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What is your burn rate? – This is a money question
Here’s what they mean…
What is your burn rate? basically means ‘how much money are you spending per month‘? Literally, how much cash are you burning?
It is implied by this question that you need to respond monthly.
There are two types of burn rate: gross and net. Gross is your straight up spend. Net deducts your revenue so it’s how much you are losing. Gross is the safer number to plan on since you can’t guarantee revenue.
Your gross burn is the amount of money you are spending per month, going out of your bank account. So if your costs are $100k per month then your gross burn is $100k.
Net burn is the amount of money you are losing per month so you net off your revenue. If your revenue is $20k per month then your net burn is $80k (100k in spend less the 20k of revenue).
Why do investors care about your burn and why “What is your burn rate?” such a common question?
In short, it tells you how long you have to live! If you have just raised and you have $1 million in your bank account with a net burn of $100k per month you have 10 months of cash in the bank left assuming your burn stays constant. However, if you went on a hiring rampage and you’re burning $500,000 per month then you only have 2 months of cash left. Shite.
The months left to live is called your runway. Your runway matters as it signals if you are about to run out of business, when you will need to raise again and approximately how much (Say 18 months times your runway). If you have a short runway it also tells investors who have the leverage… If you have a month or two left, then things are getting hairy and the investor can set the terms.
Furthermore, your burn can be telling about your operating model, hustle and founder mentality. If you’re achieving a lot with a small amount, it is very impressive! If you have a huge burn rate they will wonder what the hell you are doing if your revenue is negligible!
The next question someone might as is how many staff do you have. If you have a lot of staff and small burn, they might respond “wow, that’s impressive!” If not, they might wonder if the team is treating investor cash as a way to bank some cheddar.
What you need to say
“Our gross burn rate is $60k per month. On a net basis, it is $40k. Considering we are doing $240,000 run rate after 7 months, it’s not too bad right!
Post the round, we plan on taking this up to $120 gross in order to build out of engineers to strengthen our product functionality customers have been asking for, which with our targeted raise would give us 18 months runway at that run rate.”
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