Burn rate is the speed at which a startup spends its available cash reserves, typically measured monthly, representing the net amount of money leaving your business each month before reaching profitability or securing additional funding.
Burn rate is the speed at which your startup consumes its cash reserves, typically expressed as a monthly figure. If your company spends €50,000 more than it earns each month, your burn rate is €50,000. This metric is fundamental to startup financial planning because it directly determines how long your business can survive before running out of money.
Understanding your burn rate helps you make critical decisions about hiring, marketing spend, and when to raise your next funding round. Investors will always ask about your burn rate during due diligence because it reveals how efficiently you're deploying their capital and how much runway you have remaining.
Burn rate becomes particularly important for early-stage companies that haven't yet reached profitability. Whether you've raised seed investment or completed a Series A funding round, monitoring and managing your burn rate is essential for survival and growth.
Gross burn rate represents your total monthly operating expenses before accounting for any revenue. This includes salaries, rent, software subscriptions, marketing costs, and every other expense your business incurs. If you spend €80,000 per month running your company, that's your gross burn rate.
Net burn rate accounts for revenue, showing the actual cash drain on your business each month. If you spend €80,000 but generate €30,000 in revenue, your net burn rate is €50,000. This is the more meaningful figure for most founders because it shows your true cash consumption.
Most investors focus on net burn rate when evaluating startups, though they'll want to understand both figures. A company with high gross burn but growing revenue tells a different story than one with the same net burn but stagnant sales. Your cash flow statement provides the detailed breakdown needed to calculate both metrics accurately.
Calculating burn rate is straightforward: review your cash flow statement or bank statements and determine how much cash you're spending versus earning each month. For gross burn rate, simply total all your operating expenses. For net burn rate, subtract your revenue from your total expenses.
Most founders calculate burn rate monthly, though you can also look at quarterly or annual figures for trend analysis. Consistency matters more than the specific period—choose a timeframe and stick with it so you can track changes over time.
Your balance sheet shows your current cash position, whilst your income statement reveals the underlying drivers of your burn rate. Together with your cash flow statement, these financial statements give you everything needed to understand and forecast your burn rate accurately.
Burn rate directly determines your runway—the number of months your startup can survive with its current cash reserves. Investors use this to assess urgency and negotiating position. A founder with 18 months of runway has very different leverage than one with 3 months remaining.
When raising investment, you'll need to explain your burn rate, justify each major expense category, and demonstrate how additional funding will be deployed. Investors want to see that you're spending wisely on activities that drive growth, not burning cash on unnecessary overhead.
Your burn rate also influences how much money you should raise. The general guidance is to raise enough to fund 18-24 months of operations at your projected burn rate, giving you sufficient runway to hit milestones that justify your next round. This calculation directly impacts discussions in your term sheet negotiations.
Reducing burn rate often starts with personnel costs, typically the largest expense for most startups. This doesn't necessarily mean layoffs—consider whether every role is essential, whether contractors might work for specific projects, and whether salary levels are appropriate for your stage.
Review all recurring expenses critically. Software subscriptions, office space, marketing spend, and professional services fees can accumulate quickly. Many startups discover they're paying for tools nobody uses or services that aren't delivering value proportionate to their cost.
Increasing revenue also reduces net burn rate, sometimes more sustainably than cutting costs. Focus on improving conversion rates, reducing customer acquisition costs, and accelerating sales cycles. A €10,000 monthly increase in revenue has the same impact on net burn as a €10,000 cost reduction.
There's no universal "good" burn rate because appropriate spending depends entirely on your stage, market, and growth strategy. A pre-seed round company should burn far less than a Series B funding recipient aggressively scaling their sales team.
The more meaningful question is whether your burn rate is proportionate to your progress. High burn is justified if you're acquiring customers efficiently, building competitive advantages, or capturing market share rapidly. High burn with no corresponding growth signals a fundamental problem with your business model or execution.
Investors often evaluate burn rate relative to growth metrics. If you're spending €100,000 monthly but growing revenue 20% month-over-month, that's very different from spending €50,000 with flat revenue. The relationship between burn and growth determines whether you're investing wisely or wasting capital.
Runway is simply your current cash reserves divided by your monthly burn rate. If you have €600,000 in the bank and burn €50,000 per month, you have 12 months of runway. This calculation assumes constant burn rate, which rarely holds true in practice.
Most founders should aim for at least 12-18 months of runway after any funding round. This provides enough time to hit meaningful milestones, respond to unexpected challenges, and raise additional funding without desperation. Running below 6 months of runway creates significant stress and weakens your negotiating position.
Your runway calculation should account for planned changes to burn rate. If you're about to hire three engineers or launch a major marketing campaign, your burn rate will increase. Build these changes into your runway projections to avoid nasty surprises.
Concern is warranted when your burn rate exceeds what you budgeted without corresponding improvements in metrics that matter. If you planned to burn €40,000 monthly but you're spending €60,000 without any acceleration in growth, you have a problem to address immediately.
Watch for burn rate creep—gradual increases that seem small individually but compound over time. An extra €2,000 here for a new tool, €3,000 there for an expanded marketing campaign—these additions accumulate faster than most founders realise.
Most critically, worry when your runway drops below 6 months without a clear path to either profitability or additional funding. At this point, you need to either dramatically reduce burn rate or accept that you may need to raise money under unfavourable conditions. Many startups fail not because their business model was flawed, but because they ran out of cash before proving it could work.
Be transparent and precise when discussing burn rate with investors. Know your gross and net burn rates, understand what's driving each major expense category, and be prepared to explain your trajectory over the past several months.
Present burn rate in context of your goals and milestones. Investors understand that spending money is necessary to build a business—they want to see that you're spending intentionally on activities aligned with your strategy, not drifting into expensive habits.
When your burn rate increases, explain why. Hiring to capture a market opportunity, investing in infrastructure to support growth, or expanding into new territories are all valid reasons for higher burn. The key is demonstrating that increased spending translates into progress toward building a valuable company.
