I often get asked what a "good" burn rate is. Unfortunately the answer, like most questions that relate to raising venture capital, is “it depends.”
Some startups need a lot of upfront capital in order to scale quickly and get a competitive edge in the market. Most of these companies have a real estate, hardware, or fintech component, which often requires huge capital expenditures in order to reach a point (at a fast enough pace) where incumbents view the company as a threat.
Others, mainly software startups, can get by with much less capital for a much longer time period since the main expense incurred is usually overhead (e.g., staff salaries) or marketing (applicable to many B2C companies).
For early stage startups, I have seen burn rates as low as around $10,000 per month (mainly outside the U.S. where engineering talent is much cheaper or when the founding team is either taking no salaries or significantly reduced ones) and as high as around $100,000 per month.
Either way, one rule of thumb I would suggest following: be scrappy and try to keep your expenses as low as possible for as long as possible. This allows your company to remain nimble, delay future rounds of financing (which generally means less equity dilution for the founding team), and have the resources for unexpected events, such as the need to pivot, hire a new team member, or launch a new product.
Founders I have worked with in the past have used the seven tactics below to keep their burn rates low:
Interns for development sprints: if possible, try to have big development sprints during the summer so that your team can hire interns to help out.
Clothing: purchase a suit, wear it once, and then return it later (try not to do this too often).
Office furniture/supplies: purchase used furniture and supplies on Craig’s List from startups that are either moving to new office space or going out of business.
Choose programs wisely: choose to participate in a program that offers free server credits (this is an often overlooked expense that can add up quickly as your startup scales).
Competitions: apply for competitions as a way to get free money - there are enough out there now that you can probably win at least one.
Avoid buying things whenever possible: rent desks at a co-working space (which allows you to move out quickly if needed), ask potential investors to meet you at your office (which they should offer to do anyway if they’re in the due diligence phase of investment), and don't be afraid to ask friends and family for favors, such as sleeping on their couch or letting them drive you to the airport to save money.
Avoid the pressure: don’t feel like you have to raise money immediately after graduating from an accelerator or another program.
Following this advice can have a transformational effect on your startup.
For example, PlayPosit, a company in one of the early LearnLaunch accelerator classes, received $18,000 in funding when it joined the program, yet still had money in the bank when it graduated six months later. The company was able to keep its burn rate to around $8,000 per month for two co-founders living in Boston (not a cheap city), despite initially earning only around $5,000 per month in revenue.
Take the time to evaluate what your company is spending its capital on, and find creative ways to reduce burn while still achieving the milestones required to reach the next round of funding.
One Rule of Thumb
One rule of thumb I would suggest following is this: as a startup, you should be scrappy and try to keep your expenses as low as possible for as long as possible. This allows your company to remain nimble, delay future rounds of financing (which generally means less equity dilution for the founding team), and have the resources for unexpected events, such as the need to pivot, hire a new team member, or launch a new product.
The reality is that burn rate is just one metric used to assess the viability of a startup, and rarely the most important one.
Unless your company is an outlier in terms of spending too little or too much. If you’re able to justify to your team, advisory board, and potential investors that the amount you're spending is necessary for your company's continued growth and success, you can then turn your attention to more pressing issues.
Foundation and read more articles on the Village Capital Medium page.