowing you enough time to establish product-market fit before the next fundraising round. Generally, you want to start thinking about fundraising when you get in the 9-12 month range of cash runway left.

How do I calculate my startup’s burn multiple?

A burn multiple measures capital efficiency by showing how much cash your startup burns to generate a dollar of ARR. To determine the burn multiple, divide your net cash burn by the ARR for a dedicated period. This will show you how much cash you spend to generate each dollar of new ARR. A lower number, which is common among SaaS startups, typically indicates more efficient growth and is viewed favorably by investors.

What’s the difference between gross burn rate and net burn rate?

Gross burn rate is your total monthly spending, while net burn rate is the amount of cash that’s left after you subtract your monthly revenue from those expenses. Think of it like this: While gross burn helps inform your total cost, it’s net burn that offers the more realistic overall picture of your cash runway and serves as a key indicator of how long you can survive before you need more funding.

How much runway should I have before starting a fundraising round?

Consider beginning the fundraising process when your startup has anywhere from 8 to 12 months of cash runway remaining, which should provide a total runway of 18 to 24 months from new capital to comfortably hit milestones and build a buffer for unexpected challenges. Depending on your startup’s status, you may even consider a target runway of 24-36 months, especially during times of uncertainty.

Can a high burn rate ever be a positive signal to investors?

Yes, a high burn rate can be a positive sign for investors if it’s tied to aggressive and efficient growth or strategic investments in certain areas, demonstrating scaling. However, a high burn rate is often considered a negative sign if it suggests reckless spending or a lack of financial control. Keep in mind that investors want to see money spent on building value, not just maintaining operations.

How often should I recalculate my burn rate and runway projections?

Consider recalculating your burn rate and runway projections on a monthly basis or immediately after a significant financial change occurs or a key assumption is updated. Monthly reviews help track variance and can prevent surprises from sudden spikes or revenue dips. Rolling forecasts can help you update your financial model frequently enough to keep it accurate and capture non-monthly expenses to ensure you always have a pulse on your startup’s burn rate.