Burn Rate

Definition

Burn Rate is the speed at which a company spends its cash reserves before reaching profitability or positive cash flow. Typically expressed as a monthly amount in dollars or euros, this metric is fundamental for startups and growth-stage companies operating at a loss while building product, acquiring customers, and scaling operations.

There are two main variants of Burn Rate:

Gross Burn Rate = Total monthly operating expenses (without considering revenue)

Net Burn Rate = Total monthly expenses - Monthly revenue

For example, a startup with $200,000 in monthly expenses and $50,000 in revenue has a Gross Burn of $200,000 and a Net Burn of $150,000. Net Burn is the more relevant metric because it indicates how quickly the company consumes net capital.

Burn Rate is closely linked to the concept of runway, the time remaining before running out of available capital. The formula is: Runway (months) = Available cash / Monthly Net Burn Rate. With $1.8 million in the bank and Net Burn of $150,000/month, the runway is 12 months.

Historically, the concept of Burn Rate emerged during the dot-com bubble of the late 1990s, when hundreds of Internet startups burned capital rapidly to capture market share, often without sustainable business models. The term “burning cash” became synonymous with unsustainable growth. Today, Burn Rate is carefully monitored by founders, boards, and investors as an indicator of financial discipline and strategic sustainability.

How it Works

Calculating and interpreting Burn Rate requires understanding cash flow dynamics and operating expense categories.

Calculating Burn Rate

Gross Burn Rate includes all monthly cash-out expenses:

Personnel: salaries, benefits, cash component of equity compensation
Marketing and Sales: advertising spend, events, CRM/analytics tools
Infrastructure: servers, cloud computing, office space
R&D: product development, software tools, licenses
Administration: legal, accounting, insurance

Formula: Sum all operational cash outflows for the month, excluding extraordinary expenses (acquisitions, major CAPEX).

Net Burn Rate subtracts revenue: Net Burn = Gross Burn - (Revenue + other cash income)

Revenue includes: product/service sales, recurring subscriptions, one-time deals. Exclude non-cash income (deferred revenue already collected).

Practical Calculation: SaaS Startup

Month: January 2026

Expenses (Gross Burn):

Salaries (15 people @ avg $5K): $75,000
Marketing (Google Ads, content): $30,000
Cloud infrastructure (AWS): $8,000
Software tools (Salesforce, Slack, etc.): $5,000
Office and utilities: $7,000
Legal and accounting: $3,000
Other (travel, recruiting): $10,000
Total Gross Burn: $138,000

Income:

MRR (Monthly Recurring Revenue): $45,000
One-time setup fees: $5,000
Total Revenue: $50,000

Net Burn Rate: $138,000 - $50,000 = $88,000/month

With $1,500,000 in cash, Runway = $1,500,000 / $88,000 = 17 months.

Temporal Dynamics and Trends

Burn Rate is not constant. Common patterns:

Early Stage (pre-product): High burn for development. Small team but concentrated R&D costs. Typical Gross Burn: $50,000-$150,000/month for 5-10 person team.

Growth Stage (post-PMF): Burn increases with hiring and marketing to scale. Gross Burn can reach $300,000-$1,000,000+/month. Goal: grow revenue faster than Burn (positive unit economics).

Path to Profitability: Burn decreases with operational efficiency. Focus on CAC payback, LTV/CAC ratio. Target: Net Burn trending toward zero.

Y Combinator benchmark: post-Series A startups should aim for minimum 18-month runway to have strategic flexibility and not fundraise from a weak position.

Burn Components and Control Levers

Levers to reduce Burn:

R&D efficiency: prioritize high-impact features, reduce technical debt
Marketing efficiency: improve CAC, shift budget to better-performing channels
Headcount optimization: strategic hiring, avoid premature overhiring
Vendor consolidation: negotiate contracts, eliminate redundant tools
Remote-first: reduce office costs

When NOT to reduce Burn: If growth is healthy (high retention, strong unit economics), maintaining high Burn to capitalize on momentum is often optimal. Paul Graham (Y Combinator) advises: “Make something people want, then figure out how to make money. Don’t optimize for burn rate too early.”

Use Cases

Seed-stage Startup: Fundraising Planning

An AI startup post-seed raised $2 million. Current Burn Rate: $120,000/month (Net Burn $100,000 after $20K/month revenue). Runway: 20 months.

Planning:

Months 1-6: build MVP, early traction. Stable burn.
Months 7-12: hire sales, increase marketing. Burn rises to $150K/month.
Months 13-18: grow revenue to $80K/month, Net Burn drops to $70K/month.
Months 18-20: prepare for Series A.

