Whats is a startup burn rate?
Burn rate is the pace at which a company spends cash in a certain period, usually measured monthly. Knowing your burn rate lets you know how long your startup can operate without turning a profit. Not to mention, it’s a metric most potential investors will want to see as they asses whether your venture is worth pouring capital into.
How do you calculate a burn rate?
There are two different kinds of burn rates: Gross and net. A company’s gross burn rate is the total amount it spends on operational expenses monthly, while net burn rate incorporates the business’ revenue into the calculation. Here’s how you figure out both:
Gross Burn Rate = (Monthly Operating Expenses/Available Cash) x 100
Net Burn Rate = (Revenue - Monthly Operating Expenses / Available Cash) x 100
What is good burn rate?
A good rule of thumb is to have a cash runway (the amount of time a business can operate without turning a profit) of 12 months to have the flexibility to weather market downturns, unexpected expenses, etc. So, an ideal burn rate is around one-twelfth of your available cash.
Burn rate example
Let’s say Company A spends $20,000 per month in operational costs, makes $8,000 per month in revenue, and was launched by pulling together $100,000 from savings, friends, and family. That means:
Gross Burn Rate = ($20,000 / $100,000) x 100 = 20%
Net Burn Rate = ($8,000 - $20,000 / $100,000) x 100 = 12%
How can early-stage SaaS startups reduce their burn rate?
Overall, early-stage SaaS startups should focus on efficiency and cost-saving measures to reduce their burn rate and increase their chances of success. Here are some strategies:
- Minimize expenses: It's important to track all expenses and cut unnecessary costs. This can be done by setting a budget and regularly reviewing expenses.
- Focus on the core product: Early stage SaaS startups should focus on building their core product and avoid adding features that are not essential. This will help them save resources and time, which can be invested in more critical areas.
- Outsource non-core functions: Non-core functions like accounting, HR, and legal can be outsourced to reduce overhead costs. This can be done by hiring freelancers or using outsourcing services.
- Use open source technology: Open source technology can save costs on software development and licensing fees. Many open source solutions are available for various business needs, including database management, content management, and CRM.
- Utilize cloud infrastructure: Cloud infrastructure provides cost-effective, scalable solutions for early stage SaaS startups. Cloud computing services like Amazon Web Services, Google Cloud Platform, and Microsoft Azure can help startups save on server costs.
- Optimize marketing expenses: Early stage SaaS startups should focus on marketing strategies that are cost-effective, such as social media marketing, content marketing, and email marketing.
How do investors evaluate burn rate for early stage startups?
Investors want to see a balance between a startup's burn rate and its growth potential. A high burn rate may not be a problem if the company is experiencing rapid growth and has a clear path to profitability. Conversely, a low burn rate may not be attractive if it means that the company is not investing enough in growth opportunities.
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