Burn Rate & Runway

Gross burn is total monthly cash outflows — salaries, rent, AWS costs, marketing spend — before considering any revenue. Net burn is gross burn minus cash revenue, representing the actual monthly cash decrease. A startup spending $800K/month with $300K in monthly revenue has a gross burn of $800K and a net burn of $500K. Investors care more about net burn because it reflects the true rate of cash consumption. As a company grows revenue, its net burn decreases even if gross burn increases, which is a sign of healthy scaling.

Runway is calculated by dividing the current cash balance by the monthly net burn rate. If a company has $6M in cash and a $500K monthly net burn, its runway is 12 months. However, this simple calculation assumes a constant burn rate, which is rarely true — most startups see their burn increase as they hire and invest in growth. Savvy investors look at both the current runway and the projected runway under various scenarios (accelerating vs. flat vs. reducing burn). A general rule of thumb is that startups should raise when they have 6-9 months of runway remaining.

VCs evaluate burn rate in the context of growth efficiency. Key metrics include the burn multiple (net burn divided by net new ARR), which measures how efficiently each dollar burned generates revenue growth. A burn multiple below 2x is excellent, 2-4x is acceptable, and above 4x raises concern. Investors also assess whether the startup could achieve profitability by cutting discretionary spending (reaching 'default alive' status) or whether it is entirely dependent on the next fundraise. Companies with more optionality on their burn rate command better terms.

Founders can extend runway by reducing burn (headcount cuts, renegotiating contracts, cutting marketing spend) or increasing revenue. The decision depends on market conditions and the company's stage. During fundraising downturns, boards often advise cutting burn to extend runway to 18-24 months, providing more time to reach milestones that justify a higher valuation. Conversely, in frothy markets, boards may encourage aggressive spending to capture market share. The best founders balance growth investment with maintaining enough runway to survive downturns.