Hello, everyone. This is Alejandro Cremades, and today we’re going to be talking about
what is cash burn rate? The burn rate of your company is supercritical. It’s going to
determine whether you’re going to be able to do an acquisition, a fundraising round,
whether you’re going to be able to sustain the current business to really control your
own destiny. In today’s video, we are going to cover
everything related to cash burn rate and also help you understand different exercises that
you can do so that you can get to the point and the nitty-gritty of how to really understand
and have a clear grasp on your own burn rate. So with that being said, let’s get into
it. What is burn rate? Burn rate, in the end,
what it means is the amount of money that your company, in essence, is losing every
month. For example, if your burn rate is $10,000, that means that already accounting for the
revenues, you are losing – if it’s $10,000, the money that you are in the red every month,
at the end of each month after you’ve paid everything, cost, revenue, and everything,
essentially that $10,000 is your burn rate. Burn rate is the typical term that is used
in venture capital, especially in hypergrowth companies, and what is going to help the VC,
or that venture capital firm investor, is to understand how much burn rate you have
or how much runway you have in order to execute your different types of milestones to get
to the next stage or the lifecycle of your business.
When we’re thinking about burn rate and fundraising, burn rate is going to be a critical
component because you need to understand how much cash you’re going to require to have
left in order to get out there and start raising actively. In essence, typically, right now
is six months left of cash in the bank. Let’s say if you go out to raise money, and you
need to raise at least 18 months of runway, you have a cost of $100,000 every month, which
is the burn, you’re going to be having to raise around 1.2 million if you want to get
closer to the 18 months. But that’s what you’re going to be discussing with investors.
When it comes to the runway, keep in consideration that runway is going to be the amount of time
that you have left before you go crashing. This is, in essence, what is represented as
the plane having enough runway in order to take off before it actually crashes. That
is why it’s called runway. For that reason, burn rate and runway come hand-in-hand, especially
when you’re going out to raise money, and you need to understand how much burn rate
you have versus how much runway you have left in order to execute.
In terms of the dangers of the burn rate, or having a high burn rate, in many instances,
you’re going to see the super-hyper-growth companies, like the Uber’s or the WeWork’s
of the world that have a crazy burn rate. They’re hoping that by having that burn
rate, they’re going to be able to capitalize on having a great market share, mind share,
and eventually the costs are going to come in parallel with the revenues and that they’re
going to be able to design a profitable company. The thing is that when that happens, and that
may work out well when you’re operating in a market that is positive, a bull market,
everyone is making money. But if it turns around, and you’re going into a bear market
where everyone is losing money, essentially, money is going to dry up, and for that reason,
you want to avoid having a high burn rate so that you have more flexibility to maneuver
in case you need to course-correct so that you give yourself more oxygen.
When we’re thinking about what’s an acceptable burn rate, there are different factors that
come into place because every company is a different world, every stage is a different
cycle that you’re in, in the business, so it’s not going to be the same burn rate
that is going to be acceptable for a company that is already up and running, that has product/market
fit versus a company that is trying to validate their product or service. So there are certain
factors that come into play and that play a critical role. Those are the following:
The market and potential reward for the risk being taken
The direction of the general economy and industry The future availability of capital to keep
up this strategy Having a fast path back to profitability and
solvency if the above works against you When it comes down to how to lower your cash
burn rate, it’s really obvious. You’re going to be increasing the revenues, and you’re
going to be decreasing the costs. That’s the obvious factor. Now, there are other things
that you can keep in mind when you’re reducing the burn rate, and some of those factors are
the following: Staff layoffs
Shedding unnecessary office space, equipment, and recurring bills
Running on-demand just-in-time inventory Moving to a digital or software product or
service instead of hardware Again, the burn rate is something that you’re
going to have to keep in mind as you’re executing during the 18-24 months of runway.
It’s something that you need to be prepared to discuss with potential investors and also
with existing investors. Again, account for that, as well, as you’re perhaps preparing
your business plan or your pitch deck. I would love to hear on the comment section
below how you’re thinking about burn rate. Also, Like this video and subscribe to the
channel so that you don’t miss out on all the videos that we’re rolling out every
week. Then, take a look at the fundraising training,
which is the program where we help entrepreneurs from A to Z with everything related to fundraising.
There you’ll find live Q&As, agreements, templates, a community of entrepreneurs helping
each other all over the world, and I think that you’ll find tremendous value in it.
Thank you so much for watching.