What is Burn Rate?
Definition
Burn rate is the rate at which a company spends money in excess of income. Gross burn is total monthly spending; net burn is spending minus revenue. A company with 100k monthly expenses and 30k monthly revenue has a net burn of 70k. Burn rate determines runway and is closely monitored by founders and investors. High burn can enable rapid growth but also leads to rapid failure if funding runs out before milestones are hit. Efficient burn—getting maximum growth per dollar spent—is a key indicator of startup health.
Expert Insights
“The burn rate should not be a random number. It should be a deliberate choice based on the milestones you need to hit and the time you have to hit them.”
“Burn rate is vanity; burn efficiency is sanity. I do not care how much you burn, I care what you get for it.”
Key Statistics
The median seed-stage startup burns $30-50k per month
Source: Kruze Consulting
High-burn startups are 3x more likely to fail than capital-efficient ones
Source: Startup Genome
Efficient companies spend under $1.50 to acquire each $1 of new ARR
Source: Bessemer Venture Partners
Key Points
- Gross burn = total monthly spending
- Net burn = spending minus revenue
- Net burn directly determines runway length
- Should be justified by growth or milestones achieved
- Burn efficiency matters more than absolute burn
- Investors scrutinize burn multiple (burn / revenue growth)
- Plan to decrease net burn over time through revenue growth
How to Measure Burn Rate
Track both gross and net burn, and evaluate whether your burn is producing proportionate results.
| Metric | Description | Benchmark |
|---|---|---|
| Gross Burn Rate | Total monthly spending including salaries, rent, software, marketing, etc. Shows total cash outflow. | Know this number precisely; it is your cost of operating |
| Net Burn Rate | Gross burn minus revenue. The actual rate at which cash decreases. This determines runway. | Should decrease over time as revenue grows |
| Burn Multiple | Net burn divided by net new ARR. Shows how efficiently you convert spending into growth. | Under 1x is excellent, 1-2x is good, over 2x is concerning |
| Cost per Dollar of ARR | Total spend to acquire $1 of new recurring revenue. Similar to burn multiple but includes all costs. | Under $1.50 is efficient, under $1 is excellent |
Case Studies
WeWork
WeWork raised billions and spent aggressively on expansion, real estate, and operations, with burn rates exceeding $500 million per quarter.
They prioritized growth over efficiency, believing scale would eventually lead to profitability. They continued raising and spending through 2019.
WeWork's IPO collapsed when investors questioned whether unit economics would ever work. Their high burn without a path to profitability became a cautionary tale about undisciplined spending.
Zoom
Zoom needed to grow rapidly in a competitive market while maintaining the financial discipline that would allow them to go public.
Zoom focused obsessively on efficiency. They achieved viral growth through product quality rather than marketing spend. Their burn multiple stayed low even during rapid growth.
Zoom was profitable before IPO, rare for a high-growth SaaS company. Their capital efficiency enabled them to go public on their own terms and thrive when competitors struggled.
Common Mistakes to Avoid
Burning fast without measuring efficiency
Why it fails: High burn is only justified by proportionate growth. Burning $100k to add $10k ARR is very different from burning $100k to add $100k ARR. Without efficiency tracking, you do not know which you are doing.
Instead: Track burn multiple religiously. Know what you get for every dollar spent. Cut spending that does not translate to growth or milestone progress.
Cutting burn too aggressively during growth
Why it fails: Over-cutting can kill momentum. If you are growing efficiently, reducing burn may slow growth and hurt long-term outcomes more than short-term runway extension.
Instead: Evaluate burn efficiency, not just absolute burn. Cut inefficient spending but maintain investment in what is working. The goal is efficient growth, not minimal spending.
Treating all burn categories equally
Why it fails: Not all spending is created equal. R&D that builds product value differs from lavish offices. Lumping them together misses what is driving growth versus what is waste.
Instead: Break down burn by category and evaluate each separately. Measure what contributes to growth and what is overhead. Cut waste; invest in value creation.
What to Do Next
To manage burn rate effectively, track it carefully, evaluate efficiency, and make deliberate choices about spending.
- Calculate both gross and net burn accurately
- Break down burn by category to understand where money goes
- Calculate burn multiple to measure efficiency
- Set a target burn rate based on runway and milestones
- Review burn monthly and cut inefficient spending
- Ensure team understands the relationship between burn and runway
Frequently Asked Questions
Related Terms
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