What Is Burn Rate?
Burn rate is how much cash a company spends per month above what it earns. Net burn = cash out minus cash in. Burn rate determines how long your runway lasts.
Definition
Burn rate is the rate at which a company spends its cash. Gross burn is total monthly cash outflows (all expenses). Net burn is cash out minus cash in (gross burn minus revenue). If a company has $500K in monthly expenses and $200K in revenue, net burn = $300K/month.
Burn rate directly determines runway: how many months until the company runs out of cash. Runway = Cash Balance / Net Monthly Burn. With $3M in the bank and $300K net burn, the company has 10 months of runway — a dangerous position requiring immediate fundraising or cost reduction.
Acceptable burn rate depends on growth. A company burning $500K/month while growing ARR by $200K/month has strong 'burn efficiency.' The burn multiple (net burn / net new ARR) is a key VC metric: below 1x is excellent, 1-2x is good, above 2x is concerning for most growth stages.
Real-World Example
A SaaS startup has $5M in the bank. Monthly expenses: $300K salaries, $50K marketing, $30K infrastructure, $20K other = $400K gross burn. Monthly revenue: $150K. Net burn = $400K - $150K = $250K. Runway = $5M / $250K = 20 months. With typical 6-month fundraising cycles, this company should start raising in 12-14 months.
Why It Matters
Burn rate is existential — running out of cash without being able to raise more or reach profitability means the company dies. Founders must balance aggressive growth investment (high burn) with the survival imperative of maintaining adequate runway.
Get Glen’s Updates
Investing insights, new tools, and whatever I’m building this week. Free. No spam.
Unsubscribe anytime. I respect your inbox more than Congress respects property rights.
Frequently Asked Questions
What is a safe burn rate for a startup?
There's no universal 'safe' burn rate — it depends on your runway, growth rate, and fundraising prospects. The general rule: always maintain 12-18 months of runway to give yourself time to fundraise. If runway drops below 9 months, it becomes an emergency that can force unfavorable deals or layoffs.
What is the difference between gross burn and net burn?
Gross burn is total monthly cash out (all expenses). Net burn is cash out minus cash in (the actual cash depletion rate). For tracking runway, net burn is what matters. Gross burn is useful for understanding your cost structure before revenue.
What is burn multiple?
Burn multiple = net cash burned / net new ARR. It measures how many dollars you burn to generate each dollar of new ARR. Below 1x is excellent (spending less than you're gaining in ARR). 1-1.5x is good. Above 2x is inefficient. Above 3x is a red flag for investors.
Related Terms
Recommended Resources
Tools & books I actually use and recommend
SeekingAlpha Premium
Quant ratings, earnings transcripts, and the stock analysis community where I published 300+ articles.
Try SeekingAlphaA Random Walk Down Wall Street
Burton Malkiel's classic case for index investing. The book that convinced millions to stop stock-picking.
View on AmazonThe Little Book of Common Sense Investing
John Bogle's manifesto on why low-cost index funds beat everything else. Straight from the founder of Vanguard.
View on AmazonSome links above are affiliate links. I only recommend products I personally use. See my full disclosures.