Burn Rate

What the greatest technology investors say about Burn Rate

BURN RATE POSTS (6 posts)

The following is a list of the post titles by author under this topic.  Scroll further down this page to find the actual blog post by your selected author.   Author’s posts appear in reverse alphabetical order except for the “What is Burn Rate” post which appears towards the beginning of the blog page.  For the others for example, following this list,   Fred Wilson’s posts appear towards the beginning of the blog page, and Bill Gross’ post appears towards the end of the blog page.   

 BILL GROSS   (1 post)

 Bill Gross:  Cut Your Burn Until the Market is There

 FRED WILSON  (4 posts)

Fred Wilson: Hire Slowly & Wisely, not Quickly

Fred Wilson: Bootstrapping Leads to Great Products & Great Companies

Fred Wilson: What's the "Right" Monthly Burn Rate

Fred Wilson: Fred Wilson’s Two Burn Rate Calculations

WHAT IS BURN RATE  (1 post)

 

What is Burn Rate

Burn rate is a measure of how quickly a company consumes its cash or the speed at which cash is declining, i.e., the amount of cash that’s gone "out the door", expressed on a monthly basis. 

Fully-burdened refers to including all costs in the burn rate (or any other) calculation.

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.  Fred Wilson Burn Rate Dec. 5, 2011; http://www.avc.com/a_vc/2011/12/burn-rate.html

What's the "Right" Monthly Burn Rate

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

“The number of people [is important in] getting the company building process right. Too many [slows] things down, burn[s] through too much cash, and increase[s] [overhead needlessly]. Too few and [you’ll] be resource constrained and unable to grow as [quickly].”

Wilson’s suggested fully-burdened monthly burn by stage for mainly consumer internet, software-based businesses (Fully-burdened includes salaries, rent, overhead, etc.):

“Building Product Stage – [] below $50k per month []

Building Usage Stage – [] below $100k per month []

Building The Business Stage – [] below $250k per month []

A good rule of thumb is to multiply the number of people [] by $10k to get the monthly [fully-burdened] burn. [] [Thus,] suggested team sizes are 5, 10, and 25 respectively for the [above three stages].” Fred Wilson  Optimal Headcount At Various Stages Jun 4, 2012;  http://www.avc.com/a_vc/2012/06/mba-mondays-optimal-headcount-at-various-stages.html

Bootstrapping Leads to Great Products & Great Companies

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

Wilson suggested a $50k/month burn rate for the “building product stage”, the first of a startup’s three stages.  “You can build a product for less than $50k/month, [especially with strongly technical founders having excellent product and design skills.] [] Many (most??) of [Wilson’s] early stage investments are in companies that have bootstrapped in this way.”  However for companies that can raise seed stage money to build product, “[Wilson stands by a maximum $50k/month fully-burdened burn rate], but with a big caveat.  If [the product can be built] for less,[] do that.  Bootstrapping is a great thing and leads to great products and great companies.”  Fred Wilson, How Much To Burn While Building Product, Dec. 19, 2011; http://www.avc.com/a_vc/2011/12/how-much-to-burn-while-building-product.html

Hire Slowly & Wisely, not Quickly

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

“[Wilson’s] strong bias on [optimal headcount] [] is that  less is more.  [Repeatedly] [he’s] seen the entrepreneur who wants to hire quickly fail and [] the entrepreneur [who’s] [] slow to hire succeed.”

In his experience with software-based consumer internet businesses, “[] [success] might be most highly correlated with a slow hiring ramp [] [during a company’s early years.]  Being resource constrained can be [good] when [] getting started.  It forces [] [a] focus on what's working and get[ting] to the rest of the vision later on. []” His advice: “[] hire slowly and wisely instead of quickly.”   Fred Wilson MBA Mondays: Optimal Headcount At Various Stages, Jun 4 2012;  http://www.avc.com/a_vc/2012/06/mba-mondays-optimal-headcount-at-various-stages.html

 

Cut Your Burn Until the Market is There

Bill Gross Founder and CEO business incubator Idealab

“If you have a great offering but the market isn’t ready for you yet, immediately cut your burn to survive until the market IS there.”  Bill Gross: Here Are The 12 Lessons I've Learned In My 30 Years Of Being An Entrepreneur Dec. 15, 2011;

http://www.businessinsider.com/bill-gross-lessons-2011-12#lesson-7-survive-until-the-market-is-ready-28#ixzz1j69khehg