Fred Wilson Union Square Ventures

What Fred Wilson, Union Square Ventures says about topics vital to entrepreneurs

Fred Wilson’s Two Burn Rate Calculations

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

“Your burn rate is the speed at which your cash balance is going down. [] If [funds were unlimited], burn rate would be [irrelevant, which Wilson has never seen]. [] [With highly profitable companies generating lots of cash, burn rate is less significant.]  But companies can go from profits to losses pretty quickly,” so knowing burn rate is important. 

Wilson uses 2 burn rate calculations:  the first, “back of the envelope” method is figured using cash on 2 dates; monthly burn rate is derived by taking the difference between those cash amounts divided by the number of months between said dates (assuming no interim financing). A more sophisticated calculation begins with gross burn rate which totals monthly expenses, capital expenditures and other cash uses.  Gross burn rate offset by cash receipts from revenues results in “net burn rate”, both expressed monthly.

When working with the more sophisticated net burn rate, Wilson also does a back of the envelope calculation to ensure it’s generally consistent with net burn rate, or if further analysis is needed.  If significant one-time expenses occur every couple months, Wilson recommends incorporating them in the burn rate calculation for greater accuracy. 

“Burn rates can change pretty quickly [and] aren’t constant [so assuming] a constant burn rate can be very dangerous.  Always know if [] burn rate is going up or down []. [Always know the] cash balance and burn rate and cash out date.” The latter signals when to raise money again, at least six months before running out of cash. [254 words] Fred Wilson Burn Rate Dec. 5, 2011;