With this plan, sufficient runway to demonstrate traction ($1M+ ARR, 15-20% MoM growth) before fundraising. If traction is weak at month 12, founders can choose: (1) cut Burn 30% to extend runway, (2) seek bridge round, (3) pivot.

Series B Scaleup: Balancing Growth and Efficiency

A B2B SaaS scaleup post-Series B ($15M raised) has Burn Rate of $800K/month, revenue $600K/month (Net Burn $200K/month). ARR: $7.2M, growth 10% MoM.

Scenario Analysis:

Path 1 (Growth-first): increase Burn to $1.2M/month (aggressive hiring, marketing), target 15% MoM growth. Runway: 12 months. Risk: if growth doesn’t materialize, may need down-round.
Path 2 (Balanced): maintain Burn, improve unit economics. Sustainable 10% MoM growth. Runway: 18 months. Reach $20M ARR before Series C.
Path 3 (Efficiency): reduce Burn to $500K/month, focus on profitability. Growth slows to 7% MoM but runway extends to 30 months. Optionally reach cash-flow positive.

Choice depends on market conditions. In 2023-2026 context (capital scarce), Paths 2-3 preferred. In 2020-2021 context (capital abundant), Path 1 dominant.

Corporate Innovation Lab: R&D Spend Control

A corporation launches innovation lab to explore generative AI. Annual budget: $5 million, team of 20.

Monthly Burn Rate:

Salaries (20 people @ avg $8K): $160,000
Cloud compute (GPU training): $100,000
Software and tools: $20,000
Contractors and consultants: $50,000
Gross Burn: $330,000/month

Implicit runway: 15 months. Management requires checkpoints every 6 months to demonstrate ROI (PoC, pilot, business case). If no tangible progress at month 6, Burn is cut 50% or lab is shut down.

This model incentivizes the team for rapid delivery of proof-points to justify continued investment.

Two-sided Marketplace: Managing Burn in Chicken-and-Egg Phase

A marketplace for freelance services faces typical challenge: need supply (freelancers) to attract demand (clients) and vice versa. Initial Burn Rate: $180K/month, mainly in incentives (subsidies to both sides).

Strategy:

Months 1-6: high incentives for bootstrapping network. Burn $250K/month.
Months 7-12: gradually reduce incentives as network effects take hold. Burn drops to $150K/month.
Months 13-18: take rate increases (10% to 15%), revenue covers Burn. Net Burn = 0.

Key metrics monitored: GMV (Gross Merchandise Value), take rate, retention on both sides. If retention is low (below 40% month-over-month), incentives aren’t creating lasting value and Burn is inefficient.

Downround and Restructuring: Survival Mode

A post-Series A startup (raised $10M) has execution issues. $2M ARR but stalled growth, Net Burn $400K/month. Remaining cash: $3M (7-month runway). Investors unavailable for follow-on.

Restructuring Plan:

Layoff 40% of team (12 to 7 people): save $200K/month
Cut non-performing marketing: save $80K/month
Renegotiate vendor contracts: save $20K/month
New Net Burn: $100K/month
New Runway: 30 months

With extended runway, company can focus on product-market fit, organic growth, and rebuild credibility for future fundraising or path to profitability. Alternative was shutdown within 6 months.

Practical Considerations

Monitoring and Reporting

Mature organizations monitor Burn Rate with rigorous cadence:

Weekly Dashboard (CFO/founder):

Updated cash balance
Week-to-date burn vs budget
End-of-month burn projection
Updated runway

Monthly Board Deck:

Gross and Net Burn with category breakdown
Variance analysis: actual Burn vs forecast
6-month trend
Scenario sensitivity: what if Burn increases/decreases X%

Common tools: Excel/Google Sheets for early-stage startups, Carta/Pulley/Mosaic for scaleups, NetSuite/SAP for corporate.

Benchmarks and Targets by Stage

Pre-seed (team 2-5):

Gross Burn: $20-80K/month
Target runway: 12-18 months post-raise
Goal: validate problem-solution fit with capital efficiency

Seed (team 5-15):

Gross Burn: $80-200K/month
Target runway: 18-24 months
Goal: achieve product-market fit, early traction

Series A (team 15-50):

Gross Burn: $200-800K/month
Target runway: 18-24 months
Goal: scale GTM, $3-5M+ ARR

Series B+ (team 50+):

Gross Burn: $800K-$5M+/month
Target runway: 18-30 months
Goal: market leadership or path to profitability

Rule of thumb: runway below 12 months is “danger zone” (fundraising urgency), above 24 months is “comfort zone.”

