0,000 is your burn rate.
Burn rate is the typical term that is used in venture capital, especially in hypergrowth companies, and what is going to help the VC, or that venture capital firm investor, is to understand how much burn rate you have or how much runway you have in order to execute your different types of milestones to get to the next stage or the lifecycle of your business.
When we’re thinking about burn rate and fundraising, burn rate is going to be a critical component because you need to understand how much cash you’re going to require to have left in order to get out there and start raising actively. In essence, typically, right now is six months left of cash in the bank. Let’s say if you go out to raise money, and you need to raise at least 18 months of runway, you have a cost of
00,000 every month, which is the burn, you’re going to be having to raise around 1.2 million if you want to get closer to the 18 months. But that’s what you’re going to be discussing with investors.
When it comes to the runway, keep in consideration that runway is going to be the amount of time that you have left before you go crashing. This is, in essence, what is represented as the plane having enough runway in order to take off before it actually crashes. That is why it’s called runway. For that reason, burn rate and runway come hand-in-hand, especially when you’re going out to raise money, and you need to understand how much burn rate you have versus how much runway you have left in order to execute.
In terms of the dangers of the burn rate, or having a high burn rate, in many instances, you’re going to see the super-hyper-growth companies, like the Uber’s or the WeWork’s of the world that have a crazy burn rate. They’re hoping that by having that burn rate, they’re going to be able to capitalize on having a great market share, mind share, and eventually the costs are going to come in parallel with the revenues and that they’re going to be able to design a profitable company.
The thing is that when that happens, and that may work out well when you’re operating in a market that is positive, a bull market, everyone is making money. But if it turns around, and you’re going into a bear market where everyone is losing money, essentially, money is going to dry up, and for that reason, you want to avoid having a high burn rate so that you have more flexibility to maneuver in case you need to course-correct so that you give yourself more oxygen.
When we’re thinking about what’s an acceptable burn rate, there are different factors that come into place because every company is a different world, every stage is a different cycle that you’re in, in the business, so it’s not going to be the same burn rate that is going to be acceptable for a company that is already up and running, that has product/market fit versus a company that is trying to validate their product or service.
When it comes down to how to lower your cash burn rate, it’s really obvious. You’re going to be increasing the revenues, and you’re going to be decreasing the costs. That’s the obvious factor.
Moving to a digital or software product or service instead of hardware Again, the burn rate is something that you’re going to have to keep in mind as you’re executing during the 18-24 months of runway. It’s something that you need to be prepared to discuss with potential investors and also with existing investors. Again, account for that, as well, as you’re perhaps preparing your business plan or your pitch deck.
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