Fundraising · Revenue

Acceptable Burn Rate?

Jordan Plosky Co-Founder and CEO at ComicBlitz LLC

September 1st, 2015

*(edited with updated/correct language)
We are going to be looking for a seed round of funding soon. We are trying to crunch the numbers to figure out how much we need to ask for, and how long that will last us. But, one variable we can't figure out how to calculate, is what is an acceptable runway? I have been told that the new currency for investors is user growth, not revenue. So, as long as we're growing our user base, what's an acceptable monthly loss to project, and for how long? When should we project a positive revenue flow by? It seems like knowing this one variable will unlock the key to our entire funding pitch. 

Chris Kitze CEO at Safe Cash Payment Technologies, Inc.

September 1st, 2015

Karl is correct.  It's not just about your monthly burn.  Potential investors are asking that and the amount of cash you have left to figure out when you will be desperate and they can get a good deal.

The point is you need a solid plan for how you are going to get to making money before you run out of cash.  

If you spent all the money in the first month (not recommended, just a thought experiment) and it caused cash to flow like crazy, you'd do that.   I would focus on trying to get a proof of concept out the door ASAP to prove that everything works and "the dog eats the dog food", then upgrade it.  You'll have some good metrics that will give your investors faith in the direction and team.  If you don't get any kind of metrics and run out of money, you'd better be good looking or have friends in high places.  Good luck.

Kris Bliesner Founder and Chief Technology Officer at 2nd Watch

September 1st, 2015

Jordan, Without knowing more about what your startup is doing its a bit difficult to answer but I've take a stab at a few things to keep in mind. I've personally closed over 7 different financing rounds raising over $50M for 3 different startups so I do have some background here. 1) How quickly can you get your MVP out the door? How quickly can you iterate on it once it is live? There is no wrong answer as I've worked on complicated startups that take years to go to market and content plays that can be live in weeks. 2) If you fast forward time past your seed round, what is the story you want to tell prospective Series A investors? What milestones will you need to reach to show customer adoption or that the business model works and that applying more gas can get you an accelerated growth curve? 3) What cash burn rate are you comfortable with pre revenue and post revenue?. You can and should build a model to help you understand how long your capital will last but you also need to weigh your own comfort level around your burn. Keep in mind fixed vs. variable costs too as there are some things you may have to invest in upfront and some that you can cut loose if things don't go according to plan. My $.02 -Kris

David Still Founder of Start-ups, Entrepreneur, Financier and Advisor

September 4th, 2015

I presume by burn rate you are referring to negative EBITA and that you are looking for numbers that will get you the money and position you to win. If I am right, then there is no such thing as an acceptable burn rate. There is your business plan and forward looking statements for three scenarios that bracket the worst to expected to best outcomes (monthly for year one and annually thereafter - balance sheet, statement of income, statement of cash flows, reconciliation of equity) that you believe and present to investors. Getting the money is not the end game. Winning is the end game.

If investor(s) agree to fund your business, then you will have an "implied negotiated burn rate." Thereafter, the critical factor is that you consistently achieve your numbers. If you continually miss your numbers or the investor(s) change their mind(s) on burn rate or any other matter (for any number of reasons that may or may not relate to your business) than you have a problem. Trying to play "anticipate the numbers" with investors is a bizarre game where the only way to win is not to play. There are far too many variables outside of your control. So, just be honest and candid, and try to meet every promise you ever make to investor(s).

Plus, it's important to understand the odds. There is no longitudinal data base on the success/failure rate of founders of startups. However Wasserman at Harvard advises us that "52 percent of founder CEOs have been replaced by the 3rdround of financing. 44 percent of the founder CEOs replaced by the 3rd round of financing were fired by board (aka investors); 8 percent of the founder CEOs, the remaining cases - by far the minority - the founder raised his hand and said: "there's got to be someone better than me to lead us to the next stage"; when you're the creator of a company, you're increasing the chances that you're going to get fired; and the most successful of founders, the ones who led their start-ups to completing key milestones the quickest, were actually the first ones to get fired." If the long established numbers that circa 50 percent of startups fail in or by year 5 and 75 to 85 percent of start-ups ultimately fail are correct, then the failure rate of founders is likely over 90 percent. How these numbers enter into your mindset and decisions is up to you. At least it's better to know the odds in the beginning and not looking back.