Burn Rate and Strategy: When to Accelerate vs Brake

Accelerate Burn (increase spending) is optimal when:

Strong product-market fit demonstrated (NPS above 40, retention above 90%)
Positive unit economics (LTV/CAC above 3, CAC payback under 12 months)
Limited market window (competitors raising, land-grab phase)
Capital available at attractive valuation

Brake Burn (reduce spending) is necessary when:

Product-market fit still unclear (high churn, weak engagement)
Negative unit economics or worsening with scale
Difficult market conditions (recession, capital scarce)
Runway below 12 months without clear path to funding

Common mistake: increasing Burn (hiring sales, marketing) before validating unit economics. Result: “pouring gasoline on a fire that doesn’t burn” (investing in acquisition with terrible retention).

Stakeholder Communication

Investors: transparency on Burn is critical. Negative surprises (Burn exceeding forecast) erode trust. Best practice: share updated forecast monthly, alert board if Burn exceeds budget by more than 10%.

Team: sharing Burn Rate (appropriately contextualized) aligns team on execution urgency. Some companies share runway openly (“we have 18 months to reach milestone X”), others keep info confidential to leadership. Trade-off: transparency increases accountability but can create anxiety.

Vendors and Partners: in low-runway phases, some vendors may require upfront payment or reduce credit terms. Manage relationships proactively to avoid disruption.

Burn Rate in Macroeconomic Context

“Acceptable” Burn Rate varies with economic cycles:

2020-2021 (easy money): abundant capital, high valuations. High Burn Rate tolerated for growth-at-all-costs. Series A startups burned $500K-$1M/month for land-grab.

2022-2026 (capital efficiency): difficult raises, common down-rounds. Investors favor profitability path and unit economics. Burn Rate must be sustainable with clear milestones. “Default alive” (ability to reach profitability with existing capital) becomes key criterion.

Founders must adapt strategy to context. Paul Graham (Y Combinator): “In good times, optimize for growth. In bad times, optimize for survival.”

Common Misconceptions

”Low Burn Rate is Always Better”

Too low a Burn Rate can be suboptimal if it prevents capitalizing on opportunities. A startup with strong PMF and limited market window should invest aggressively (high Burn) to build a moat before competitors enter.

Example: Uber and Lyft burned billions to capture market share during land-grab phase. Those who optimized for low Burn would have lost the market. Today, with dominant positions, they can reduce Burn and target profitability.

Optimal Burn Rate depends on stage, market dynamics, and capital availability. In seed stage with unclear PMF, low Burn is prudent. In growth stage with strong traction, high Burn can be strategic.

”Gross Burn and Net Burn are Interchangeable”

Gross Burn shows total spending, Net Burn shows net capital consumption. They’re complementary but answer different questions:

Gross Burn indicates operational efficiency: are we spending too much on headcount, marketing, infrastructure?
Net Burn indicates financial sustainability: how fast are we depleting capital?

A startup can have high Gross Burn but low Net Burn if revenue grows rapidly. Conversely, low Gross Burn but high Net Burn if revenue doesn’t materialize.

Example: Company A has Gross Burn $500K, revenue $400K, Net Burn $100K. Company B has Gross Burn $200K, revenue $50K, Net Burn $150K. A is more scaled and efficient (better margins), B has shorter runway despite spending less.

”Burn Rate Considers All Costs”

Burn Rate measures cash-out, not accounting expenses. Differences:

Included in Burn Rate:

Salaries, marketing spend, cloud bills (actual cash)

Excluded from Burn Rate:

Depreciation and amortization (non-cash accounting entries)
Stock-based compensation (equity, not cash)
Deferred revenue (cash already collected, doesn’t count as income in the month)

For decision-making, Burn Rate (cash-based) is more relevant than P&L (accrual-based). A startup can have positive Net Income (profitable on paper) but positive Net Burn (burning cash) if customers pay late or CAPEX is high.

ARR: annual recurring revenue that reduces Net Burn Rate and extends runway
Churn Rate: revenue loss from departing customers increases Burn Rate
EBITDA: operating profitability excluding non-cash items, correlated with Burn
Unit Economics: per-customer economics determine Burn sustainability
Burn Rate: monthly spending rate determines how long runway extends

Sources

Y Combinator (2024). A Guide to Seed Fundraising
Wilson, F. (2011). Burn Rate. AVC Blog
Graham, P. (2015). Default Alive or Default Dead