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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 However Wasserman at Harvard advises us that "52 percent of founder CEOs have been replaced by the 3rdround of financing. 44 percent of the founder CEOs replaced by the 3rd round of financing were fired by board (aka investors); 8 percent of the founder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.
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
The question is very very simple:
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
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
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.
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.