BURN RATE STARTUP

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The burn rate in a startup is the rate at which the company is spending its capital, which translates into the amount of money the company is losing each month. It is a critical metric for any startup, as it determines how long the company can survive before running out of cash. A high burn rate means that the company is spending much more than it is generating in revenue and is therefore burning cash at a rapid rate. A low burn rate indicates that the company is spending less than it is generating in revenues, which means that it is operating at a relatively high profitability. It is important to note that the burn rate is different from cash flow, which refers to the amount of cash flowing in and out of the company in a given period of time. The burn rate is a measure of how much cash the company is losing each month, while cash flow refers to how much cash is flowing in and out of the company.

To calculate the burn rate, et is necessary to subtract the company's total expenses from its total revenues over a given period of time. For example, if a company spent $100,000 and generated $50,000 in revenue during a given month, its burn rate for that month would be $50,000. It is important for entrepreneurs to understand their burn rate and monitor it closely, as it is a critical metric for the survival of their startup. If the burn rate is too high, the company may run out of cash and have to close its doors before it has a chance to grow. Therefore, it is important for entrepreneurs, control your expenses and keep your burn rate under control to ensure the long-term viability of your business.

WHAT IS IT?

A very appropriate number for a startup, what it tells us is the money we "burn" on a monthly basis, which includes salaries, marketing expenses... etc. It is an indicator of the speed at which we consume our funds.

WHY IS IT IMPORTANT?

Because it tells us not only the cost of being up and running but, if we divide it by the money we currently have available, it tells us in months what we have left to run out of money... something very important as it helps us to decide when to start looking for investment (if appropriate) or, if not, when we should already be earning enough money to at least cover the costs.

HOW IS IT CALCULATED?

The CBR is calculated by adding up all the fixed and structural costs we have per month in our company. To calculate the "life time" in months if we have no income we have to divide the CBR by the capital we have. If we are earning money it is a bit more complicated but not much more.

Examples of BURN RATE

Here are some examples of burn rate in different situations:

• Startup that has just received funding: Suppose a startup has just received a $500,000 investment from a venture capital fund. The startup team decides that they need to hire 10 employees, rent an office and purchase IT equipment. The team estimates that this will cost approximately $400,000 in the first year. The startup's burn rate would be $400,000 divided by 12 months, giving a monthly burn rate of $33,333.
• Company launching a new product: An established company has decided to launch a new product that requires significant investment in marketing, product development and hiring additional staff. The company estimates that it will need to invest $1 million in the first year. The monthly burn rate would be $83,333.
• Startup seeking scalability: A startup that has been running for a year and is ready to scale its business. The team estimates that they will need to invest $250,000 in marketing and hire 5 new employees to achieve this. The monthly burn rate would be $20,833.

It is important to remember that these are only examples and that the burn rate will vary depending on the needs of each business. It is important for entrepreneurs to monitor and control the burn rate to ensure that the cash flow is sustainable and the growth of the business can be maintained.

Some examples of burn rates of well-known companies are:

• Uber: At the end of 2019, Uber reported a burn rate of $500 million per quarter, meaning it was spending $1.8 billion more than it was generating in revenue.
• Tesla: Tesla has had a significant burn rate for many years due to its high research and development costs as well as the construction of new production facilities. In 2018, its burn rate was estimated at around $6,500 per minute.
• WeWork: WeWork has been known for its high burn rate, especially in the early years of the company. In 2018, the company reported a burn rate of $219,000 per hour.
• Twitter: In its early years, Twitter had a significant burn rate due to its high infrastructure and staff costs. In 2008, its burn rate was estimated at around $20 million per year.
• Amazon: Amazon had a significant burn rate in its early years due to the construction of new production facilities and the expansion of its business. In 1998, its burn rate was estimated at around $250 million per year.

It is important to note that these figures can vary and that the burn rate can be high in the early stages of a business as investments are being made to build the business. However, it is also important to monitor the burn rate and ensure that expenses are justified and are being used effectively to drive long-term growth and profitability. The burn rate in a startup refers to the rate at which the company's funds are being spent. It is a important indicator for determining the capacity of the startup (+) to finance itself and achieve its long-term goals. It is recommended that entrepreneurs maintain a low burn rate to ensure the long-term viability of the company. Tips to reduce burn rate include: prioritise essential expenditures, seek additional sources of funding, and monitor and adjust spending frequently.

If your startup is facing a long journey, valley of death (+) Until it is profitable and needs fuel to do so, the burn rate tells us the rate at which we are using fuel. In other words, the burn rate measures how much money we are consuming from cash each month and is in fact calculated as the difference between our operating or structural costs and the gross margin we have. If we do not sell, our gross margin is 0 and therefore the whole operation of the company is supported by the money we have in the cash (the financing we have received).

And why the burn rate and the runway (+) are two important metrics?

The answer is simple, they tell us how much time we have to put money in the till (refuel), i.e. to open a new one. funding round (+), to seek a loan or, of course, to invoice. The burn rate also says a lot about how we are managing our startup as it indicates whether we are efficient in our operations or whether we are just focusing on attracting customers without paying attention to cost. (efficiency and effectiveness are not the same thing).

Why pay attention to burn rate and runway in a startup?

If one of the key tasks of the CEO of a startup is precisely to ensure that there is no shortage of cash in the company's till, I think it is quite clear that the burn rate and the runway are two key metrics that have to be managed and controlled. On second thoughts, a round of funding should fill our fuel tank to reach relevant value milestones to consider the next big leap in 12 months or so. In other words, the round has to provide us with a runway of 12 months or more (and I say more because if we invoice, we are putting money in the till).

As it is always necessary to think about contingencies (and I think this COVID-19 crisis has made this clear), it would make sense to keep the burn rate under control so that, on average, it never exceeds the 10% of the round. This brings us to the point that, as CEOs, we have to be the guardians of the company's cash flow and not delegate decisions that have to do with increasing the company's operating expenses. In addition, to contain the burn rate (and therefore lengthen the runway) we need to think very carefully about when we need to grow our team in size, get our signings right (remember hire slow and fire fast), think about contingencies and raise more than what our Excel says in case something goes wrong and, most importantly, do not delay the decision to pivot if things do not go as we expect them to.

This is not to say that the key is to spend little money and become a miser when it comes to running our business. What I mean is that money must be well controlled, CASH IS THE KING so that it serves to make us achieve our objectives and, therefore, it must be spent on everything that contributes to making the business work. So superfluous expenses such as designer furniture, corporate merchandising or some of the "barbarities" we saw in the HBO series Silicon Valley when the startup raises its first round.

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