Visualizing Funding Runway & Burn Rate
Visualizing Funding Runway & Burn Rate
The Most Common Mistake Every Founder Makes While Fundraising | VC Remote Jobs
In a recent conversation with a Founder, we received a startling revelation - their runway was down to a mere three months, and they were urgently seeking investments. As an entrepreneur seeking funding, it is crucial to have a firm grasp on your Funding Runway and Burn Rate. This conversation leads me to write this writeup and explain what’s the common mistake that most founders do.
So, grab your coffee and get ready to dive in! We'll demystify complex concepts like Gross Burn Rate and Net Burn Rate, transforming them into a breeze to understand. Discover how to calculate these essential metrics and gain the knowledge to secure the resources your startup needs for success…
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You may think that calculating the runway period and burn rate is a piece of cake, but let me tell you, it's not as simple as it seems. Many of you still make mistakes in these calculations. So, let's dive in and explore this topic from the basics, with clear examples.
By now, you're probably familiar with the terms:
Funding Runway, which refers to how long a startup can survive before running out of cash, and Burn Rate, which signifies the rate at which the startup is depleting its available funds.
To get a clear idea of the runway period and burn rate - here initially we have to calculate Gross Burn Rate (operating expenses) and Net Burn Rate ( the rate at which the startup is losing money)
Let’s Take An Example-
Suppose a Startup started its operation with a cash balance of $200,000
- No new investment was there
- After one year remaining cash balance of $20,000
- Gross Burn Rate = ($200,000-$20,000)/12 months= $15,000/ month
- $15,000/ month will go into the operating expenses such as salaries, office spaces, servers, marketing, R&D expenses, and other overheads
Calculating Net Burn Rate taking the same example:-
- $30,000 new Investment was there
- $30,000/12 months= $2,500 cash added per month
- So, $15,000 gross burn rate - $2,500 added cash= $12,500 is the net monthly burn
Calculating Runway:-
Beginning cash balance= $200,000
- Net Burn Rate= $12,500/ month
- Funding Runway= $200,000/ $12,500= 16 months
Now How Much Runway Does The Startup Need:
Ideally Seed stage and Series A stage startups should plan to have 12-18 months of runway. The focus should be on keeping the burn rate at a minimum while investing in key areas.
Every month a Founder/ Management Team should check for potential challenges or opportunities that could increase/ decrease the runway.
Check:
- Revenue Increase/ Decrease
- Product Cost deviation
- Whether a project is running as planned or needs extra investment
- Be flexible and willing to abandon ideas that are not working
- Avoid big expenditures whenever possible, etc
A Founder needs to understand that Fundraising is rarely quick. The entire fundraising process can take up to 3 to 6 months and a VC Fund may decide not to invest in the company at any point. While Fundraising a Founder has to focus on so many things like focus on money, product development, sales & marketing, and how fast they are burning.
It would be better that they frequently communicate their financial runway to their previous investors and other important stakeholders. Transparency is the key.
Most importantly a Founder should remember fundraising is not complete until the documents are signed and the fund is deposited and available. And that’s why if a Founder can master the funding runway, their company has a better chance of remaining solvent, and they’ll know when it’s time to raise additional capital without wasting funds.
That’s it for today.
I hope this small piece of write-up helps you to gain insights on runway period and burn rate and avoid making the mistake while calculating this.
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