Karl Schulmeisters Founder ExStreamVR

September 1st, 2015

You do this as though you were running a business.
Gross Revenue - COGS is your net revenue.  If negative, you have a burn rate, if positive, you have profit.

So figure out your solution.
figure out what it will cost to develop
figure out what it will cost to market
figure out what size sales team you will need initially
figure out what size service and QA team you will need

And then have a fast but realistic growth curve into the market.  And see what infrastructure and staff growth you need to support that, and figure what that will cost you vs. revenues you generate.

But no, this is NOT the "one variable that will unlock the key to your funding pitch"..  this is just "due diligence"

Your investors will want a 10x valuation 3 years after investment.  If you have revenue it will be based on revenue growth rate and booked revenue

if you don't have revenue but have users, it will be based on the expected monetizable value of each user and the growth rate.

but if you are not 10x valuation, you will not be funded. 

Rodrigo Vaca Product & Marketing

September 1st, 2015

Jordan -

I think you're mixing a couple concepts.

Loss = money in - money out. Most VCs expect that you are operating at a loss in the early stages, that's ok. This is an over-simplificaiton of an income statement and just taking it on a cash basis, but it is good enough for this purpose. If you are referring to this, then you need to project how much "runway" do you need. And in a nutshell - if you're losing 10K a month, and you want to be able to last 20 months at this rate so you can prove your model, hit milestones. Then 10k * 20 = you need 2Million. This is related to, but orthogonal to valuation.

"Loss of revenue" typically means that there's revenue that you didn't earn for some reason - for example, your business had to shut down because there as a natural disaster, that caused you to lose revenue (not earn in). That might or might not lead to financial losses.

What you might be referring to, which is usually more interesting to VCs is user attrition - that is - of the 100 customers that you acquired last month, how many are still with you this month. You usually measure this on a yearly basis. I have no insights about the kind of business you're in. In the SaaS/Software world, great companies have 2-4% yearly customer attrition.

Having a high user attrition directly impacts your Lifetime Customer Value, which is what VCs will ask you about. If LTV makes sense, and your CAC (Customer Acquisition Cost) is well below that, then you have a profitable business in the long-term. That's what VCs care about... they expect you to be cash-flow negative right now.

John Seiffer Business Advisor to growing companies

September 1st, 2015

Fred Wilson said it better than I

But what bothers me about the question is you seem to be looking at what investors want to hear rather than looking at what it takes to build a successful business with a successful exit. That's what investors want - a successful exit. 

Steve Everhard All Things Startup

September 1st, 2015

Not many early stage investors are expecting to take a startup to profitability. Nice when it happens but not necessarily a gate on whether you are investable as an early stage business. What you need to concentrate on in this early stage is what milestones you can hit that will make you investable by others, that will take you through to profit (hopefully). And you'd better hit those metrics way before you run out of money.

If you are on a user recruitment drive you need to explain what that unlocks and how revenues will emerge. Your plan for a volume of users with low attrition doesn't necessarily make you an investment bet if you don;t understand the levers that drive revenue in your model. Volume might be it, but quality and engagement are likely to be better goals as long as the market potential is there. In other words if you recruit the only three people likely to use your business then they better be high spenders, live long lives and believe you are the only solution for them.

Ultimately it comes down to believing in your team, your potential, approach and ability to carry both the technical and business challenges of your enterprise. As the Fred Wilson quote above nicely summarises, if your goal is to get early money under any pretence you are grifting and not building a business.

