Burn Rate
Description
Burn rate is the rate at which a startup is using up its available cash to cover expenses and stay operational. It is typically measured on a monthly basis, and is calculated by subtracting the company's total expenses from its available cash at the beginning of the month. The resulting figure is the amount of cash the company "burned" through during the month.
A startup's burn rate is an important metric because it indicates how quickly the company is using up its available capital. If a startup is burning through cash too quickly, it may run out of money before it has a chance to become profitable. On the other hand, if a startup is burning through cash too slowly, it may not be investing enough in growth and may be missing out on potential opportunities.
Burn rate can be affected by a number of factors, including the size of the startup's team, its expenses, and its revenue. Startups with high expenses and low revenue are likely to have a high burn rate, while startups with low expenses and high revenue are likely to have a low burn rate.
Frequently Asked Questions
Burn rate is important because it helps startups understand how quickly they are using up their available capital, and whether they are on track to become profitable before they run out of money.
A startup can reduce its burn rate by cutting expenses, increasing revenue, or both. This may involve reducing salaries, outsourcing certain tasks, or finding ways to increase customer acquisition.
If a startup runs out of money, it may be forced to shut down or seek additional funding. In some cases, investors may be willing to provide additional funding to keep the startup afloat, but this is not always the case.
Juicero, a startup that produced a high-end juicing machine, burned through $120 million in funding before shutting down in 2017.
Webvan, an online grocery delivery startup, burned through $800 million in funding before going bankrupt in 2001.
Further Reading Materials
"The Lean Startup" by Eric Ries
"Burn Rate: How I Survived the Gold Rush Years on the Internet" by Michael Wolff
"Startup CEO: A Field Guide to Scaling Up Your Business" by Matt Blumberg.
