Burn rate

Burn rate (or “spending rate”) refers to the speed at which a startup spends its available capital over a specific period, usually expressed as a monthly amount. It’s a critical metric because it directly determines how long a startup can operate without new revenue or additional investment.

Formula: Burn rate = (Starting capital – Current capital) / Number of months. Example: Startup starts with $500,000. After 5 months, $350,000 remains. Burn rate = ($500,000 – $350,000) / 5 = $30,000 monthly.

Burn rate directly connects to “runway”—how long the startup can operate. If burn rate is $30,000 monthly and $350,000 remains, runway is 350,000 / 30,000 = 11.7 months. This means if the startup doesn’t earn or receive new funding, it operates for only 11.7 months more.

Two burn rate types exist: (1) Gross burn rate—total spending regardless of income; (2) Net burn rate—spending minus income (revenue). For non-earning startups, net and gross are identical. For earning startups, net is better indicating progress toward sustainability.

Investors regularly examine burn rate showing startup “efficiency” with money. Low burn rate startups are more attractive as they grow longer with same capital. This is because investors see: “This team is disciplined with money, so my investment lasts longer.”