Hunter Ashmore

September 1st, 2015

I know others said what I am about to, but I want to reinforce some of these points:

Agreed that you are asking the wrong question. It isn't "what is acceptable to investors?" but rather "how much will it take to be profitable and reach an exit?" This isextremelyimportant! Your business model and execution determine how much you will need, not your investors.

Regarding how much is "enough"; you probably will not raise it all at this moment, since multi-round financing is standard for almost all early-stage investors now. It is their way of minimizing risks as they search for the successful startups. Most investors will want a realistic outline of the follow-on rounds required to get to an exit. Future investment rounds will determine how much capital they will need and/or their potential dilution over time Given this context, validating customer demand as early as possible with as small an investment as possible will allow you to demand better terms in a follow-on round.

There are three answers you need to provide to investors. 1) How much do you need now? 2) How much will you need before an exit? 3) How far away is an exit?

Here is an example of how to answer these questions: draw up your milestones for the minimum product required to validate customer/market demand, the fully developed product, the scale required to reach profitability, and the requirements for an exit. What do you have to prove, validate, or develop in each round?

You should be able to come up with a conservative estimate for items like revenue, headcount, overhead, marketing, etc. for each stage. This tells you your burn rate, but also tells you what you need in each round.This is what you then present to investors.

Karl Schulmeisters Founder ExStreamVR

September 1st, 2015

Actually Jordan, if you take investor money, you ARE going to be running a business guided by investors. Early stage investors- precisely because failure rates are so high - tend to be very hands on and very involved in the running of the business. That is why the ideal is to avoid external financing for as long as possible.

And the question again is NOT

  • what is an acceptable runway for investors

The question is very very simple:

  • do you have a credible plan to get to EXIT.

and what EXIT means depends on the stage you are in, but in almost all cases it means.... 3 years and 10x ROI so if you ARE

  • Angel Round - it means showing that in 3 years you will get to MVP AND have enough growth and/OR revenue that your company can be sold for 10x what they invested

    Notice - not 10x of 100% of the valuation, JUST 10x of what they invested. IOW, if you take $100,000 from Angels, THEY want a credible strategy for your company to get to $1,000,000 in 3 years. Even if they only get 10% for their $100,000 - because of how early stage payout contracts are written, in Three years
    • they will have a right to force you to buy them out or sell
    • they will have the right to collect that $1,000,000 before you see a penny
    • so if you sell for $1,100,000 and they have 10% of the company - They walk away with $1,000,000 and you keep $100,000
  • Series A - It means showing that in 3 years you will hit your next major growth milestone (does not have to be revenue yet but revenue makes the sale easier) and since the are investing $1,000,000 to buy out your angel round, in 3 years (6 years from start) they will want the company sold for $10,000,000
    • in three years they will be able to force the sale
    • if in 3 years you sell for less than $10,000,000- they get it all
    • if its more than $10,000,000 then they get the first $10,000,000 and you get what's left over

So its not about "the runway" per se. the "runway" is going to be their weekly/monthly evaluation of whether or not they let you stay on as CEO, or whether they start moving for a management shift or a product shift...


the metric the investors will use is whether you are on track for the plan to generate 10x ROI in 3 years. either by growth or by revenue or a combination.


so, if it will take you $150,000 and 12 mos to build the MVP, then you have 2 years in which to do the sales and marketing to get to 10x the investment.  If your business plan shows you needing another $100,000 to get revenue going so that by Year 3 you have $100,000 in ARR..


then at the end of 3 years, the company will be sold for $3,000,000 and you will pay the investors and walk away with $500,000 to be spread out amongst all the remaining shareholders

Jordan Plosky Co-Founder and CEO at ComicBlitz LLC

September 1st, 2015

Rodrigo, thanks for letting me know the proper terminology for what I was trying to describe.  It's the first one you spelled out, our runway.  So, what is an acceptable runway for investors?  I'm assuming that even a seed round might not cover our entire runway before we start seeing a profit?  So, what is an acceptable amount of time for a "runway", before we should be turning that corner, and starting to bring in a profit?  Thanks for that.