Returns & Metrics

What is burn rate?

Quick Answer

Burn rate is the monthly rate at which a startup spends cash beyond its revenue. Gross burn is total monthly spend; net burn is spend minus revenue. Runway = Cash on Hand ÷ Monthly Net Burn Rate.

Detailed Answer

Burn rate measures how quickly a startup is spending its cash reserves. It's the most critical operating metric for pre-profitable companies.

Two types: - **Gross Burn** — Total monthly cash spending (payroll + rent + vendors + everything) - **Net Burn** — Gross burn minus revenue (the actual monthly cash decrease)

Formula: Runway (months) = Cash Balance ÷ Net Monthly Burn

Example: $3M in bank, spending $200K/month, earning $50K/month → Net burn = $150K → Runway = 20 months

Burn rate benchmarks by stage: - Pre-seed: $20K-$50K/month - Seed: $50K-$150K/month - Series A: $150K-$500K/month - Series B: $500K-$2M/month

VC rule of thumb: Start fundraising when you have 6-9 months of runway remaining. The fundraising process typically takes 3-6 months.

Related metric — **Burn Multiple**: Net Burn ÷ Net New ARR. A burn multiple below 1.5x is excellent; above 3x is concerning. This measures how efficiently you're spending to grow.

Related Questions

What is IRR (Internal Rate of Return)?

IRR is the annualized return rate that makes the net present value of all cash flows equal to zero, accounting for the timing of investments and distributions. Top-quartile VC funds target 20-30% net IRR.

What is ARR (Annual Recurring Revenue)?

ARR is the annualized value of recurring subscription revenue, calculated as MRR × 12. It's the primary growth metric for SaaS companies, with VCs typically expecting 2-3x year-over-year growth for Series A candidates.

What is MOIC (Multiple on Invested Capital)?

MOIC is the ratio of total value returned to total capital invested, regardless of time. A 3x MOIC means investors received 3 times their money back. Top-quartile VC funds target 2.5-3.5x net MOIC.

What is TVPI in venture capital?

TVPI (Total Value to Paid-In) measures the total value of a fund relative to the capital called from LPs. It combines realized returns (distributions) plus unrealized portfolio value (NAV). TVPI = (Distributions + NAV) ÷ Paid-In Capital.