Burn rate is the speed at which a startup spends its cash reserves, typically measured monthly. It is the fundamental constraint governing every startup decision: how fast you can hire, how long you can operate, and when you need to raise more money or achieve profitability. Burn rate is effectively your company's clock.
Key Concepts
Gross burn rate is your total monthly spending regardless of revenue: salaries, rent, AWS bills, software subscriptions, marketing spend, everything. Net burn rate subtracts revenue: if you spend $150K/month but earn $50K, your net burn is $100K. Net burn is what actually drains your bank account.
The relationship between burn and runway is direct: Runway = Cash / Net Burn. Higher burn shortens runway. As revenue grows, net burn decreases. When revenue exceeds expenses, net burn goes negative, meaning you are generating cash and runway becomes infinite.
Burn multiple (Net Burn / Net New ARR) measures how efficiently you convert spending into growth. A burn multiple under 1.5x is excellent (you are spending $1.50 to generate $1 of new ARR). Above 3x indicates inefficient growth that investors will question.
Why It Matters
Every dollar burned is a dollar closer to either profitability or death. Startups that burn too fast run out of cash before finding product-market fit. Those that burn too slowly lose market windows to faster-moving competitors. The art is matching burn rate to the stage of validation: low burn during exploration, higher burn during scaling proven channels.
Investors evaluate burn relative to progress. $200K/month burn is fine if MRR grows $50K monthly. It is alarming if growth is flat. "Efficient growth" has become the dominant investor framework since growth at any cost died with the 2022 market correction.
In Practice
A 15-person startup has $2M in the bank, spends $180K/month (primarily salaries at $140K, infrastructure at $20K, and marketing at $20K), and earns $60K/month in revenue. Net burn is $120K, giving them 16.7 months of runway. They model that reaching $180K MRR (break-even) requires 12 months at current growth rates, leaving a 4-month buffer.
Pro Tips
Review burn monthly with your cofounders and quarterly with your board. Categorize spending as essential (keeps the lights on), growth (drives revenue), and discretionary (nice to have). When extending runway, cut discretionary first. Watch for "burn creep," where small additions that individually seem harmless collectively shorten runway by months. Always know your default-alive date.