What Is Burn Rate?

You should know this if you plan to get a new startup company going or already have one up and running. Burn rate is a startup term that refers to how fast you spend your venture capital. Burn rate measures how much cash is coming in and going out. If you can keep the company running on its revenues long enough to reach profitability, it's considered sustainable. A low burn rate is ideal for any company, but it is significant for startups trying to get product/market fit. Once the company has raised a Series A round of funding, it will have a certain amount of money to last 12–18 months. It must start thinking about how it will reach Series B and beyond. The easiest way to keep the money flowing is to spend it, which is where the burn rate comes in: Later, investors began to pay more attention to the current cash burn rate and the projected burn rate of new startups. Investors also began to pay more attention to the time it would take for a new business to generate a profit. The initial expectations of quick turnarounds ended, and investors began to look for companies that would be profitable after two or three years. For example, it is not uncommon for investors to expect profits from an AI company after three years. It has resulted in later-stage investors demanding higher equity percentage ownership for their funding. Burn rate is a simple measure of how fast your company spends its money. The faster a company burns through cash, the quicker it needs to raise more or shut down. A high burn rate can indicate poor management and unrealistic expectations. When companies run out of cash and go bankrupt, we call it "going to zero".